Franchisors need to develop a multi-unit model. There are fewer available franchisees, it is costly to find them and the market is very competitive. Similarly unit franchisee quality in Australia is questionable as a consequence of essentially full employment and high middle management salaries. So systems that rely on network expansion via new single unit franchisees will struggle to expand as quickly as systems that can expand via the multi-unit model.

There are other economies in terms of the multi-unit model, such as savings on recruitment and training costs, lower initial support requirements. However the current unit franchise model cannot just be replicated, and often needs major change. Systems that rely on the franchisee working long front line hours in the business need to work on improved margins and systems. And the workable multi-unit model may need 3 units or more, not just 2. With 2 units a franchisee may still not be able to achieve the requisite operational economies, or for larger franchised businesses to employ a senior manager and change their own role to be working on the business rather than in it.

Franchisors need to ensure they are able to provide the sort of brand and systems value and support a multi-unit franchisee will require. Otherwise there will be pressure for fee reduction.

When franchisors turn their minds to these challenges they often re-think the total model. Area development arrangements may become more common in Australia, with quality unit franchisees given regions and having a development program set from the outset. The unit franchise becomes the first step, not the end in itself. Or franchisors may look to establish a mix of franchised and corporate stores with a regional franchisee or area franchisee providing local coordination and support.

There are numerous legal and structural issues that need to be considered. In a paper presented to the Multi-Unit Summit in Melbourne early March Stephen Giles listed in point form the following questions and issues most specific to multi-unit franchising:-

Franchisee structure

  • One entity, or separate entities for each outlet? Usually one entity will be best, but not always.
  • Company, trust or other structure? Sometimes a more sophisticated structure may become more appropriate.
  • Taxation, profits and losses and grouping implications? It is critical to be able to net off losses and profits between businesses.
  • Finance implications? Simple is best.
  • Guarantee relief or limitation? Sometimes the franchisee becomes of such a size and value that individual guarantees become redundant, but this needs careful consideration.

Franchise Agreement

  • Review standard definitions as they will probably need to be changed. For example: “premises”, “territory”, in term and post-term restraint terms.
  • One agreement or multiple agreements or over-arching agreement as well? We typically prefer an over-arching multi-agreement with development and aggregate performance criteria and cross-default, with separate single unit agreements to facilitate separate sale etc. However every situation is different, and merits specific consideration.
  • Performance criteria – development of the territory or region, plus criteria for aggregate group sales is often sensible.
  • It is sometimes worth creating eligibility to be a multi-unit owner so the franchisor can review that status and require divestment of one or more outlets if the franchisee cannot cope.

Common mistakes

  • Doing deals on royalties and fees - royalties should be the same as the brand and systems benefit is still substantial. There can be compromises in fee for service arrangements and rebates where the multi-unit franchisee provides efficiencies. Franchisees should be entitled to aggregate sales between outlets for rebate purposes.
  • No cross-default clause, so the franchisor is unable to take action under all franchise agreements in situations such as insolvency, serious breach etc.
  • Cross-default clauses do not comply with the Code – termination of one agreement is not automatically termination of all related agreements if they are a “franchise agreement”.
  • Variable performance of outlets not addressed by the franchise agreement performance criteria clauses.
  • Lack of alternatives to termination, such as appointment of more senior staff, management changes at outlets etc. A franchisor is less likely to want to terminate a multi-unit operator, but needs some remedies to ensure appropriate action including divestment can be taken.
  • Lack of ability to require unit divestment where multi-unit franchisee is capable at unit level but is under-performing at group level.
  • The divestment clauses do not enable the franchisor to specify which unit should be divested and allow the franchisee to divest the wrong unit.