CHALLENGE
Our clients operate a home cleaning franchise in New York. The business remained resilient despite major recent issues, like the emergence of the COVID-19 pandemic, inflation and supply chain risks.
As the clients neared the conclusion of their first 10-year franchise agreement, they needed to decide on whether to renew for another 10 years or walk away from the business. In order to renew, a franchisee will almost never sign a franchise agreement that is the same as the prior agreement with a new expiration date. Typically, a franchise agreement will provide the franchisee with a right to renew the franchise, but pursuant to a new form of agreement that will likely be more onerous than the first one. This is common for the franchising industry – franchisors often modify their franchise agreements over time and by the time a franchisee is up for renewal, the agreement may contain significant changes including higher fees or new operating procedures.
While considering whether to renew, the clients thankfully contacted Lusthaus Law – which had represented them at the time they first acquired the franchise – to review the terms of the renewal and compare it with the client’s extant agreement.
SOLUTION
It is difficult to negotiate more favorable terms with the franchisor when renewing an agreement, but it is not a lost cause.
Lusthaus Law provides services to help with the renewal process, and negotiation is a natural extension of that function. We have also previously discussed franchise renewal tips, and the firm has negotiated countless renewal agreements which have led to favorable results for clients.
Here, we reviewed the new disclosure document to determine what changes to the franchisor and franchise system had occurred since our clients first purchased the business. Next, we reviewed the new form of franchise agreement that the clients would be required to sign at renewal and compared it to the prior one. As with any renewal, we encountered many issues of concern in the new documents, including:
- A recent change in ownership of the franchisor which would likely impact business operations for the clients;
- The royalty rate increased from 6% to 8%;
- Territory protections had lessened; and
- The franchisor intended to require our clients (and all franchisees in the system) to install a new point-of-sale system (POS), notwithstanding that the existing POS system worked fine and transition to the new one would come at a significant cost to the franchisees.
As a result, we discussed with the clients the possible impact of the change in the franchisor’s ownership. Also, while we could not circumvent use of the new POS, we were able to negotiate a delay in implementation by the clients until a majority of the franchise system was using the new POS and the franchisor could ensure that the bugs and kinks would be resolved prior to the clients’ investment and transition.
Additionally, while the new agreement called for an increase in the royalty and change in territory, we noted a critical, missing detail that we had negotiated when the clients first bought the franchise. That is, the clients’ existing agreement contained a provision which required that the royalty and territory remain the same on renewal and we were able to ensure those protections were honored in the new agreement.
RESULT
As a result of our review of the documents and negotiations with the franchisor, Lusthaus Law protected the rights and finances of the clients, which made them more confident about committing to another 10-year term in the franchise system. They continue providing much-needed cleaning services to residents in their territory.
