If your aspirations as a franchisee extend beyond opening a single location, you potentially have a few different options available. Franchisors often favor selling new territories to well-qualified and trusted franchisees, and as a result over the years the industry has developed a number of “standard” methods for providing expansion options to franchisees seeking multi-unit opportunities. These methods include:
- Area Development Agreements
- Rights of First Refusal
- Options for Additional Territories
Methods for Securing Multi-Unit Franchise Development Rights
1. Area Development Agreements
When you sign an Area Development Agreement, you receive the right to open multiple outlets. However, you also have the obligation to open these outlets – most likely on a very tight schedule or within a very limited period of time. As a result, when considering an Area Development Agreement, it is critical to thoroughly assess both the market conditions and your financial capacity to ensure that you are not taking on an unviable business or biting off more than you can chew.
Importantly, when you enter into an Area Development Agreement, you will still be required to sign a Franchise Agreement for each individual outlet. As an area developer, carefully negotiating both the Area Development Agreement and the individual Franchise Agreements is critical to protecting your multi-unit development and individual franchise rights.
Remember, franchisors want as many protections as possible, and it is very possible that your franchisor’s standard agreements allow for termination of all of your rights if you fail to meet your development schedule or if an individual franchise fails to perform.
2. Rights of First Refusal
The second common method of securing multi-unit franchise rights is what is known as a “right of first refusal.” With a right of first refusal, if a new candidate contacts your franchisor about a franchise opportunity (typically in a territory adjacent to yours), your franchisor must offer you the same opportunity before awarding the opportunity to the prospective franchisee.
Of course, rights of first refusal usually aren’t free, and they always come with strings attached. Then, there is the practical issue of not knowing when you will be forced to make the decision about whether to invest in a second franchise. As a result, while rights of first refusal avoid many of the strictures associated with Area Development Agreements, they require their own careful consideration as well.
3. Options for Additional Territories
The third common method is known as an “option.” With an option, you receive the exclusive right to open an additional outlet in a specific territory for a specific period of time.
Like rights of first refusal, options come at a price. In addition, since options are (or should be) exclusive, they tend to be less favored by franchisors. As a result, negotiating an option can require significant leverage, especially in more-mature franchise systems.
IMPORTANT: Secure Your Multi-Unit Rights Up Front
Regardless of the method you choose, the key to securing multi-unit rights is to negotiate for them up front. Once you sign a franchise agreement, your franchisor will have significantly less incentive to offer you contractual rights to open additional outlets. An experienced franchise lawyer will be able to advise you on the options you have available, and should be able to effectively represent you in negotiations to secure the multi-unit development rights you desire.
Are You Considering a Multi-Unit Franchise Opportunity? Schedule a Free Consultation Today
If you are considering a multi-unit franchise opportunity, contact the Goldstein Law Firm for a free, confidential consultation. Attorney Jeffrey M. Goldstein has over 30 years of experience representing franchisees in negotiations and complex franchise litigation, and can help you make informed decisions about your franchise venture and negotiate effectively with your franchisor. To speak with Mr. Goldstein directly, please request an appointment online or call (202) 293-3947 today.
