Another way to expand your franchise is through what is known as an option. An option is simply a right provided to a franchisee to choose, at a later time, whether or not to open a franchise in a given territory. As part of the transaction, the franchisor must agree to remove the agreed “territory” from the market, and refrain from locating other franchisees within that territory.
Options are not prevalent in franchising, but can still be negotiated on a case-by-case basis. The benefit to an option is that, unlike under an area development agreement, the franchisee is not obligated to develop another franchise. The franchisee is permitted to “exercise” its option if it wishes to expand within the option period, but is also free to walk away without consequence if another location is not desirable. Unlike the area development scenario, a franchisee who does not open the anticipated store will not lose other units or face the risk of losing his exclusive territory.
Options are a great way to lock in territories for short periods of time. However, in order to obtain an option, one must typically pay for it. If the option is not used, the fee paid is usually not returned to the franchisee. So for this reason, an option might not be the most cost-effective method for expansion.
In the next post, I will discuss what are known as “rights of first refusal.”
If you have any questions about franchise law, please contact Brian Loffredo at
ABOUT BRIAN LOFFREDO
Brian is a commercial litigator with more than seventeen years of experience representing clients in the franchise industry. Brian routinely assists clients during the licensing and franchise/FDD review process, as well as with the resolution of franchise-related disputes, including those involving terminations, territorial disputes, fraud, disclosure/relationship law violations and breaches of contract.
In addition, Brian represents and counsels clients in the construction industry on matters involving litigation, construction defects, licensing and compliance, collections, mechanic’s liens, payment bond and Miller Act claims, contract drafting, and compliance with home improvement laws and other construction industry laws.
Brian also has extensive experience representing financial institutions with workouts, collections and residential / commercial foreclosures.
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