Securing A Multi-Unit Territory Can Make a Newer Franchise Brand Worth the Risk

Franchises offer a unique ownership opportunity that includes a defined path and business direction. If you’ve finally decided to take the leap and join the franchisee world, or you’re ready to grow your existing portfolio, there are a few things to consider.

What direction will you choose? A seasoned franchise or a less established brand? Both have positives and negatives. Finding an established franchise within a given territory could be difficult, so you may need to consider alternative locations. These franchises have a higher chance of success since they are already proven, but they may have limits on what is available.

Less established (younger) franchises pose more risk but also allow more opportunities, including multi-unit franchise development agreements (MUDA) and regional representative agreements. A MUDA is a contract in which a franchisee is granted the right to develop and operate multiple franchise units within a specific territory over a defined period. A regional representative agreement is a legal contract outlining the terms and conditions of a sales representative’s role within a specific geographic area.

In comparing the potential benefits of the franchise direction you choose, there is nothing wrong with buying a seasoned franchise and operating it yourself. You can make a nice living for your family and a good financial return. On the other hand, if you can find the right opportunity with a less established franchise and secure a territory, your rewards can be much higher and offer a path for an exit once the franchise becomes more established.

Here is an example from my experience of buying a less-established franchise and reaping the benefits. If I'm considering a seasoned franchise, such as an oil change business that has been around for years, I'm pretty sure that “territories” or MUDAs are not available. Those territories are likely already bought. In simple terms, seasoned franchises are probably sold in most major markets. Hence, there are no available multi-unit deals.

I decided to go with a new franchise and secured the rights with OrangeTheory to build 33 gyms in North Texas. There’s no way I could have ever done that with a seasoned franchise, since the territory would probably have already been sold.

So, the basic question is, do I go with a seasoned franchise, knowing it will be successful, but also knowing I will be limited in my expansion? Or do I take a chance on something new and buy an entire territory, taking a shot at it being a home run?

If you can find a less established franchise brand, multiple territories should be available. You can usually secure a defined territory with up to 5-10 potential locations. In most cases, you enter into an agreement with the franchisor in which at least one franchise is purchased up front, and the remaining locations are options available to you and mostly on a predetermined time schedule. As an example, your schedule could be one franchise up front, the second franchise in one year, the third and fourth by year three, etc.

If you meet the schedule, the MUDA will reserve the other locations, and you purchase, build, and operate based on this schedule. If you don’t meet the schedule, typically the franchisor has the right to sell them to others. So, it’s wise to meet your schedule and build a multi-unit territory.

Many people have questions about the exit strategy when it comes to multi-unit territories. It’s actually quite simple. Typically, this is a 5-7 plan whereby you follow your MUDA agreement and open and successfully operate 5-7 franchises. Once fully established, you are a much bigger target for the bigger buyers. Larger MUDA operators, private equity groups, and family offices all have an interest in territories versus single franchises. If you still have a few “extra” opportunities in your territory, it can be that much more attractive to buyers.

Here’s the main takeaway: a beneficial scenario is to secure the MUDA and the appropriate schedule that you can maintain. That plan will allow you to build a multi-unit territory. It also creates a possible exit to either larger franchisees or private equity.

James Harold Webb is the chairman and CEO of Paradigm Development Holdings, LLC, which is the holding company for the BeBalanced Center and ScentHound franchise brands.