Multiple Franchise Outlets Pros and Cons

There are quite a few issues to consider when looking at whether to open a second or third franchise outlet.

Simple accounting would indicate that having 2 or 3 outlets would allow you to centralize administration, obtain economies of scale, and perhaps even create a pool of staff.  It should allow you to delegate some internal management tasks.   Theoretically 1 + 1 + 1 +1 = 4.

Apart from the obvious issue of the capital required for additional outlets, there are some other things to consider.

Firstly, some franchises will have policies for or against multiple outlets.

As a generalization, franchisors should make their decision based upon your individual circumstances and the franchisor’s assessment of your ability to profitably run the additional outlets.

The Franchise Agreement

It is slightly less common now, but many Franchise Agreements, particularly the older ones, will have a couple of clauses which bear upon this.  Your Franchise Agreement may have a clause which in effect says, that if the franchisor believes that your current territory is too large, then it may require you to split the territory and open a second outlet anyway.  This is not exactly ideal, as you have the same customer base but double the fixed expenses.

Another, still common clause is a first right of refusal for the adjacent territory when it becomes available.  This is usually the time that franchisees consider the multiple outlet scenarios.

Things to Consider

• Economies of Scale

Look specifically and critically at what savings you will make on the second or third outlet.  Check what accounting, management, stock, staff, stationery and rostering benefits are likely to be available.

• Your time

It is unfortunately true that sometimes 1 + 1 = 1.5.  Ask yourself what role you are going to be required to play, both during the infancy of the new outlet and the longer term.  If all that is happening is that you are doubling the amount of effort that is required by you, then this is unlikely to be beneficial.

• Management Resources

Check that your existing Franchise Agreement allows you to delegate to a manager, the tasks which you will need to give up when the second outlet opens.  You will also need to consider whether you have the right people in the first outlet to allow it to run profitably in the long term without the level of scrutiny and effort you currently put in.

• Assistance and Procedures

Though your operations manual will undoubtedly provide you with a good process for producing and selling the product, it is unlikely to assist you with any systems, procedures and processes for how to manage multiple outlets.  If other franchisees have done it, you should take advantage of their experience.

• Skill Set

Ask yourself do you have the ability and the drive to make the effort to ensure the success of the new outlet.

• Risk and Goals

Ask yourself if you are prepared to risk your current level of income and comfort level to take on a new outlet which will, at the very least initially, drain resources and profit from your current situation.  You need to consider your medium term goals (sale, retirement, income levels, passive income program) and ensure that multiple outlets fit that plan.

Rights of Entry

You might be surprised to find that several people have a right to enter onto the premises from which you conduct your business, whether you like it or not.

The Landlord

Naturally, subject to the terms of the Lease, the Landlord has a right to enter, as the owner of the premises.

There are 2 possible structures for your occupancy:-

1.    You have a Lease direct with the Landlord;

2.    Your franchisor has a Lease and you simply have a licence to operate.

The second of these structures is becoming more rare.  In difficult times, franchisors do not want to hold leases, and would prefer for the franchisee to take this risk.

If you have a direct Lease, the Lease will specify the rights of entry, and there are also Lessor rights contained in property law legislation in each state.

Essentially, the most common Lease terms provide that the Landlord may enter at any time to inspect the condition of the property, upon reasonable written notice.  The Landlord may also enter without notice in an emergency.

In either of these situations, the Landlord may bring tradesman and other people at the same time.

Members of the public

During the times when your business is open and operating, every member of the public has a right to enter, unless that right (or “licence”) is removed or revoked.

The most common example of revoking a licence to enter is the sign on the door saying “no hawkers or canvasses”.  Any person who enters onto your premises can have that licence revoked at any time whilst they are there.  This means that you or a person authorised by you, can at any time, say to a person “get off the premises”. 

If they do not remove or attempt to remove themselves within a reasonable time, then it is open to you to use reasonable force to eject them.  You would obviously not do so in circumstances where that will damage your business or its reputation, and I’m sure you can see that both the facts of what happened and the definition of reasonable regarding time taken to leave and force applied, are obvious points of dispute.

Nonetheless, it is open to you to refuse service and entry to anyone without reason.  Be aware that there is competing law relating to discrimination both at a State and Federal level.

Franchisor

If the Franchisor holds the Lease and you simply have a right to occupy, then the Franchisor’s representatives can attend at any time, in or out of hours, for any purpose, without explanation.  Effectively, the Franchisor is the tenant and occupies the premises.  You are simply allowed, for the moment, to be there.

