For prospective franchisees with sufficient access to capital, entering into an area development agreement or a multi-unit development agreement can seem like a smart investment. A multi-unit opportunity will allow you to leverage what you learn about the system through economies of scale while protecting your geographic region from competition from other franchisees, and it will make it more difficult for the franchisor to push you out in the event that you do not see eye to eye.
While a multi-unit development opportunity can be a profitable investment for the right franchisee under the right set of circumstances, these types of franchise opportunities raise some unique legal issues as well. These issues include the following:
Multi-Unit Franchisee vs. Subfranchisor
Although there are numerous variations, most multi-unit development opportunities fall into one of three categories. They involve either (i) direct development of multiple franchised outlets; (ii) serving as a “subfranchisor” in your region; or (iii) an option to either own or subfranchise your allotted number of franchises. Operating as a multi-unit franchisee and serving as a subfranchisor are two very different businesses; and, if you pursue the subfranchisor route, you will need to comply with the applicable federal and state registration and disclosure requirements.
Right to Develop vs. Obligation to Develop
When pursuing a multi-unit development opportunity, it is important to maintain realistic expectations. Entering into an area development agreement or multi-unit development agreement will typically not only give you the right to open multiple outlets (subject to various conditions), but also the obligation to do so. If you are unable to meet the timelines established in your multi-unit agreement, not only could this result in loss of your development rights; but, if your franchise agreements include “cross default” provisions, it could lead to loss of your individual franchises as well.
Territory Rights vs. Territorial Restrictions
In your multi-unit agreement and each of your individual franchise agreements, it will be critical to ensure that the territory provisions read as you intend. Franchise territory rights are not always exclusive; and, in some systems, the “territory” is simply an outer boundary on the franchisee’s development and marketing opportunities.
Additionally, if you do not establish each of your individual locations’ territories up front, your multi-unit agreement should include provisions that ensure you will be able to secure the protect you need for each individual outlet. To avoid unintended consequences, consider using a metric such as population density rather than something like ZIP codes that has the potential to change in economic value over time.
Current Franchise Agreement vs. Then-Current Franchise Agreement
Will you be able to negotiate a single franchise agreement that you can use for all of your individual outlets, or will you be required to sign the franchisor’s then-current franchise agreement for each franchise? Having an obligation to sign the then-current franchise agreement will mean not only additional legal fees, but also limited negotiating leverage and the potential for non-uniform obligations across your various franchised businesses.
Speak With National Franchise Lawyer Jeffrey M. Goldstein
The Goldstein Law Firm is a national franchise law firm that exclusively represents franchisees and dealers. We offer a variety of fixed and flexible fee options, and every engagement starts with a free and confidential consultation. To discuss your multi-unit development opportunity with attorney Jeffrey M. Goldstein, please call (202) 293-3947 or get in touch online today.
