June 22, 2018
Signing a multi-unit agreement to buy several franchise territories can unlock fantastic savings on franchise fees and exponentially increase the opportunity for return on your investment. For example, if you agree to open up three pizza franchises, you will sign a standard franchise agreement for the first unit, and a separate multi-unit agreement to open all three units over a set period of time, usually at a discounted fee. You will also be required to provide notice to the Franchisor and execute two additional franchise agreements for territory two and three. It sounds simple and straightforward, but there are a few potential pitfalls to be aware of before agreeing to buy multiple units.
Look to give yourself as much time as possible to have all your locations up and running, especially if you are new to running a retail business and have never negotiated and leased commercial space before. The process of finding, leasing, and building out a space is costly and potentially time-consuming. Sticking to the example of buying three pizza territories, understand that in a multi-unit agreement, the clock is ticking on the second and third territories while you are building out the first. Ideally, you would have three years or more to open three restaurants, so you have time for the first one to become established before turning your focus toward the second and third territory.
You might be surprised at the number of multi-unit franchisees who do not have the money set aside up front to open their additional territories. Even if you have a high risk tolerance, remember that you need to account for inflation and rising rents; if you sign an agreement in 2018 to open your second and third pizza restaurants in 2020 and 2021, those costs will be higher than they appear at the time of signing. Additionally, you need to have enough reserves in place for the length of time it will take for each location to become profitable.
Given the multiplied nature of multi-unit agreements, it’s also crucial to have accurate estimates for the opening costs of each location. If you estimate that each of your three restaurants will cost $250k to open, and they end up costing $300k, that’s a $150k—not a $50k—margin of error.
Some multi-unit agreements include language stating that a breach in one agreement is a breach in all agreements. That’s quite problematic, because if you wish to close one of your locations due to poor performance, it could trigger a default on all your locations.
Say you’re using trademarks incorrectly despite being warned multiple times; that may constitute reasonable cause for termination of your entire agreement. Simply wishing to close an unprofitable business, when the other two locations are profitable, would not be a reasonable This is the type of issue we as franchise attorneys address directly with franchisors.
Are you considering buying a franchise? The attorneys at Soden & Steinberger, APLC are here to advise you through the process, whether you’re looking to open one or multiple locations. Learn more about our expertise in franchise law, and call us at 619-239-3200 to schedule your free franchising consultation today.