Multi-Unit and Multi-Brand Franchising: past, present, future

Edward (Ned) Levitt | Dickinson Wright LLP416.646.3842 | nlevitt@dickinsonwright.com

Introduction

• Typically franchise systems grew through the sale of ma and pa units

• Cost of franchise sales

• Cost of maintaining the system

• More control but harder to achieve uniformity

• Franchisor’s bottom line

• The future will be much different

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Definitions

• Multi-Brand Franchisors

• Same franchisor with several brands or several different franchisors

• Multi-Brand Franchisees

• As above

• Multi-Unit Franchisees

• Area developers, area representatives, master franchisee

• Multi-Brand and Multi-Unit Franchisees

• Just to keep things interesting

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Trends

• More complex relationships and franchisees that are more like real companies – investors and boards of directors – sometimes public

• Increasing interest by franchisees in multi-unit and multi-brand arrangements

• More multi-brand franchisors

• Growing interest on the part of private equity investors for larger franchisee companies and acceptance of franchisors who embrace that type of franchisee model

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Multi-Brand Franchisees

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Multi-Brand Franchisees

• Disclosure issues

• Different if different franchisors

• For multi-brand franchisor, need to decide on one FDD or several

• “Clear and concise” rule could be a factor

• Interaction between the brands may make earnings claims and cost projections difficult

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• Contract Issues

• Different considerations depending upon a number of factors

» Shared location

» Shared management and employees

» Term and renewal conditions

» Rights of termination and repossession

• Should one franchise agreement be used for all brands?

» If multiple brands may want a bridge agreement

» Might have inconsistent terms

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• Contract issues (cont’d)

• Calculation and allocation of royalties and adv. Fees

• Single or multiple cash registers by brand

• Does the advertising fund spend apply only to 1 brand?

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• Operational Issues

• Do brands compete with each other or compliment each other?

• What about territorial restrictions of sister brands?

• Allocation of support resources

• Sharing of employees

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Multi-Unit Franchisees

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Multi-Unit Franchisees

• Advantages for the franchisor

• Reduces franchise marketing costs overall

• Reduces training costs

• Reduces store opening support costs

• Reduces head office overhead

• More resourceful and savvy franchisees

• Greater opportunity for uniformity across outlets

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• Advantages for the franchisee

• Spread risk over several locations

• Economies of scale

• Common management

• Greater volume and profits

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• Disadvantages for the franchisor

• Franchise sale cycle is longer

• If disputes arise, the franchisee has more resources to fight

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• Disadvantages for the franchisee

• More capital is at risk

• More complicated enterprise to operate

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• Ways in which to become a multi-unit franchisee

• Negotiated multi-unit agreement

• Acquisition of other units over time

• Rights of first refusal ****DANGER****

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• Contract considerations

• The parties

» Development agreement and unit agreements

• Territory

» Exclusivity

» Not to big, not too small

» Rights of first refusal ****DANGER****

• Term

» Not too long, not too short

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• Contract considerations (cont’d)

• Initial franchise fee

» For development rights, plus unit franchise fee

» Not too big, not too small

• Selection of locations

» Franchisee may have superior local knowledge

» Greater franchise autonomy over time

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• Contract considerations (cont’d)

• Development schedule

» Many factors, rarely achieved

» A breach or not a breach

» Consequences

• Default and termination

» Termination of development agreement only?

» Will franchisor have an option to purchase units back

» Will unit economics change?

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ConclusionIt is less important what you do than how you do it.

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Q & AEdward (Ned) Levitt | Dickinson Wright LLP416.646.3842 | nlevitt@dickinsonwright.com

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