Multi-unit Opening Obligations: What to Check Before Joining a Franchise in Japan

When joining a franchise network, the prospect of running several outlets in future can be appealing. But your decision should depend on whether further openings are optional or must be completed within a set period. Do not sign based solely on the profitability of the first outlet: check how far any multi-unit commitments will constrain your future finances and business decisions.

Are further openings a right, a target or an obligation?

Start by reviewing the outlet numbers stated in the franchisor’s recruitment materials, business plan and contracts. ‘May open’, ‘aims to open’ and ‘must open’ do not mean the same thing. Check not only the number of outlets, but also who is responsible for achieving it and by when.

Ask the franchisor the following questions:

• Can the franchisee decline to open additional outlets?
• Is the outlet count an aspirational target or a binding contractual obligation?
• Is the deadline measured by the date the premises agreement is signed, the franchise agreement is signed or trading begins?
• Does the deadline remain unchanged if the franchisor is late in approving premises or assessing a proposed outlet manager?
• Is a separate franchise agreement required for each additional outlet?

Take particular care where an overarching agreement covering several outlets sits alongside individual outlet agreements. The agreement for the first outlet alone may not reveal the full development obligation. Whatever the documents are called, review every agreement you will sign.

A promise of priority rights to open within a territory does not necessarily create an obligation to do so. Conversely, favourable terms may be conditional on opening a specified number of outlets. Start by listing the rights you receive separately from the obligations you take on.

Distinguish statutory disclosure requirements from your specific opening conditions

Japan does not have a single law that uniformly governs all franchise agreements. However, Article 11 of the Act on the Promotion of Small and Medium-sized Retail Business requires franchisors whose operations qualify as a ‘specified chain business’ under the Act to provide prospective franchisees with written information and an explanation before concluding a contract.

Whether a business falls within this scope is not determined simply by labels such as retail or food service. The assessment considers requirements including whether franchisees are primarily small and medium-sized retailers; whether standard-form contracts provide for ongoing supply or arrangement of goods and management guidance; the use of trade marks; and payments collected on joining.

The Japan Fair Trade Commission’s Guidelines Concerning the Franchise System under the Antimonopoly Act also apply regardless of business sector. They explain the desirability of adequate disclosure during franchise recruitment and the potential problems with dealings that unilaterally disadvantage franchisees after a contract has been signed. They do not impose an identical statutory disclosure obligation for every item discussed.

If there is an obligation to open several outlets, check that it does not contradict recruitment statements such as ‘additional openings are optional’. The Civil Code and other laws may also be relevant to contract interpretation and liability for non-performance. An opening obligation is not automatically unlawful: the contractual terms and the actual circumstances of the business relationship need to be examined separately.

Assess cash flow across all outlets, not just each outlet’s profitability

For a multi-unit plan, forecasting a profit at each outlet is not enough. The key question is whether you can pay to open the next outlet while retaining enough working capital to operate the first.

Using the franchisor’s estimates, itemise each outlet’s initial franchise costs, premises acquisition costs, fit-out and equipment, recruitment, pre-opening staff costs and initial stock. Then combine all outlets’ cash receipts and payments into a single monthly cash-flow forecast. If payment dates overlap, you could run short of cash even while making a profit.

Compare at least the following scenarios:

• The first outlet gets up and running as planned.
• Sales build more slowly than expected, requiring additional working capital.
• The next outlet’s opening is delayed after you have paid its pre-opening costs.

If you receive discounts on franchise fees or other charges on the basis of opening several outlets, check whether the difference becomes payable if you fall short of the agreed number. Understand not only the value of the discount, but also when any repayment obligation arises.

An obligation to open more outlets does not, in itself, secure future lending. Present lenders with the plan for all outlets and discuss when further borrowing will need to be assessed and how much you will need to fund from your own resources.

Agree decision criteria for further openings and conditions for revising deadlines

Even with funding in place, further openings may be difficult if you cannot recruit managers and staff. If the plan assumes that the owner works full-time in the first outlet, consider who will run it once the owner moves to the next one.

During contract negotiations, proposing not only an opening deadline but also the conditions for proceeding can help make potential problems clearer. For example, you could propose deciding on the next investment only after confirming that a manager is in place, premises have been secured, funding is available and existing outlets are operating satisfactorily. Such conditions will not necessarily be accepted, so establish whether agreement is possible before joining.

Also check when you can request an extension—for example, if suitable premises cannot be found, the franchisor’s approval is delayed or recruitment falls behind. Agreeing who makes the decision, which documents must be submitted and when a response is due is more useful in practice than a vague assurance that the matter ‘can be discussed’.

If you expect the franchisor to introduce potential premises or support the opening process, clarify its role. Planned support does not necessarily guarantee that suitable premises will be secured or that the outlet will open.

Check how missed targets could affect existing outlets

Finally, review the consequences of failing to open the agreed number of outlets. The burden differs substantially depending on whether you simply lose the right to open more, face additional charges or put the agreements for outlets already trading at risk.

Pay particular attention to clauses that treat a breach of the overarching agreement as a breach of each outlet agreement. Equally, check whether a contractual problem at one outlet could affect the others. Ask the franchisor whether there is a period to remedy a breach, scope to renegotiate the plan or an option to limit action to the outlet concerned.

To make the review easier, summarise ‘opening deadlines’, ‘funding requirements’, ‘the franchisor’s role’ and ‘consequences of falling short’ in a single table. Attach the relevant contract clauses and ask a lawyer to review them. Where explanations are unclear, ask which payments and liabilities would remain in the worst-case scenario.

Practical takeaway: Expanding to several outlets offers growth opportunities, but it can also commit you to future investment. Before signing your first franchise agreement, establish how much choice you have over further openings and under what conditions you can stop or postpone the plan.