Written by Jean H. Gagnon, Ad.E.
Lawyer | Mediator | Arbitrator
Recently, Me Benoit Morel, MBA, Director of Legal Affairs at Franchises Cora Inc.(whom I thank), drew my attention to an interesting article published in Entrepreneur magazine under the title " Why Multi-Unit Franchise Ownership Is Now the Norm "(which you can read by click here), which suggests that " multi-franchising " is now the norm(or the way forward) for sustained, long-term expansion of a franchise network.
What is a " multi-franchise "?
This is an agreement under which a franchisee(referred to as a "multi-franchisee") undertakes to open and operate a number of franchised outlets in a given territory, either himselfor through subsidiaries controlled by him.
A multi-franchise differs from an individual franchise in that it covers several franchised establishments, rather than just one, and from a master franchise in that, unlike a master franchisee, the multi-franchisee must open and operate its own franchised establishments, and therefore has no right to grant individual franchises in its territory.
According to this article, multi-franchisees now control 76.5% of franchised restaurants and 53% of all franchised establishments in the United States.
Indeed, as this article clearly states, multi-franchising offers a number of advantages over individual franchising.
By developing a network of multi-franchise outlets, the franchisor avoids having to go through the whole process of finding and selecting a franchisee, finding and selecting a site, training, support and follow-up for each outlet, since once established, each multi-franchisee is responsible for the development and operation of the franchised outlets in his or her territory.
Subsequently, the multi-franchisee is able to ensure more professional management and better coordination of development and marketing efforts in his or her territory, since he or she is the sole owner of all network outlets located there.
Also, if an outlet gets off to a slower-than-expected start, or fails to meet its financial targets, this will not have the same impact on a multi-franchisee(who can spread this risk over several outlets) as on an individual franchisee who owns only that one franchised outlet.
So is multi-franchising THE best way to develop a franchise network?
Multi-franchising is, without a doubt, a development avenue to be carefully considered, especially when expanding into a new territory.
However, the franchisor must also be aware of the challenges and risks of multi-franchising.
On the challenge side, (i) finding a suitable multi-franchisee is much more difficult, and tricky, than finding an individual franchisee, (ii) franchisor contracts need to be reviewed in their entirety, since a multi-franchise agreement has to stipulate very different clauses than an individual franchise agreement, (iii) negotiating a multi-franchise agreement is generally much longer, and more complex, than negotiating an individual franchise agreement, and (iv) once the agreement has been signed, managing relations with a multi-franchisee is very different from managing relations with an individual franchisee.
The franchisor who wishes to use the multi-franchise route to develop his network will therefore need to be ready to face these challenges.
As for the risks, there are also some very serious ones, including (i) the risk that the multi-franchisee will not open the planned number of outlets according to the agreed schedule(which means that the multi-franchise agreement must include very clear clauses on this opening schedule and on the consequences of the multi-franchisee not respecting it, especially when the multi-franchisee has exclusivity in its territory), (ii) the risk of one or more failures on the part of the multi-franchisee to comply with the franchisor's standards and rules(which will then affect several franchised establishments at once), (iii) the risk arising from the fact that a dispute, or litigation, with a multi-franchisee will require the franchisor to act with regard to several franchised establishments at once, multiplying the costs, as well as the possible consequences, of any recourse.
Added to this may be the fact that the multi-franchisee often has substantial financial resources(even greater than those of the franchisor), knows his market much better than the franchisor, and may be interested in developing his own network rather than being constrained by the rules of an agreement with a franchisor.
In short, multi-franchising is one way to consider expanding a franchise network, but it's not the only way, and it's not always the best way!
On another level, like all the other recognized development paths(corporate branch, individual franchise, territorial development agent, master franchise, joint venture), multi-franchising is well suited to certain business sectors and franchisors, but less so to others.
The development method chosen by a franchisor must therefore, in all cases, be the one that best suits the characteristics of his business sector, his values, his vision, his management philosophy, his resources(human and financial) and his management style.
Strictly speaking, there is no such thing as the best or worst method. What works well for one franchisor may not work at all for another, even in the same industry.
Contracts relating to these different development methods are highly specialized documents that must necessarily be drafted and negotiated by truly competent and experienced lawyers in this field, in order to foresee and prevent major problems that may arise in the absence of relevant, clear and effective clauses in the contract.
By way of example, a multi-franchise contract will have to deal with, among other matters, (i) whether or not the multi-franchisee can operate its outlets through subsidiaries, and if so, the terms and conditions applicable to this type of ownership, (ii) whether or not the multi-franchisee can take on minority shareholders for some of its franchised outlets, and if so, the terms and conditions applicable to this minority shareholding, (iii) the rules governing the financing of the multi-franchisee, and (iv) the terms and conditions applicable to the multi-franchisee, (ii) whether or not the multi-franchisee can acquire minority shareholders for some of its franchised outlets and, if so, the terms and conditions applicable to such minority shareholding, (iii) the rules governing the financing of the multi-franchisee(which are quite different from those applicable to an individual franchisee), (iv) the multi-franchisee's rights within its territory and, where applicable, any limitations, (iv) the rights of the multi-franchisee in its territory and, where applicable, limitations, conditions and exceptions to these rights, (v) the schedule for the development of sales outlets in the territory of the multi-franchisee, (vi) standards as to the number of sales outlets to be maintained in operation by the multi-franchisee at various times during the term of its contract, (viii) the consequences of failure to comply with the development schedule and the standards for maintenance in operation, (ix) the consequences of a default under the contract, depending on whether the default concerns one or several sales outlets, (x) the consequences of the insolvency or closure of a franchised establishment, and (xi) the consequences of the end of the term, non-renewal or termination of the multi-franchise contract.
Jean H. Gagnon, Ad.E.
Lawyer | Mediator | Arbitrator
