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Bulletin

Multi-Franchising: Opportunities, Risks and Best Practices!

Fasken
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Overview

Franchising Bulletin

Granting multi-franchises is a method of expanding a franchise network whereby a franchisor grants a single franchisee the right to own and operate multiple franchises.

Unlike a master franchise (which allows the master franchisee to grant sub-franchises in turn), in a multi-franchise, the multi-franchisee must own and operate, directly or through subsidiaries, all of its franchised businesses.

Over the past decade, multi-franchising has grown dramatically in the United States. Some research estimates that the number of U.S. multi-franchisees has grown from 34,462 in 2010 to more than 43,200 in 2018, and that, as of 2018, these multi-franchisees operated more than half (approximately 54%) of the 450,000 franchised locations operating in the United States.

Also in the U.S., some franchisors and franchise experts consider multi-franchising as the best way to develop a franchise network.

Is this really the case?

Indeed, multi-franchising has undeniable advantages.

Among other things, multi-franchising makes it possible to recruit franchisees with greater resources, reduces the number of franchisees to be recruited, offers an avenue of development within the network for successful and ambitious franchisees, reduces the need for training and support at the opening of each new franchise establishment (after the first one) and limits the number of franchisees to be managed.

Multi-franchising is particularly, but not only, used to develop a network in a new market (e.g., a city or region) where the franchisor wishes to expand. In such a context, the multi-franchisee may be granted exclusive development rights in that market in exchange for performance commitments and development quotas in its market, particularly in terms of the minimum number of franchised establishments to be opened and maintained in operation according to a schedule agreed upon with the franchisor.

On the other hand, multi-franchising also raises certain risks and issues that the franchisor must carefully consider before committing to this approach.

Here are, according to our experience, some of its main issues (or risks):

  1. It multiplies by the number of locations held by a multi-franchisee the magnitude of the risk in the event of problems with that multi-franchisee as well as in the event that the multi-franchisee experiences financial or management difficulties;
  2. It has the potential to create tension in the network by creating two classes of franchisees, individual franchisees and multi-franchisees, who may have very different skills, resources and objectives;
  3. It may also limit or slow down the development of the network in a market exclusively awarded to a multi-franchisee, including in the event that, for whatever reason, the multi-franchisee does not meet its development objectives; and
  4. It also raises relatively complex issues in the event that the multi-franchisee does not meet its performance and development objectives. For example, what happens if the franchisor withdraws the Multi-Franchisee's territorial exclusivity? How can a new franchisee truly take its place in a market where several franchised locations are already owned by a single franchisee?

The management of the relationship between a franchisor and a multi-franchisee is different from that between a franchisor and an individual franchisee. These differences will become more pronounced as the number of franchises held by a single multi-franchisee increases.

The franchisor must therefore be able to manage these two types of relationships in a parallel manner and ensure cohesion within its network of both individual and multi-franchisees.

Here are some of the best practices recommended for any franchisor considering multi-franchisees

Be careful in selecting your multi-franchisees

The characteristics, skills and resources required of a multi-franchisee are very different from those required of an individual franchisee.

The franchisor must therefore adapt its franchisee selection process to take into account and properly evaluate these differences.

In particular, if a potential multi-franchisee is already a franchisee of the network, it is still appropriate to re-evaluate his or her skills, abilities and resources as a multi-franchisee.

Unfortunately, some franchisors have learned the hard way that a successful franchisee running one franchised business may not be able to manage several.

Provide for a trial period

Especially in the situation where the new multi-franchisee is not already a franchisee of the network, it may be important to provide a trial period before granting a multi-franchise, and even more so when the multi-franchise includes territorial exclusivity.

This trial period may consist of the granting of an individual franchise that the new franchisee will have to open and operate successfully for a certain period of time before the franchisor commits to granting him a multi-franchise.

Alternatively, it may consist of the immediate execution of a multi-franchise agreement, which provides for such an initial trial phase during which the multi-franchisee must open and successfully operate one or two franchised locations before being allowed to open additional locations. In the latter case, the multi-franchise agreement should also clearly state the right of the franchisor to terminate the agreement in the event that the multi-franchisee fails to meet certain performance, quality and franchisor standards in the operation of the first franchise (or first two franchises).

Use separate agreements

It is always risky for a franchisor to legally govern multiple franchised locations through a single agreement.

Similarly, in a multi-franchise, it is risky to attempt to govern both the franchise and multi-franchise components (i.e., territorial exclusivity, development quotas, performance targets, consequences of failure to meet development quotas or performance targets, etc.) of the multi-franchise relationship in a single agreement.

A better practice is therefore to use a master agreement governing the specific aspects of the multi-franchise and a separate franchise agreement (ideally the franchisor's model franchise agreement, which, in the case of a multi-franchise, may be supplemented by an addendum making certain adjustments agreed upon with the multi-franchisee) for each of the franchised locations owned by the multi-franchisee.

This provides the franchisor with greater flexibility to make decisions that may become necessary in certain situations, such as where one of the franchised locations is experiencing serious problems while the others are generally doing well, or where the multi-franchisee is operating some of the franchised locations adequately but is not meeting its development quotas.

For the same reasons (as well as, where permitted by the multi-franchise agreement, to allow the multi-franchisee to have a minority shareholder operator in some of its locations), it is also often recommended that the multi-franchisee use a separate corporation (of which it must be the sole or at least majority shareholder) for each franchised location. However, this approach raises serious tax and financing issues that must be carefully evaluated before implementation.

Have a plan in case of difficulties with a multi-franchisee

Finally, as mentioned above, the consequences for a franchisor and its network of difficulties with a multi-franchisee are much more significant, and also much more complex, than difficulties with an individual franchisee.

Even if this is not the most pleasant task when setting up a network expansion tool, it is still important that, when setting up a multi-franchise, the franchisor thinks about the possible consequences of such a situation and plans the decisions to be made and the actions to be taken if it should occur in order to avoid being left behind by the multi-franchisee.

The multi-franchise agreement should reflect the result of this reflection and planning in order to provide the franchisor with the clauses and tools that will allow him to act effectively and in the interest of his network if the situation or the relationship with a multi-franchisee deteriorates to the detriment of the franchisor and its network.

Ensure that the terms of the franchise, multi-franchise and related agreements are consistent.

Given the importance of the various agreements that drive the relationship between the franchisor and the multi-franchisee, it is appropriate to ensure, to the extent possible, that the various agreements and their renewals (such as franchise agreements, leases and subleases, if any) are entered into and renewed for the same terms. For example, the consequences of certain provisions at the termination of one or another of the franchise agreements (non-competition clause, forfeiture of territorial protection, etc.) may have important consequences for the other agreements still in effect and for the management that must follow from them.

Provide for a mandatory, flexible, fast and efficient method of dispute resolution.

Given the considerable importance that a multi-franchisee can represent for any of the franchisor's markets, any public, time-consuming dispute can be very costly to the brand image of the banner.

It is therefore to the advantage of the franchisor to provide, in its agreements, for mandatory prior recourse to mediation in the event of a dispute and to arbitration in the event that mediation fails.

Several other alternative dispute resolution methods can also be considered.

But for the most part, early, mandatory, informal and private recourse to resolve any dispute as quickly as possible can only be beneficial, given the innumerable repercussions that a dispute with a single multi-franchisee, as opposed to an individual franchisee, can cause.

Fasken has all the experience and resources necessary to help you structure your network properly, to provide you with adequate contracts tailored to your needs, and to properly prepare and execute any expansion project, whether in Quebec, in other Canadian provinces or anywhere else in the world.

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