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Buying a Franchise: Have you Thought About Future Expansion Rights

Date: 01/02/2013 | Category: Buy a Franchise | No comments

For those prospective franchisees who are not only looking to buy a franchise but rather‚ over time‚ to buy and open multiple franchise locations‚ now is the time to carefully consider and plan out the expansion rights that you will need.  Far too often prospective franchisees sign a single unit franchise agreement and then‚ later‚ consider additional expansion rights. This creates a problem if‚ at this later date‚ the franchisor is unwilling to permit your expansion.

Here is some basic but "real world" thoughts that you should consider and discuss with your franchise lawyer:

  • Your Single-Unit Franchise Agreement Will Restrict Future Expansion.  If you just sign a "typical" single unit franchise agreement (without including some critical modifications)‚ you will be legally obligating yourself and restricting yourself to both "in-term"and "post-termination" franchise agreement restrictive covenants that will prevent you from establishing a competing business and from opening multiple locations.
  • Co-Branding.  If you are planning to co-brand your franchised location with products or services that will be offered through two separate franchisors‚ naturally‚ you will require approval of both franchisors.  However‚ what about future expansion?  What if one franchisor grants you additional franchises but the other does not?  Under this scenario you need to be careful so when signing your original franchise agreement you need to put in place each franchisors agreement to permit future expanded co-branding.
  • In-Term Restrictive Covenants.  If your plan is to open up multiple franchised locations‚ you must include this right in your initial franchise agreement.  Consider that during the term of your franchise agreement‚ that you will‚ most likely‚ be subject to a non-compete that will prohibit you from establishing a competing business.  So‚ what happens if your franchisor refuses to approve you for additional franchise locations?  You could be stuck.  

Again‚ this post is for those who are planning and seriously thinking about multi-unit franchise expansion.  If this type of expansion is in your business plan‚ it must be addressed prior to signing any franchising agreement.  Otherwise you will be giving up too  much leverage and‚ worse‚ you may be subjecting yourself to unnecessary risk.

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