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Representing franchise investors who are capable of developing entire territories or states is a very different ballgame from representing single unit investors. The reason is simple. Single unit investors have no leverage.
Territory developers have very great leverage with new or recent franchisors and the issue is how that leverage may be used to establish trigger points in the franchise relationship that seriously reduce the risk of overreaching as the relationship grows over the years. There are also simple dollar amount triggers in play.
Exceptions to this are situations in which investors that already have experience in the franchise concept they wish to invest more in because they already know the franchisor and have decided they can do business with him. That is why you seldom see a good franchise resale opportunity that is available to an outsider. That franchisor would much rather have one of his own family be the buyer in any resale because of experience and reduced risk of the new owner not bringing a full experience and financial load to the resale’s future performance.
The franchise investor that has not only the financial ability but also a positive history of operations performance, franchised or not, is the diamond every new concept franchisor is looking for. In some instances the investor may even be stronger than the franchisor and the deal could possibly capitalize on that relative strength in several ways up to and including the investor actually becoming the franchisor. So many of the new concept franchisors are looking to be quick hitters and the possibilities at some point become a little like the television show “Shark Tank”.
The triggers are many, but a look at just a few should give you an idea of the approach. Money now versus money later is always a multivariate negotiating category. Territory rights, non infringement, rights of first refusal and alternative distribution channel infringement rank high on the list. The investor’s right to invest in other concepts notwithstanding in term covenants not to compete in the proposed franchise agreement provides fertile ground, especially when played against other variables. Terms of renewal and resale rights are important considerations to the power investor. The right to develop your own stores or to do it as a sub franchisor, sharing in the franchise revenue stream from those stores, often accelerates the available rate of development of new stores. Think of the triggers that might be available regarding dealings with vendors and overcoming the difficulties of not having access to reasonably competitive suppliers. The power investor can make that more rational at the beginning without regard for what might happen to other less important investors.
There are no rational excuses for not considering these important triggers when a new or recent franchisor is dealing with a power investor. You can’t side step important issues with claims that you are prevented from doing what is needed by some law or because your lawyer says you can’t do that. The power investor knows better and if the new franchisor tries those useless ploys he may lose the opportunity to get a very strong initial player that can enhance his salability reputation with others. That foolishness is for the single unit investor who usually doesn’t know up from down in franchising.
For the franchise lawyer representing these investors there needs to be awareness of the corporate, taxation issues that would be in play with each variable. The power investor already has these resources retained or employed, and these folks have a history with the investor that should not be compromised by using the franchise lawyer’s abilities in these areas. Open channels to the investor’s professional resources that are already in place are critical to mistake avoidance.
The franchise lawyer is his own separate specialized resource and brings focused expertise that those others don’t have. A few years ago a local very large retail chain made the mistake of buying into a franchise system thinking that their customary business lawyers were sufficient. They weren’t. The deal was inadequately vetted. The relationship failed to work in ways that should have been seen and prevented before the papers were signed. The investor lost 27 stores in the breakup and had to wait out the two year covenant not to compete before going back into a business that the family had been in for three generations. That kind of calamity is never justified. Tax and regular business lawyers are not equipped to vet or negotiate large franchise deals on their own.
The new concept market is full of FranWhacks with some qualified offerings in the mix. No large developer investor should ever consider venturing into this area of opportunity without expert guidance in this very discrete specialty.