Quick Facts About Multi-Brand Franchise Development

by Julie Lusthaus

The Basics

Experienced franchisees often look to expand their business by becoming area developers, purchasing the right to open multiple locations. However, where those opportunities are exhausted, some developers will begin acquiring franchise rights in other brands, often in the same industry as the fi rst brand (ex. restaurants), but which do not compete with each other. Multibrand franchise development offers many advantages but raise unique concerns. If you are considering such an arrangement, you should seek experienced legal and fi nancial advice to determine whether it is the best way to accomplish your business goals.

Contractual and Operational Issues

Working with two sets of franchisors requires a careful review of both sets of contracts to determine whether they confl ict or otherwise could adversely impact one or both franchises. The most common issues that must be negotiated include:

� Non-compete provision. Generally, franchise agreements include a non-competition clause which states that franchisees cannot operate a similar business in the geographic area for a designated period of time. For multi-brand developers, typically, it is preferable to have a narrowly written non-compete so that any future brands the developer may want to purchase the rights to are not deemed competitive. Developers should exclude their existing businesses from the defi nition of a “competitive business” as well as limit competitive businesses to those offering products or services fundamental to the franchise.

� Non-disclosure and confidentiality covenants. This is an essential provision in the franchise agreement. However, the clause should be reviewed carefully to ensure it is not so restrictive that developers cannot take advantage of shared resources (HR, accounting, etc.) and buying power across their brands.

� Personal compliance. While franchisors usually require the owners of the developer to personally comply with a non-compete or confi dentiality provision, this may not make sense because multi-branddevelopers are often large companies or private equity fi rms. As a result, the non-compete and confi dentiality provisions should

be limited to those owners who are active in the developer’s business or who will have access to the franchisor’s confi dential information.

� Customer information. Both the franchisor and multi-brand developer must negotiate their respective rights to use customer information for advertising, loyalty programs, and cross-marketing purposes.

� Active management of the business. Franchisors often want franchisees to manage the franchise full-time. However, this must be revised since developers are unlikely to be devoting full-time efforts to the business. Instead, the agreement may include provisions related to the hiring of managers.

� Supplier requirements. Franchisees may have good relationships with certain suppliers or vendors that they would like to leverage for the new franchise brand. However, franchisors have the right to designate what products and services franchisees must use in the operation of their businesses. Compromise may be achieved by having the franchisor vet and approve alternate suppliers or allowing other suppliers in certain circumstances.

Julie Lusthaus represents franchisors, franchisees and independent business owners. To learn more, visit her website at www.lusthausfranchiselaw.com