While multi-unit opportunities have long been available in the franchise industry, they are becoming increasingly popular among first-time buyers. Buying multiple units increases upside potential, and many new franchisors promote multi-unit opportunities as a way to quickly increase their sales figures.
But, while buying the right to develop multiple franchised units carries potential, it also carries risks. As a franchisee, the more you invest, the more you have to lose. Additionally, many franchisors impose penalties for franchisees who do not open all of their contracted units on time, and, in some systems, failure to open one outlet can jeopardize others as well.
Key Questions to Consider When Pursuing a Multi-Unit Franchise Opportunity
With these factors in mind, what do you need to know before pursuing a multi-unit franchise opportunity? Here are five key questions to consider:
1. How Will You Finance Each Unit?
Financing is a key consideration for all first-time franchise buyers. But, for multi-unit franchisees, securing adequate access to capital can present particular challenges. While there are a variety of potential options available, prospective franchisees need to choose wisely, and prospective multi-unit franchisees may need to tap multiple sources in order to meet their development obligations.
For those who qualify, government-backed programs will often be good options. These include Small Business Administration (SBA) loans for franchise systems listed in the SBA Franchise Directory as well as the SBA’s veteran loan program. While available, options such as home equity lines of credit and pulling from retirement savings are far riskier.
2. What Happens if One Unit Isn’t Successful?
When pursuing a multi-unit franchise opportunity, it is critical to have a clear understanding of what happens if one unit isn’t successful. In this scenario, many franchisors reserve the right to terminate all of the franchisee’s outlets. Of course, different outlets in different locations can have different business prospects, and, as a franchisee, you should not be at risk of losing everything if one of your units fails. If your multi-unit development agreement (or any other agreement) provides the franchisor with this type of termination right, this is definitely a provision that you will want to negotiate with the help of your franchise attorney.
3. What Is the Development Timeline?
Along with considering what happens if one unit isn’t successful, it is equally important to consider what happens if you are not able to open each unit as scheduled. The franchisor will want you to open each unit as quickly as possible, and you will need to be careful not to let the franchisor’s sales representatives talk you into an unreasonable commitment. From financing opportunities to the practicalities of managing one business (or multiple businesses) while opening others, there are several factors that should influence your development timeline.
4. Will You Be Required to Sign the “Then-Current” Franchise Agreement for Each Unit?
Most franchisors want their multi-unit developers to sign their “then-current” franchise agreement for each unit. As a franchisee, this means that you could potentially have different contractual rights and obligations for different outlets. This, as you might expect, can be difficult to manage, and you may want to work with your attorney to negotiate a provision that states you will have the same franchise agreement for all of your locations.
5. What Multi-Unit Rights Are You Actually Getting?
Finally, you need to make sure you know what multi-unit rights you are actually getting. Franchisors can offer a variety of types of opportunities, and if you aren’t familiar with the franchise industry’s lexicon, it can be difficult to tell the difference. There are four main models:
- Subfranchisor – As a subfranchisor, you won’t open multiple outlets yourself but rather manage a system of your own subfranchisees.
- Area Developer (or Multi-Unit Developer) – As an area developer, you will have a commitment to open a specified number of franchised outlets according to a prescribed development schedule.
- Options for Additional Outlets – With an option arrangement, you get to choose when (and if) you will open additional outlets within a defined region for a prescribed period of time.
- Rights of First Refusal – With a right of first refusal, you will be given a time-limited opportunity to open new outlets in a defined region when other prospective franchisees inquire.
Discuss Your Multi-Unit Franchise Opportunity with Attorney Jeffrey M. Goldstein
If you are considering a multi-unit franchise opportunity, we strongly encourage you to contact us for more information. To speak with attorney Jeffrey M. Goldstein in confidence, please call 202-293-3947 or request a free initial consultation online today.