If you have a direct Lease, your Franchise Agreement will allow a right of entry to the Franchisor and its representatives.  Check the wording of your Franchise Agreement carefully.  It is very unlikely that you will want to attempt to exclude the Franchisor.  You would only do so in an outright dispute and then only if the law allows.  It is important, in any situation, particularly in a dispute, not to hand the other side any contract breaches which will place you in a weaker position.

Your Financier

Any loan documentation is very likely to contain a right of entry.  The right is usually not triggered unless and until a default occurs, but in those circumstances, the Financier will usually have the right to enter onto your premises, after having issued the appropriate default notices, to sieze and recover equipment.  This document suite is often accompanied by a document to be signed by the Landlord, ensuring that the Landlord cannot bar entry, if you have been locked out of the premises because you are in breach of your Lease.

Franchisor’s Financier

Where the Franchisor has leased directly, its Financier may also have the right to enter the premises, to sieze any equipment owned by it.  This is quite a rare scenario.

Conclusion

It’s important to know who can enter onto your premises, in what circumstances, and with what notice.  Obviously, your relationship with your Franchisor is paramount and you would not, except at the most combative circumstances, seek to exclude the Franchisor’s representatives, particularly if that hand of the Franchisor has the right to issue your breach notice.

Lease and Franchise Agreement Renewal

Lease Renewal

If you have or are taking over an existing franchise business, it is unlikely that the lease renewal and the franchise renewal will coincide.  You may have to deal with several lease renewals during the life of the franchise agreement term.  Generally, so far as lease tenure is concerned, more is better.  The franchise operation will be more secure (and therefore more valuable) if it has a secure long term tenancy.  Depending upon the situation, this may be a long lease or a short lease with multiple options to extend.

Time Limits

WATCH OUT FOR OPTION TIME LIMITS!

Virtually the most important thing with leases is to ensure that you accurately calculate and diarize the period during which you can exercise your option to extend your lease.  In some jurisdictions, retail shop lease legislation requires the Lessor to specifically notify these dates, but you should treat it as your responsibility to watch this time frame.

Options to extend

Some large retail outlets have a policy of not providing options to extend.  Those large retail organisations believe they have so much market power that it is better to threaten the tenant with being locked out on expiry, in order to pressure the tenant into higher rents, new shop fitouts and changed lease terms.  They are not concerned about a threat not to renew.

Retail Shop Leases Legislation

Most States of Australia have specific legislation which provides additional rights for tenants in retail shopping centers.  Check whether you fit the definition.  These acts of parliament provide higher obligations from the landlord with respect to disclosure, minimum first terms of lease, outgoings and other benefits.

Prior history with other tenants

Other tenants in your complex are usually very forthcoming with information regarding their dealings with the Landlord.  This can be a valuable source of intelligence where you are attempting to determine what your Landlord will do.

Exercise of Option

Your Lease will specifically state whether you have an option to extend or not.  It will also specify the window (often between 3 months and 6 months before the end of the current term of Lease) during which you can exercise.  If you issue a notice of intention to exercise the option, the Landlord has to offer you a further Lease upon the same terms, except that the rental will be renegotiated.

Things to watch for

1. Check the date and be sure;
2. Check the requirements for service.  The Lease will always have a paragraph specifying the rules for issue of notices.  Make sure that you have the correct address and the correct method of notice (post, personal delivery, fax, email etc);
3. Proof of service.  Make sure that you either have an acknowledgment of receipt of your notice, or some independent method of proof (registered post receipt or personal service details (date, time, place and person)) written down.

New rental negotiations

The Lease will usually specify the format and process for new rental.  The most common process is that the Landlord will be required to specify within a certain number of days, the figure that it believes should be the rental for the first year of the new term.  You will then have a certain number of days to agree or provide a counter proposal.

If the parties cannot then agree, the rental will be calculated according to a set format, usually by an independent expert.  Use this format sparingly, as it is costly, causes delay and will damage the relationship with your Landlord.

Registered verses Unregistered Leases

There are pros and cons for each of these.  Essentially a Registered Lease is a lease where the State Titles Office has noted the lease details on the Title.  This is more expensive and the additional cost will be paid by you.  The only benefit that you receive from having your Lease registered is that your options to extend your Lease are not always protected if your Lease is unregistered and the Landlord sells the freehold to a new owner.  If the Landlord sells the freehold and you have an unregistered Lease, it may be open to the new owner to deny that you have a right to exercise your option to extend.  New Landlords denying in this way are extremely rare and you have rights against the outgoing owner in this circumstance.

Most outgoing owners will ensure that they obtain a written undertaking from the new owner to honour any options, in order to avoid claims from disgruntled tenants.  You need to make a decision about a whether the additional cost of having your Lease registered (as it is your option to do so, not the Landlords) is worth the cost to avoid the risk.