For many current and prospective franchisees, the goal is not just to buy and operate a single outlet. Instead, the goal is to buy multiple franchises that will be operated by managers while the owner focuses on investing, reinvesting and ultimately building a much larger franchise portfolio. While this approach can prove very profitable, there are a number of inherent risks involved, and this makes it critical to work closely with an experienced franchisee lawyer who can help ensure that you are making informed decisions.
With this in mind, when should you consider becoming a multi-unit franchisee—and what do you need to consider before you commit to moving forward? Here are some key insights from national franchisee lawyer Jeffrey M. Goldstein.
5 Scenarios for Becoming a Multi-Unit Franchisee
Most multi-unit franchise opportunities involve one of five main scenarios. Each of these scenarios presents its own timing considerations and risks, and making an informed decision requires a clear and comprehensive understanding of the legal issues involved. For example:
1. Buying Multiple Franchise Rights At the Same Time
Prospective franchisees who have sufficient access to capital may choose to buy multiple franchise rights at the same time. While this guarantees that you will be able to open franchised outlets in your preferred territories, it not only requires a substantial up-front investment, but also careful planning and effective time management. If you fail to open any of your franchises by stipulated deadline, this could put all of your outlets (and your up-front investment) in jeopardy.
2. Buying Area Developer Rights
An alternative to buying multiple franchise rights at the same time is to buy area developer rights. Area development agreements allow franchisees to open multiple outlets according to a predetermined schedule. While area developers may have broad territorial rights, area developers must be extremely careful to ensure that these rights provide adequate exclusivity so that they do not find themselves losing out on desirable locations.
3. Buying a Second Franchise from Your Current Franchisor
If you currently own a successful franchise, you may be thinking about buying a second franchise from your franchisor. In this scenario, one of the most important things you need to know is that you will be required to sign your franchisor’s current franchise agreement for your second outlet—which could be materially different from the franchise agreement that you have currently.
4. Buying a Second Franchise Under a Different Brand
Another option if you currently own a successful franchise is to buy a second franchise under a different brand. This could be a brand operated by one of your franchisor’s affiliated entities, or it could be a brand under an entirely separate franchise system.
In either case, pursuing a different franchise opportunity will require thorough due diligence, and you will want to hire an experienced franchisee lawyer to thoroughly review the Franchise Disclosure Document (FDD) and franchise agreement. You will need to make sure your proposed investment is permitted under your current franchise agreement’s non-competition covenant as well.
5. Buying an Existing Franchise (or Multiple Existing Franchises)
The last option we’ll cover briefly is buying an existing franchise (or multiple existing franchises). Here too, this could involve making an additional investment in your current brand or branching out into another non-competitive concept. In either scenario, there are several additional legal considerations (and steps) involved in buying an existing franchise; and, here too, working closely with an experienced franchisee lawyer will be key.
5 Important Considerations for Expanding Beyond a Single Franchise
Regardless of which option you choose, making informed decisions will start with ensuring that you are addressing all pertinent legal considerations. Here are just five examples of numerous potential concerns you may need to address:
1. Cross-Default
If you own multiple franchised outlets within a single franchised brand, the “cross-default” clauses in your franchise agreements will come into play. Franchise agreements almost universally include cross-default clauses that apply to multi-unit franchisees. These clauses provide that a default under any of a multi-unit franchisee’s franchise agreements triggers a default under all of the franchisee’s other franchise agreements as well.
2. Operational Capacity
While hiring managers to operate your franchised outlets may free up your time to focus on the bigger picture, it is important to keep your own operational capacity in mind. As your portfolio grows, will you be able to stay on top of all of your contractual obligations? What if a manager resigns unexpectedly? The more contractual responsibility you take on, the more prepared you need to be.
3. Franchise Agreement Compliance
Likewise, managing compliance under multiple franchise agreements can present additional challenges as well. Even if your franchise agreements are identical, making sure your employees consistently observe system standards ensuring that none of your franchises’ operations encroach on other franchisees’ territories will be more challenging the more franchises you own.
4. Managing Liability Risk
Owning more franchises means taking on more liability risk as well. This is true not only with regard to potential employee and consumer claims, but also with regard to liability under your franchise agreements. For example, many franchisors include liquidated damages clauses in their franchise agreements, which make their franchisees liable for “lost future royalties” in the event of early termination.
5. Non-Competition Covenants
As mentioned above, if you decide to invest in multiple franchised brands, you will need to ensure that your second investment does not implicate the non-competition covenant in either of your franchise agreements. Violating a non-competition covenant can lead to swift termination—and potentially termination of all of your agreements with the franchisor if your agreements are subject to cross-default.
Schedule a Call with Franchisee Lawyer Jeffrey M. Goldstein
If you need to know more about the legal considerations involved in investing in a second (or subsequent) franchise, we invite you to get in touch. We represent prospective and active franchisees nationwide. To schedule a call with franchisee lawyer Jeffrey M. Goldstein, please call 202-293-3947 or request an appointment online today.
