Why Franchisors LOVE Multi-Unit Development Agreements

Franchisors 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.

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