The Multi-Unit Franchise Agreement

According to FranData (a franchise services firm), approximately 50% of all franchise businesses are part of a multi-unit franchisee. The clear trend in franchising right now is for a franchisor to find the prospective franchisee with the experience, capital and desire to develop more than a single franchise unit in a territory.

The Multi-Unit franchisee provides many advantages to a franchisor including:

·         Opening franchise units in a more planned and strategic manner

·         Fewer franchisees to manage and oversee

·         Accelerated growth

·         Reduction in training and other initial obligations

·         Faster new market penetration

While the multi-unit development may look like the best way to grow a franchise system, there are some cautions to both the prospective multi-unit franchisee and the franchisor.

Prospective Franchisee

Any prospective franchisee looking at the option of purchasing a multi-unit development agreement should consider their current: 1) experience not only in the industry of the franchise system, but their experience in successfully running a business; 2) access to sufficient capital; 3) current infrastructure or ability to develop the infrastructure to handle the development obligations, operations and administration of all the franchise units.

One clear advantage of the multi-unit option is the ability for a franchisee to leverage success, and the possibility to combine certain operations.

Franchisor

When determining whether a prospective multi-unit operator is going to work within a franchise system, a franchisor should examine the franchisee’s abilities on several fronts, including: 1) whether she/he has strong management experience; 2) do they have experience in the underlying industry; 3) their financial capacity to meet the development and ongoing operational obligations; and 4) a demonstration of their ability to fulfill the development obligations.

Many franchisors will find it beneficial to look to their current franchisees and ask high performing single unit operators if they would like to develop additional franchise units. Another key place to find successful multi-unit franchisees is from another franchise system. If looking to another franchise system, a franchisor should look at the prospective franchisee’s current compliance, reliability and reputation in the franchise system, as well as where they are in that development schedule. This last point is important because while it may appear a prospective franchisee has sufficient capital, if they are in the middle of their development obligations for another franchise system, the capital may not be sufficient to carry them through both development obligations.

When setting out the obligations for a multi-unit franchisee, a franchisor should also be aware of the ability on a functional level to meet the development obligations (i.e. is real estate available at the right price, how easily can the permits be obtained, what type of capital is needed from both the franchisee and the franchisor). In addition, the size of the territory will often determine the development speed and number of units in the development schedule.

More helpful information on multi-unit franchising can be found at:

International Franchise Association (IFA)

NASDAQ Community Board