Should I buy Multiple Franchises
Many franchise agreements have financial discounts or other incentives -larger territory-if a new franchisee purchase multiple franchises up front. This option may be represented by what may be called a Developer Agreement or Area Agreement, or something similar, which will be in the Franchise Disclosure Document. (FDD).
This is generally a creative method for Franchisors and sell more franchises quicker, and to collect more initial fees up front, especially a new or relatively Franchisor. Very rarely will the Franchisor give the franchisee an objective analysis of this option. Most systems that offer an OPTION with some sort of discount will require a minimum number of franchises required to be purchased to take advantage of the option. My experienced with more mature franchise systems is NOT to accept multiple franchise purchases unless and until the existing franchisee passes a variety of qualifying procedures.
If the franchise concept is a brick and mortar facility, I always caution about not being induced to go with more than 1 unit at the beginning, even with a substantial discount of franchise fee. You’ll still have to pay something substantial for the right to purchase the 2nd franchise. However, if things aren’t working according to plan with the first location, a struggling franchisee definitely won’t want to invest more heavy up front costs of building another store and obligate on another expensive lease. It is critical to know if a franchisee can make a go of one store before paying for more. It takes the operating income out of the franchisee’s pocket when needed most.
There is always a specific timeframe to sign the 2nd franchise agreement, at best a year after the first store opens. If the franchisee does not meet the deadlines on the 2nd store, all upfront franchise developer or area fees are kept by the franchisor-there is NO refund, and the franchisee loses extra promised the territory. I have seen the 2nd locations drag down the first successful location over and over, due to the influx of needed capital investment all at once, plus the time drain on the owner trying to teach the managers, taking away from the focus on the first location. Expanding a 2nd brick and mortar location should not be a decision you make when purchasing your first franchise, unless you have purchased and operated multiple franchises, or businesses in the past, and have sufficient capital and resources NOT NEEDED for the first location.
On the other hand, if the franchise concept is service oriented only, and does not require heavy up front equipment purchases or a site lease (other than a small office), and additional territory is offered for a discount, this may be a better investment in a multiple franchise purchase. In these franchise concepts, having more protected territory is generally more beneficial to the franchisee’s sales potential. However the caution I give even in these situation is to closely analyze all the fees the franchisee must pay, as in these concepts, fees are charges “by Territory” or “by Zone” -so if the franchisee believes he gets 7 zones for a great up front price (rather than 1), pay particularly attention to the “per zone: fees….
In general, Franchises need to keep in mind that the first year of ANY business will almost always be a monetary drain for a long period of time, until there is a break event point. The franchisee’s estimation of this break even timeframe is almost always wrong, as it depends highly upon a myriad of factors, including the location, delays in construction (if applicable), delays in opening, the costs of employees and management, the effectiveness of advertising, the competition, the owner’s business acumen, effectiveness of the franchisor’s system, etc. etc. Franchisees invariable go into opening a business without keeping in mind delays and additional costs occur almost 100% of the time.
Having an experienced franchise attorney reviewing this option and the development agreement terms, should be critical to your decision. —-did I give away the secret sauce here? Can you edit it for me??
