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Before Signing a Multi-Unit Franchise Agreement, Question It!

Multi-unit franchise development deals entail an array of unique issues and challenges. Before signing on the dotted line to secure one, it is essential to ask these key questions.

Units

  • Will you have the right to develop more units than your “minimum” or will you be limited? For example, if you have to develop one unit per year for ten years, can you develop fifteen or twenty units during the ten-year term if you are able to do so?
  • Will you be permitted to operate each of your units under separate corporate entities?

Territory

  • Will the territory have a “buffer zone” around it so that the franchisor cannot open a unit so close to your “market” that it could cannibalize your business? If yes, how is it defined?
  • Does the same protected territory “formula” apply to urban and suburban units?
  • What if the franchisor acquires a competing system, with a different brand, and with units within your territory? Will the franchisor have the right to compete with you? Will you have the right to purchase the units the franchisor has acquired and convert them to your brand? If yes, at what price?

Fees

  • Will any portion of the development fee be attributable to the franchise fees that will undoubtedly, be charged as you develop units?
  • Will the franchise fee be “set” during the development term or can it change (increase) to be consistent with the franchisor’s “then-current franchise fee”?

Development Schedule and Rights

  • How do you meet your development schedule?
  • What does being "open and operating" entail? Does a location that is "under lease with construction proceeding" qualify? What about a location with a letter of intent with the landlord "in place" or even a location that you have identified and that the franchisor has approved? Or, can it be a combination of the above (e.g. three open, two under lease, two identified, etc.)?
  • What happens if you are not able to meet your development schedule? Can the franchisor “take back” your territory and develop company-owned or franchised units within the territory? What happens to the units that you have already opened? Are they protected?
  • What if you have a failing store? Will you have the right to close it? If yes, will closing a unit create a default under your development schedule? Since you will have a franchise agreement for each of your units, will a default under one of your franchise agreements be deemed to be a “cross default” under your other franchise agreements?
  • What happens when the development period ends? Does the franchisor get the territory back or, if you met the development schedule, can you retain it?
  • If you developed more units than the development schedule called for during the initial development term, can you “carry over” the excess units into the renewal term (if you have one) and will they “count” as part of your new development schedule?
  • What if you want to sell your development rights? Will you be required to open and operate a certain number of units first? Will the franchisor have a “right of first refusal” before you can sell?
  • If the franchisor acquires a competing system with a different brand, with units in your territory, will you be able to buy and convert the units? If so, will they count towards meeting your development schedule?
  • Will the franchisor have the right to “carve out” so called “non-traditional sites” (hospitals, sports and entertainment venues, airports, colleges) from your development rights?
  • Will the franchisor have the right to sell the same products that you are selling, online or in supermarkets? If yes, will you share in these revenues?

If you receive answers to these questions that will result in unfavorable terms, the next step is to try to negotiate the offending provisions. An experienced franchise lawyer will not only help you to do so, but can alert you to any red flags within the franchise agreement that may have escaped your notice.

This post was written by Richard L. Rosen, the founding member of The Richard L. Rosen Law Firm (www.richardrosenlaw.com). Mr. Rosen has been actively engaged in the practice of franchise law for over 35 years during which time he has represented many franchisors and franchisees both as counsel and as a business advisor.


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