As a franchisee (or prospective franchisee), purchasing and operating multiple units is one of the keys to increasing your profitability. Most franchises offer a restricted suite of products or services from a single retail location, and their revenue potential is limited as a result. Operating multiple units expands this potential, and, as a result, it is an option that many franchisees (and prospective franchisees) will find themselves considering.
But, while owning and operating multiple franchises can increase your revenue potential, it will increase your risk as well. You will also need to carefully review each franchise agreement to make sure you are contractually allowed to do what you want to do. This is especially true when operating two franchises side-by-side, commonly known as co-branding. In this article, franchise attorney Jeffrey M. Goldstein discusses some of the key legal considerations involved with co-branding for franchisees.
Co-Branding Under the Same Umbrella or Under Different Umbrellas
One of the first legal considerations involves deciding whether you want to co-brand with franchises under the same corporate umbrella or under different umbrellas. One of the most well-known examples of co-branding under the same umbrella is operating side-by-side restaurants franchised by Yum! Brands. Taco Bell, KFC, Pizza Hut and Long John Silvers are all franchised by Yum! Brands and you will frequently see these fast-casual restaurants in the same building by franchisees who are hoping to attract more customers by offering a wider variety of food options than they could with a single franchised restaurant.
In this type of situation, the franchise agreement will typically be drafted to specifically allow the operation of a co-branded restaurant under the same umbrella. But what if you want to operate two franchises that aren’t under the same umbrella? For example, what if you want to operate a smoothie restaurant next to a gym or perhaps a car wash next to an oil change center?
If you are interested in operating two franchises under two different corporate umbrellas, you will need to make sure that both franchise agreements allow this. Franchise agreements and operations manuals impose tight restrictions on the use of the franchisor’s name and logo, and marketing materials are often subject to the franchisor’s approval. Additionally, franchise agreements almost universally include non-competition covenants that restrict franchisees from operating certain types of businesses during (and for a period after) their ownership of the franchise. If you are thinking about co-branding and either of the franchise agreements prohibits you from doing so, you will need to either (i) hire a franchise attorney to negotiate appropriate language into the franchise agreement or (ii) choose a different franchise opportunity.
Understanding the Risks Associated with Each Franchise Opportunity
Along with these types of contractual considerations, it is also important to ensure that you have a clear understanding of the risks associated with each franchise opportunity. If you lose one franchise, will operating the other one still be worth it? Does one franchisor have a habit of litigating with its franchisees—which could potentially drain your resources and put both franchises in jeopardy? Do you have adequate renewal rights under both franchise agreements to ensure that it is up to you (and not one of your franchisors) to determine if you will continue your co-branding endeavor well into the future?
These are all critical questions, and they aren’t easy to answer.
Whether you currently own a franchise and are interested in co-branding or you are considering two (or more) franchises as a prospective franchisee, making informed decisions requires careful financial planning and a detailed review of each franchise system’s Franchise Disclosure Document (FDD) and franchise agreement. The risk of marketing and competitive restrictions prohibiting you from executing your plan is just a couple of numerous risks you need to consider. Buying a single franchise requires an in-depth franchise business review. Co-branding franchises requires multiple franchise business reviews, and it also requires a higher level assessment of the unique considerations and risks involved with multiple franchise ownership.
Franchisees Who are Planning to Co-Brand Must Get Everything in Writing
If you are interested in co-branding, having a discussion with each franchisor is a good place to start. You don’t want to waste your time and money on a comprehensive franchise business review if your idea is a nonstarter.
However, it is also imperative that you get everything in writing. What you discuss with a franchisor’s sales representatives and what you can expect as a franchisee won’t always align. Additionally, even if both franchisors are on board with your co-branding idea now, they could change their tune down the line (especially if one wants to start its own co-branding venture). So, as you go through the buying process, you need to make sure that each franchise agreement provides suitable protections. Depending on your specific business plans, these may include protections such as:
- Suitable territory and site selection terms and protections that allow you to co-brand as desired
- The right to use both franchisor’s branding in joint marketing materials
- A carve-out from each non-competition covenant that allows for the operation of your co-branded franchise
These are just examples. While co-branding offers additional revenue potential, it also presents additional legal risks—and, as a franchisee, it is up to you to make sure you manage these risks effectively. Once you’ve had your initial discussions with both franchisors, it is time to engage an experienced franchise attorney who can help you put in place the documentation you need to move forward with confidence.
Discuss Your Franchise Opportunity with National Franchise Attorney Jeffrey M. Goldstein
Jeffrey M. Goldstein is a national franchise attorney who has been representing prospective and active franchisees for well over 30 years. If you are considering a co-branding franchise opportunity, we encourage you to get in touch for more information. Give us a call at 202-293-3947 or contact us online to schedule a free initial consultation with Mr. Goldstein today.
This article is provided for informational purposes. Goldstein Law Firm does not recommend or endorse any individual franchise opportunities.
