Q: My franchisor is pressuring me to open the second unit of my multiunit deal. I know I’m not ready. Am I in danger of defaulting?

 

Propose to the franchisor that you would like what’s called delayed development. It’s an amendment to your multiunit agreement. Explain that you don’t want to miss a benchmark and don’t want to be in default, but you want to be very careful and cognizant of when and how to open your second location.

Good franchisors that have this internal practice will recognize this term and say, “OK, she’s been proactive.” If they don’t have that internal practice, they might be slightly confused. They might think to themselves, “I might have heard this somewhere in the industry.”

The norm in the industry for delayed development is six months. But it will depend on what kind of brand. If it’s an ice cream brand, for example, then you’ll want to request a little bit longer amendment; you don’t want to open in the winter.

I coordinated delayed development policies and procedures when I was at AFC Enterprises because they had a number of development agreements that weren’t being tracked or benchmarked. Some of our leadership wanted to terminate those agreements. I said, “That’s not fair. No. 1, you haven’t tracked them. They’ve received no notice from you. We should go to them and say, ‘Are you interested in opening another unit?’ If they say no after they’ve signed an agreement and we’ve blocked out that market for them, then we’ll get into a separate conversation. The ones who are interested in opening another, we should automatically give them a delayed development.”

Now you’re seeing franchisors who are putting that into their actual franchise agreements. What I don’t like that they’re putting in the franchise agreement, and I’m sure this was a lawyer’s idea, is a charge for the delayed development. I don’t believe in doing that for the first one. Actually, I don’t believe in doing it second, third, or fourth if they have a legitimate reason. If they’re just defaulting to be defaulting, then that’s a problem. But I don’t believe you should charge for delayed development. The franchisor might have a little lost revenue on royalties, but it’s not going to be equivalent to what it’s charging.

A brand can’t force you to open a store if you don’t have a site. What it can do is send a letter saying you’re in default. If the contract says, “If you’re not under construction by a certain date,” that’s a problem. If it says, “If you’re not open by a certain date,” that’s a problem.

Even if they send you a default letter, no matter how it’s worded, if the brand hasn’t triggered you and said, “Where’s your site? Are you moving along?” they are going to have to give you a cure period. That period has to be viewed as reasonable by the court.

If you haven’t heard from the franchisor in months, and the company comes to you and says, “Your agreement says you have to be open by June 1 and if you’re open by July 1, we’re going to terminate your franchise agreement,” then you have an argument to go back and contest that. I would draft a letter back to the franchisor letting the company know that’s not reasonable.

The franchisor might come back and say, “Well, that’s your responsibility.” The answer to that is, “Yes, but you knew I was a new multiunit franchisee,” which rolls me into the real background of this: Franchisors sell multiunit agreements to people who are not already multiunit franchisees.

Eighty percent of franchisors teach you how to get that first store open. You’ll get an operating manual to run that one location. What they don’t have is ongoing education on how to become a multiunit franchisee. Most multiunit franchisees learn how to struggle through that all on their own.