Can you negotiate a franchise agreement when selling your franchise?

Can you negotiate a franchise agreement when selling your franchise?

 

Yes — but only certain items are negotiable and you should be contentious of how you present negotiations and how you document changes to your franchise agreement and FDD.

Particularly for emerging franchisors, it can in many cases be critical for new franchisors to be flexible on negotiating and managing the franchise engagement when selling your first franchise unit.

Learn more about selling your first franchise from Devin Conner with WCFD:  https://www.youtube.com/watch?v=NRLcjzqAkyk&pp=ygUhaG93IHRvIHNlbGwgeW91ciBmcmFuY2hpc2UgY29ubmVy

 

Most franchisors use a standard, non-negotiable Franchise Agreement for brand consistency and regulatory compliance. That said, many franchisors will negotiate around the agreement rather than rewrite it entirely.

 

Commonly negotiable items

These are the areas most franchisors will consider adjusting:

• Territory size or protection

• Development schedules (especially for multi-unit deals)

• Initial franchise fee (discounts, credits, phased payments)

• Royalty structure timing (temporary reductions or step-ups)

• Marketing fund contributions (deferrals or caps)

• Site selection timelines

• Training fees or extended support

• Personal guaranty scope

• Transfer fees (for resale rights later)

 

These negotiated items are usually documented outside the core Franchise Agreement.

 

Typically non-negotiable items

• Brand standards and operating system

• Trademarks and IP ownership

• Quality control requirements

• Core royalty and advertising framework

• Term length (in many systems)

• Default and termination rights

• System-wide compliance obligations

 

Key point: If a franchisor negotiates terms for one franchisee, those terms must be disclosed properly — which brings us to documentation.

 

How negotiated franchise terms are legally documented

Franchisors do not usually change the main Franchise Agreement. Instead, negotiated items are documented through formal addenda and disclosures.

 

A. Franchise Disclosure Document (FDD) updates

 

Under U.S. franchise law (FTC Franchise Rule):

• Any material deviation from the standard franchise offering must be disclosed

• Special terms are disclosed in Item 22 (Contracts) and Item 19 (if financial terms change)

• If terms are offered selectively, they must be described as “negotiated provisions”

 

Failure to disclose negotiated terms correctly can:

• Trigger rescission rights

• Create state enforcement issues

• Expose the franchisor to lawsuits

 

B. Addendum to the Franchise Agreement (most common)

 

Negotiated terms are typically captured in a Franchise Agreement Addendum, which:

• Overrides specific sections of the Franchise Agreement

• Is signed at the same time as the Franchise Agreement

• Becomes legally binding

 

Examples:

• Reduced initial franchise fee – this tends to be one of the most significant drivers in getting early stage franchisees to join a new system.

• Modified territory description – offer larger spaces, this can be a fantastic element of the franchise to leverage in negotiating your first franchise sales.

• Delayed royalty start

• Altered development timeline

 

This keeps the core agreement intact while allowing customization.

 

C. Side letters (used carefully)

Some franchisors use side letters, but these are riskier.

 

Acceptable use:

• Non-material concessions

• One-time obligations

• Timing clarifications

 

High risk if:

• They contradict the Franchise Agreement

• They affect economics without FDD disclosure

• They are not referenced in Item 22

 

Best practice: Side letters should be referenced in the FDD or incorporated by addendum.

 

Steps to properly document the franchise sale

Here’s the correct, defensible process to negotiate and document a franchise sale.

 

Step 1: Identify negotiable deal points early

Before offering concessions:

• Decide which terms are firm vs flexible

• Confirm concessions won’t break system economics or fairness

• Coordinate with franchise counsel

 

Step 2: Update the FDD (if required)

If you offer:

• Fee discounts

• Economic changes

• Territory modifications

• Special rights

 

You must:

• Update Item 22 (Contracts)

• Potentially update Item 5, 6, or 19

• Ensure consistency across disclosures

 

Some states require FDD amendments or re-filings

 

Learn more about franchise registration states and the process of managing the franchise compliance process:  https://franchiseconsultants.live/2023/12/29/how-do-franchise-registration-states-work/