are likely to find variations between their original contract with the franchisor and the new franchise agreement for later units. Your franchisor may also include cross defaults in the agreements, meaning that if you can be terminated at one location, the franchisor reserves the right to terminate all of your franchises at the same time – even if every other location is operating perfectly.
Instead of growing one location at a time, many franchisees instead choose to become multi-unit franchisees right from the start. By entering into a multi-unit development agreement, a developer obtains the right and the obligation to open a specific number of locations during a defined period of time and usually within a specified contiguous geographic area.
For example, say you want to open ten hair salons in your town. You can go to the franchisor and buy one franchise at a time (see the preceding section), but you have certain risks:
❯❯ You may have to share the market with other franchisees from the system. And by the time you’re ready to grow, the best locations for your brand may have been taken by other franchisees, or worse, the franchisor may have achieved critical mass in your market and is no longer offering additional opportunities where you want to grow.
❯❯ Even if the franchisor is offering a better “deal” to multi-unit developers, it may not be offering that same deal to single-unit franchisees, and you likely won’t have the necessary leverage you need to negotiate the changes you want.
To avoid these risks, you can enter into a multi-unit development agreement and agree to open and operate your multiple locations, say over the next several years, and the franchisor will grant you an exclusive market to develop your little chain.
A multi-unit developer will typically pay the franchisor a fee for the right to enter into a multi-unit development agreement. As you sign a franchise agreement for each new location, generally a portion of the multi-unit development fee is credited by the franchisor against your initial franchise fee. (More on this shortly.)
Expect that your development obligations will be specific. For example, instead of simply agreeing to ten units over five years, your agreement will usually have precise dates that you must meet, such as requiring that you have your locations open and operating on January 1, July 1, and so on during the term. These opening dates are important to the franchisor, so if you think the time provided for development is too restrictive or ambitious, this is something you and your attorney should discuss with the franchisor before you sign the development agreement.
Frequently, the initial franchise fee for locations developed after the initial franchise in a development agreement will be reduced from the franchisor’s standard initial fee. However, how the franchisor applies your development fee to the initial franchise fees you will owe varies from company to company.
In most franchise systems, as the franchisee signs a new single-unit franchise agreement and pays the initial fee, a pro-rata portion of the development fee paid will be applied to the initial franchise fee due. In other situations, you will receive no credit and you may pay the full initial franchise fee for each location.
You can expect that the development agreement may modify some portions of your franchise agreements. In addition to changing the initial franchise fees you may be charged, the franchisor may offer a reduced royalty after a certain number of locations have been developed, and changes in training, site selection, and development are common. You can also expect your franchisor to require you to have a general manager overseeing your units, and they may require you to have someone on staff to conduct the training of your staff.
A multi-unit development relationship can have significant advantages for both the franchisor and the multi-unit franchisee.
For the franchisor:
❯❯ Each multi-unit franchisee will be opening more than one location. That means the cost of acquiring a franchise on a per-unit basis will be lower than had the franchisor needed to find separate franchisees for each location.
❯❯ Fewer franchisees owning multiple locations means that the cost of supporting each location may be lower because the franchisor will be working with the franchisee’s general manager for all the locations and may not work with separate unit managers for each location.
❯❯ Having controlled growth leads to better planning for advertising and better leveraging when negotiating with suppliers and other vendors.
❯❯ With fewer franchisees in a market, it is easier to coordinate local advertising and promotions.
For the multi-unit developer:
❯❯ You gain the ability to shift personnel from one location to another depending on where the staff is needed.
❯❯ You may be able to establish a commissary or kitchen and combine the preparation of products for all the locations or save on freight and other costs by buying in greater quantities at a lower cost and storing inventory in a centralized warehouse, allowing for smaller retail locations and lower real estate costs.
❯❯ General managers overseeing multiple locations may reduce management costs at each location. Franchisees may only need an assistant manager, and with consolidated back-of-house support staff, including a trainer, internal costs on a unit basis can be reduced.
Figure 2-2 depicts the multi-unit franchisee-franchisor relationship.
© John Wiley & Sons, Inc.
FIGURE 2-2: The multi-unit franchisee family tree.
Why are two agreements needed? Because the multi-unit development agreement and the franchise agreement serve different purposes. The multi-unit development agreement lays out the rights and obligations being granted to open the locations, and the franchise agreement governs how each location, as part of the franchise system, will operate.
When you become a master franchisee, you become a franchisor in an area and are authorized to offer subfranchises through your master franchise license. As with any franchisor, your master franchisor will prepare and provide to prospective franchisees its own FDD and agreements that will contain information about you and your services.
In most master franchise relationships, the first thing you will likely be required to do is open and operate a few locations of your own. Once that has been accomplished, you will then be allowed to offer franchise rights to other franchisees (called