Tony Wilson

Negotiating with franchisors: Pick your issues wisely

Special to The Globe and Mail

(PHOTOS.COM)

In my last column, I wrote that the negotiation of royalties and initial franchise fees by prospective franchisees trying to get a better deal in their franchise agreements was not something that franchisors readily entertain.

Negotiation of these fees isn’t likely to happen unless the franchisor is just starting out and needs those first few franchisees “on the ground” to validate future sales (not to mention get some cash); the franchisee is acquiring more than one location; the franchisee is acquiring area development or master franchise rights (so everything may well be on the table); or, the franchisee has something unique to offer, such as a prime location that it controls (such as a lease in an airport).

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Given my view that there are only a finite number of issues a franchisee should raise before the franchisor thinks you’re a tire-kicker wasting his or her time and moves on to the next prospect, leaving you in the dust, anything you or your lawyer asks to “negotiate” probably prevents you from asking for other concessions. And those could be concessions that the franchisor may actually be prepared to bend on and which will always be more beneficial for your business than the things you’ll never get.

So you have to pick your issues wisely and strategically. You have to know what’s normal and boilerplate – and never negotiated – and what the real negotiable issues are.

That’s why it’s always a good idea to have a lawyer experienced in franchising assist you. He or she ought to be able to assess the issues the franchisor might move on from the ones it’ll never touch.

Franchisors don’t like to negotiate their agreements. In part, it’s because they’ve paid their lawyers and accountants tens of thousands of dollars, or more, to develop the legal and business package that forms the franchise agreement and the franchise disclosure document (in those provinces that require a disclosure document).

It’s also because other franchisees don’t like it when they hear that so-and-so got a better deal than they did. Word gets around.

Besides, a franchisor that’s negotiating too many sweet financial deals in favour of franchisees is putting itself into a financial corner. It may not have the monetary resources to properly administer the system and the brand that you’re thinking about buying into. That’s something that will erode the value of the entire franchise system one day.

As I’ve said in prior columns, trying to negotiate a financial cap to any personal guarantee you’ve been asked to give the franchisor, delaying the introduction of the system-wide advertising fund until there’s a franchise system large enough to justify collecting it, or trying to negotiate a larger exclusive territory that is legally protected from having another franchised or corporate store located within it are legitimate items to raise.

If the franchisor says “no,” you have a choice to make, don’t you? Do you do the deal, or do you move on to the next one?

Sometimes, though, the franchise agreement contains provisions that are just plain wrong, and which really have to be addressed by your lawyer. More often than not, this happens in “non-disclosure jurisdictions” such as British Columbia, where the legal and accounting costs of entry are lower than they are in Ontario, Alberta, Prince Edward Island, New Brunswick and, soon, Manitoba, where there is such legislation.

We don’t have franchise disclosure laws that would protect franchisees in B.C. So, in my experience, it can be the Wild West in this province. Franchisees can be hoodwinked by fly-by-night and bottom-feeder franchisors that don’t worry about the legal consequences of a failure to disclose or a mis-disclosure, as they would in other provinces.

In B.C., franchisees just don’t have the statutory framework of disclosure and the extensive rights of rescission of the contract enjoyed by most Canadians if things go wrong due to a misrepresentation or a fraud committed by the franchisor or its sales staff.

Indeed, I’d have to say there are some franchisors that don’t care if franchisees are successful or not, as long as they receive an initial fee for the “sale.”

Franchise legislation in B.C. might weed out bottom-feeders that can give franchising a bad name.

As a first step to assessing whether the franchisor knows what it’s doing, I always do a trademark search of the franchisor’s “brand” when I’m advising a prospective franchisee. Believe it or not, there are startup franchisors that have acquired their agreements off the Internet, or they’ve found one for a well- known franchisor, that is, stolen it, and have attempted to replace all of the references to the original brand and system with their own.

These franchisors might also believe that registering their company name in Victoria or another provincial capital is the same as a trademark registration and conveys the same rights. It doesn’t. So a very simple trademark search using the search engine maintained by the Canadian Intellectual Property Office, will normally reveal whether the franchisor owns the mark. .

If the franchisor doesn’t own or control the trademark, or the trademark hasn’t even been applied for with CIPO (believe it or not, this happens), this should be a warning that either the franchisor doesn’t know who’s buried in Grant’s Tomb or it doesn’t care. Alarm bells should be going off. It’s a warning signal that the franchisor is either inexperienced or is not that concerned about its franchise system or what the documents say, as long as it gets its initial franchise fee.

This can happen with startup franchisors that use $99 agreements they’ve found on the Internet. It can happen when they’ve used sales consultants to prepare their franchise agreements, as opposed to lawyers. It also happens with some smaller U.S.-based franchisors that might naïvely think that a U.S. trademark registration will suffice for Canada because it’s the 51st state anyway.

If the CIPO search shows that the trademark is in the process of being registered, but isn’t yet, or, that the registration is being opposed by another party, I’d be asking who will pay for the signage changes and rebranding costs if the franchisor can’t get the trademark it’s wanting to licence to you under its franchise agreement. That’s because someone will have to pay for rebranding if the trademark you’ve been sold on and which you’ve opened a location under turns out to be unavailable. Why should you pay for it if the franchisor doesn’t have all of its trademark ducks in a row?

It’s a legitimate question to ask when the trademark isn’t yet registered, and one the franchisor may be prepared to move on, because it has to.

Special to The Globe and Mail

Tony Wilson practices franchising, licensing and intellectual property law at Boughton Law Corp. in Vancouver, an adjunct professor at Simon Fraser University, and the author of two books: Manage Your Online Reputation , and Buying a Franchise in Canada . His opinions do not reflect those of the Law Society of British Columbia, SFU or any other organization.

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