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Why Franchisors LOVE Multi-Unit Development Agreements

dollarFranchisors love to sell multi-unit development agreements, but some of the reasons may not be so obvious.

  • Multi-unit franchisee typically pre-pay a portion of the franchise fees for each potential location.  Similar to a non-refundable downpayment.  Lately, many franchisee haven’t opened their additional locations or have slowed the opening pace, but the franchisor still keeps their pre-paid franchise fees, which is typically $5,000 – $15,000 per location.  For example, if a franchisee signs an agreement to develop 10 units, then he may pre-pay a franchise fee of $10,000 per unit, or $100,000 for the rights to open 10 units.  He still would pay the remainder of the (oftern discounted) franchise fee as each location is opened.  The Development Agreements typically set a timeline for openings, and if you don’t keep to the schedule which is often opening at least one per year, then you lose your pre-paid franchise fee.
  • The parties are negotiating one franchise and development agreement rather than a new agreement upon each new opening.
  • Concentration of stores in one small area will help franchise sales in neighboring areas
  • Generally multi-unit buyers have more reserve cash, so stores are less likely to fail from lack of short-term capital.
  • A multi-unit franchisee is more likely to honor their penalty charges for closing a unit, compared to a single unit franchisee who has less assets.

About Ryan Knoll

Attorney and advisor with an interest in franchising. Feel free to email me comments and questions on the "Contact Us" page.
1 comments
franchisebooks
franchisebooks

Truly informative! It's nice to know some facts in franchising from another perspective. At least the franchisees are given an overview of the situation. Regarding the ins and outs of franchising, it is best to look at it from different perspectives to really discern all aspects pertaining to the business.