Legal Perspectives For Growth
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Legal Perspectives For Growth

Legal Perspectives For Growth

One of the foundations of growing a business is infrastructure to support the growth. Think of an area of the country that was not very populated but within a short period of time became extremely popular.  Think Redmond, Washington just before Microsoft moved into town.  The area grew so fast that the infrastructure around it could not support the growth in the beginning.

Owning and growing a multi-unit franchisee enterprise is really no different and with that you have to ensure you have what you need to scale and sustain the growth you desire.  Processes, procedures, marketing, talent, attractive culture, capital, and a keen eye for the legal technicalities are only a few of the diversity nuances that must be in sync for success.

I recently asked Michael Einbinder, an attorney with Einbinder & Dunn LLP, for insights from a legal perspective.  Michael shares:

There are really only two choices.  

  • Build out more units of concepts you already own or 
  • Acquire new concepts. 

The latter of these may have some advantages.  Assuming a multi-unit franchisee has built out an existing territory with your existing brand, you may have saturated your market and do not have any more space to put in additional units.  Acquiring a second brand that is complementary to the first allows for continued growth.  Given the growth of consolidation in the industry and the creation of platforms for multiple brands, franchisees may find that they can grow by acquiring sister brands of existing businesses.  Diversification like this is critical to growth.

There are, of course, economies of scale in this approach.  If properly created, a management team can take on more responsibility than just one brand.  The existing executive team (operations, accounting, etc.) will be able to take on more responsibilities.  The same may also be true at the regional and district manager level.  These personnel may be able to handle the necessary functions without the requirement of hiring more employees at that level.  These costs can be split among multiple brands.  Of course, it is best to have skilled employees in place when you start this growth endeavor.  And it goes without saying that specific roles should be filled by an executive team that is bound by employment contracts and protections for trade secrets.  Franchisors may also require these types of agreements for high-level employees.   If the franchisee is run as a family business, development of family governance agreements should also be considered.

Furthermore, Michael shares, from the legal perspective you must aware of a few considerations:

  1. Franchise agreements for existing and new concepts need to be reviewed to make sure they allow what some franchisors may view as competing businesses (they should be reviewed by knowledgeable counsel before being entered into anyway).  In some cases, waivers can be obtained.  
  2. Another issue is how the franchisee company is structured.  The best approach may be to have a holding company with two subsidiaries, one for each brand.  Those companies can be parents to the operating entities with each location owned separately.  The holding company can be set up to employ the executive team and management level personnel.

Thank you to Michael Einbinder for his legal perspective on growth.  Regardless of the growth path you choose, a takeaway here is that you want to make sure you are surrounded by advocates and advisors who are experts in the multi-unit franchise industry. This will ensure you are building your own personal foundation for the scalable growth of your portfolio.

Kendall Rawls knows and understands the challenges that impact the success of an entrepreneurial-owned business. Her unique perspective comes not only from her educational background but, more importantly, from her experience as a second-generation family member employee of The Rawls Group - Business Succession Planners. For more information, visit www.rawlsgroup.com or email info@rawlsgroup.com.

Published: March 28th, 2022

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