New York Franchise Law Blog : Franchise Lawyer & Attorney Charles N. Internicola, Providing National Representation of Franchisees and Franchisors

I am a firm believer in the efficiencies and economies of scale that may result from operating multiple franchise units.  Provided that you are a dedicated business person and that you are operating within a solid franchise system, the advantage and benefit of operating multiple franchise locations may be substantial.  Of course, if things are not going well, owning and operating "multiple units" may serve to double or triple your difficulties.  If you are a prospective franchisee considering the potential investment in a multi-unit franchise opportunity (i.e., where you obtain the "right and obligation" to develop more than one franchise unit with a proscribed geographic territory) you must carefully consider and evaluate the advantages, if any, that will result from any potential “mult-unit opportunity”.

When evaluating a multi-unit franchise opportunity your starting point must involve a thorough analysis of the franchisors FDD and a clear analysis as to the substantive rights that you will be acquiring as compared to the additional "legal obligations" and expenses that you will be assuming. Factors that should be evaluated include:

• What is the amount of the development fee that you must pay to acquire the multi-unit development rights?

• Will you be afforded a discount to the franchisor’s fixed ”initial franchise fee”; If a discount exists will the discount allow you to recoup the additional initial development fees that you will be required to pay to the franchisor?

• Will you be afforded a protected territory that possesses sufficient demographics and territory size to permit your "profitable" development of the franchise units that you will be required to develop?

• Will you receive a reduced royalty structure as you develop additional franchise units, or, will you be paying the same royalty rates as single-unit franchisees?

• What are the minimum number of franchise units that you must develop?

• Is the development time-table sufficient for your development of the required number of franchised units;

I am a strong proponent of multi-unit franchising and believe that for the right franchisee, multi-unit franchising presents a significant opportunity. However, much will depend on the franchisor, the franchise opportunity and your ability to develop and manage multiple franchise units. If multi-unit franchising is something that you are considering, you must also recognize that there may be additional opportunities (when compared to the negotiation of a single unit franchise) to negotiate and refine the terms of your franchise agreements.

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If you are researching the benefits of franchising, buying a franchise or starting a franchise, chances are that you have come across articles and promotional materials discussing the benefits of a "proven franchise system".  That is, prospective franchisees are advised that if they become a franchisee of  a particular franchise they will benefit from a "proven system".  While this vague term is used often and claimed by almost all franchisors, not every franchisor possesses legitimate systems and not every franchise system is "proven".

So, what is a "proven franchise system"?  While this question is subject to a broad range of interpretation, the following is some fundamental information about "systems" and "franchise systems" that must be considered by prospective franchisees and franchisors:

• "Systems" - are simply the procedures and tasks undertaken by business owners and managers in connection with the day-to-day operations of a business.  Every aspect of a business including, advertising, financial controls, production of goods, employee management and customer service can all be boiled down to a set of procedures and "systems".  Not every business is successful and not every "system" is effective or beneficial.

• Franchise Systems - are the procedures and tasks itemized and detailed by a franchisor (typically disclosed and detailed in the franchisor's operations manual) in connection with the operation of a franchised business.  A franchisors business systems typically include tasks and procedures focused on (a) Marketing, (b) Customer Service, (c) Employee Training, (d) Production of products and (e) Methods for delivering services.

• Proven Franchise Systems - Are the "franchise systems" that have been "previously" implemented (presumably by the franchisor and other franchisees) and have been demonstrated to result in successful and profitable operations of the franchised business.

Considerations for Prospective Franchisees:  

Effective and legitimate "systems" are critical for the successful operation of a franchised business. Don't just assume that a franchisor's "systems" are "proven" or "effective".  Ask the franchisor's representatives detailed questions about what makes their "systems" unique, effective and profitable and recognize that the "proven" nature of a start-up franchisor's "systems, in most cases, may be extremely limited.

Considerations for Prospective Franchisors:

Successful franchise systems depend on successful franchisees.  The mere act of preparing franchise disclosure documents and registering disclosure documents does not create a franchise. Strong franchises require thought out and tested business "systems" and procedures that have been tested and proven successful.  During the start-up franchising stage controlled growth (with limited franchise sales) may be necessary to will permit the necessary monitoring and refinement of your business systems. 

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