Multi-Unit and Multi-Brand Franchising: past, present, future
Edward (Ned) Levitt | Dickinson Wright LLP416.646.3842 | [email protected]
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 | [email protected]
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