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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In a comment to a recent post - "5 Things to Know before Buying a Franchise" - the Franchise King, Joel Libava, raises the critical issue of maintaining "uniformity" in franchise agreements.  That is, the insightful Mr. Libava, challenges the propriety of promoting negotiated modifications to franchise agreements.  The point raised by Mr. Libava is a legitimate and genuine issue that must be evaluated by both franchisors and prospective franchisees.  

From a franchisors perspective uniformity is a critical factor that must underly the franchisors  legal relationship with its franchisees.  Similar to the uniform standards and procedures inherent in franchise systems, franchise agreements must also maintain consistent levels of uniformity.  Such uniformity will, at a minimum, serve to reduce litigation exposure and foster a consistent platform for the management and growth of the overall franchise system.  

From a franchisee's perspective, uniformity in franchise agreements may be a positive factor (i.e., a franchisor committed to its franchise agreement and systems) if the proposed franchise agreement is "balanced" and the franchisor possesses a substantive track record.  So how do you determine if the franchise agreement is "balanced" ?  You do your research, review the franchise agreement and FDD with a qualified franchise lawyer, speak to qualified franchise consultants and conduct the necessary due diligence.  Chances are that there will be "imbalances" in your proposed franchise agreement - there always will - but you must honestly evaluate the impact of this relationship.

So how do I put all this together, i.e., "franchisors perspective", "franchisees perspective", "balance", "imbalance"? Here are my thoughts:

1.  If you are a franchisor, focus on the development of a balanced franchise agreement that fosters the maintenance, protection and growth of, both, your franchise system and business interests of your franchisees.  Once this is achieved - really achieved - then stick to your franchise agreement and be prepared to "walk-away" from potential franchise sales;

2. If you are a prospective franchisee and you have viable questions or concerns about a potential franchise investment (after you have conducted the necessary due-diligence and evaluated the legal implications of the franchise agreement) then be prepared to "walk away" . 

The real issue comes down to a "third scenario" involving  a "franchisor not prepared to walk-away" or a "franchisee not prepared to walk away".  These are the situations where negotiations and targeted franchise agreement modifications come in.  For that prospective franchisee I would much rather obtain targeted franchise agreement modifications that I know will have a substantive impact on the prospective franchisees rights.   I think that Mr. Libava's position would be that  there should not be a third scenario?

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