Franchising an Existing Business: Structuring Multi-Unit Agreements and Setting Expansion Conditions

When turning an existing business into a franchise, you need to consider not only the initial franchise agreement but also what happens when the same franchisee opens additional outlets. A verbal promise that “the second outlet will be on the same terms” leaves room for uncertainty over support, fees and how far a problem at one outlet may affect others. To build a sustainable franchise network, decide how multi-unit agreements will be structured before you start recruiting franchisees.

1. Separate franchisee-wide obligations from outlet-specific terms

Start by dividing contractual rights and obligations into those that apply to the franchisee as a whole and those that relate to individual outlets. Establish whether the contracting party will remain the same as the number of outlets grows, or whether separate companies might operate individual outlets.

For example, confidentiality obligations and responsibility for liaising with the franchisor can readily be addressed at franchisee level. By contrast, the location, opening date, trading name, services covered, payment terms and contract term need to be confirmed for each outlet. A separate company does not automatically gain contractual rights simply because it shares the same outlet manager or company representative.

Practical options include signing a separate franchise agreement for each outlet, or combining a framework agreement with outlet-specific agreements. Whichever approach you choose, make the following clear:

• Which company or individual is a party to the agreement
• Which outlets are authorised to use the trade marks and operating methods
• Which terms take precedence if the common terms and outlet-specific terms conflict
• How the term of the framework agreement relates to the terms of individual outlet agreements

Having the same franchisee is not the same as treating all outlets as a single contract. Do not group outlets together solely for the franchisor’s administrative convenience. Use a structure that allows the franchisee to understand each outlet’s responsibilities and profitability.

2. Do not make further openings an automatic right

Strong performance at the first outlet does not necessarily mean a franchisee has the capacity to manage several. An outlet where the owner handles day-to-day operations requires a different management structure from one run through an outlet manager.

When a franchisee wants to expand, review at least the performance and operation of existing outlets, the allocation of management responsibilities, cash flow after the additional investment, and the impact on existing outlets. Do not use sales as the sole criterion. Consider whether outstanding improvements have been left unresolved and whether transferring staff from an existing outlet could disrupt its operations.

For example, if the plan is to move an existing outlet manager to the new outlet, check who will replace them and how long the handover will take. The franchisor must also assess whether it can provide opening preparation and on-site support at the proposed time. These are operational criteria set by the franchisor to suit the business, not statutory assessment requirements that apply uniformly across Japan.

The process from application to decision can be documented as follows:

1. The franchisee submits an opening plan and proposed management structure.
2. The franchisor reviews the existing outlets and the new outlet plan.
3. The franchisor sets out any gaps and conditions to be met in writing.
4. The parties finalise the outlet-specific terms and sign the necessary agreements.

Explain the difference between an aspiration to “entrust you with several outlets in future” and a commitment to allow further openings. Accepting an application, considering premises and giving final approval to open should also be treated as distinct steps.

3. Match additional outlet fees to the support provided

For multi-unit franchisees, fees are easier to explain if you distinguish between work required only at the outset and work needed for every new outlet. Rather than making everything free for an existing franchisee or automatically charging the same amount as for the first outlet, establish what each fee pays for.

For example, introductory briefings for the owner may no longer be necessary, but training for a newly recruited manager and outlet-specific opening preparations may still be required. For additional outlet agreements, a schedule covering the following can be useful:

• Payments required for the additional opening and the work they cover
• People whose previous training will be recognised and those who need further training
• Support provided before and after opening, and the outlets covered
• Fees calculated separately for each outlet and fees calculated across the franchisee’s business
• Treatment of fees already paid if the opening does not go ahead

Even if you issue a consolidated invoice for several outlets, make sure the breakdown can be traced to each one. For security deposits, specify which outlet’s liabilities they secure. Do not assume that a deposit held for one outlet can automatically be applied to unpaid amounts owed by another.

If you offer discounts, set out when they begin and when they cease to apply. If a reduction in outlet numbers would also change the terms for the remaining outlets, explain this before the franchisee decides whether to expand.

4. Limit how far a problem at one outlet affects others

Multi-unit agreements require particular care where a breach at one outlet could lead to termination of agreements for other outlets. The structure should distinguish between minor shortcomings confined to one outlet and serious problems that call into question the franchisee’s ability to fulfil its obligations across the business.

The franchisor should establish the nature of the problem, which outlets it affects and whether it can be remedied, then identify who must be notified and the deadline for corrective action. If action affecting other outlets is necessary, the franchisor should be able to explain its reasons and scope. The fact that outlets are covered by a single agreement does not, by itself, mean that action against all of them is always justified.

Japan does not have a single law governing all franchises uniformly. Instead, regulations triggered by particular conditions apply alongside general law. 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 an agreement is signed. Applicability does not depend simply on whether a business is described as retail or food service. The relevant criteria, including ongoing supply or arrangement of goods and management guidance, need to be checked.

For additional openings, do not assume that an existing franchisee needs no further explanation. Have a specialist check the contractual structure and how the law applies. Regardless of whether there is a statutory duty, sound practice is to explain new fees and obligations affecting all outlets in writing before signing.

The Japan Fair Trade Commission’s guidelines on franchise systems under the Antimonopoly Act also treat franchisors and franchisees as independent businesses. Terms that go beyond what is operationally necessary and unfairly disadvantage or restrict franchisees may raise concerns such as abuse of a superior bargaining position or trading on restrictive terms. Questions of contractual validity and non-performance should also be considered under the Civil Code.

Practical takeaway: Before recruiting franchisees, prepare a “conditions for opening a second outlet” sheet. Summarise the contracting party, outlets covered, additional fees, support and implications for other outlets on one page. Start by checking that the agreements and day-to-day practice are consistent.