Did you know a good many franchisors require in their Franchising Disclosure Documents or FDDs that you must put in more than one franchised outlet. Indeed, the franchising companies that have these clauses usually require you to set up additional units on a development timetable. Generally, this timetable goes for a 10 year period, or the length of the original franchise term. Therefore, each time you put in a new store, you must have more capital, or use all the profits from your other stores to finance the newest store.
I’ve seen franchise agreements that require new franchisees to put in a new franchised outlet in their exclusive territory or trading area every two years, during the length of their ten-year agreement. This means they will have five stores total by the time the franchise agreement has to be renewed, and then they are expected to sign the new franchise agreement for another 10 years, but they do not know what those new stipulations will be in the new agreement.
In fact, they could end up spending all kinds of money and walking away from their franchise, or being in a situation where they feel they have to transfer their franchise or sell it to someone else. Worse, if they put in new stores every two years, but they aren’t making money, they are still required to continue to put in new stores, and find the money to do it somewhere else. If they fail to do this, they could lose their franchise and be terminated for cause by the parent company.
Of course, it’s not all bad as many franchisees want to put in multiple units already, and often they put the new units in way ahead of their required schedule. Nevertheless, I would recommend that you talk to a franchise attorneys which is a specialist in this industry sector, and ask them all about it, and you might find you can negotiate the development schedule to a worst-case scenario, just in case things don’t work out exactly as you planned, or the franchisor expects.
The more leeway you negotiate in advance, the safer for your investment over the long-haul. Now, it’s not my intent to tell you how to run your business or give you legal advice, these are just some things that I’ve noticed over the years, and things you should discuss with your attorney prior buying a franchise. Please consider all this.
Lance Winslow is a retired Founder of a Nationwide Franchise Chain, and now runs the Online Think Tank. Lance Winslow believes in franchising.
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