What Emerging Franchisors Need to Know About Multi-Unit Franchising Before Starting
In recent years, especially since the Great Recession, more franchise brands have focused on expanding through multi-unit franchising. Selling more than one unit to a single franchisee is appealing for many reasons, including faster growth with fewer franchisees.
Multi-unit franchising is an attractive way for emerging franchisors to grow. For some, it’s even a necessity. But, it’s not for every franchise. For many emerging franchise brands, starting slowly and working their way up to multi-unit operators is a more measured approach that is good for both the franchisor and the franchisees in the long run. There’s a lot to consider before deciding if multi-unit growth is right for your emerging brand.
Who Should Use Multi-Unit Franchising?
Some concepts are better suited for multi-unit growth than others and should even consider it right from the start, such as food, beauty and fitness brands. Restaurants, especially QSR concepts, are well-suited for multi-unit growth. In fact, multi-unit franchisees dominate the restaurant sector of the franchise industry given the need for well-financed operators with prior food service experience. Therefore, not having a multi-unit development offering for potential multi-unit franchisees may hinder your franchise sales.
Multi-unit franchisee candidates typically do not want nor are they a good fit for the standard owner-operator model seen in single unit franchising. But, they do serve a role as the investor if they have the past experience in putting operational teams together to run the restaurants, stores or clubs. Multi-unit franchisees do not have to be in the business every day running the operation, but to be successful they do have to remain involved daily in the business on the back end, ensuring everything is running smoothly.
Unit-level economics also play a role. For instance, a small franchise that produces a solid return, but low aggregate dollars per unit (e.g., home service franchises) may need to sell multi-unit deals to make the overall aggregate dollar return more appealing to their franchisees. Conversely, a franchise that allows a franchisee to make a significant income with only one unit may be less compelled to sell multi-unit development deals.
What Multi-Unit Franchisees Should Bring to the Table
Multi-unit franchisees are unlike single unit franchisees. They wear many hats and are typically more aggressive about building a franchise empire.
Franchisors should look for potential multi-unit franchisees who have experience in their field or a similar field, along with experience being a multi-unit owner. Multi-unit franchisee candidates must be able to multi-task, manage a team effectively, understand their way around financial statements and have a strong work ethic. They should also be able to fund whatever amount of stores or units they agreed to open up front.
An emerging franchisor should never put their brand in the hands of an operator who must be successful with their first unit in order to open their second unit. Ensuring they are well capitalized upfront for all the units they signed up for means that financial constraints will not be the reason why the franchisee does not meet their obligations.
The Pros and Cons
For the right kind of franchise, there are several pros to multi-unit franchising:
- Faster growth and the ability to penetrate territories and markets quickly
- Planned growth via schedules
- More co-op opportunities built in
- More efficient labor costs for franchisor because of fewer franchisees to manage
- Stronger and more stable franchisees, if they are successful
However, multi-unit franchising also comes with potential pitfalls:
- Larger franchisees can have too much control and influence in a system
- Multi-units are typically more litigious
- More negotiation on contracts and schedules
- Problems arise if they do not meet development schedules
- Weaker and more likely to fail if they are not successful
- Long-term multi-unit franchisees in large franchise systems may have difficulty exiting when ready to retire or move on if a transition or succession plan is not in place
Managing Multi-Unit Growth
Multi-unit franchising is both a blessing and a curse, depending on how it is managed. Your job as the franchisor is to make sure that the brand is represented the way you would want it to be in every territory. Therefore, ensuring that you have the right partners, whether multi-unit or single unit, is critical to the long-term success of your brand. Be sure you award your multi-unit franchisees only what you think they can handle at the time. Be patient and take your time with each decision and don’t be afraid to say no if the fit is not right. And, be sure each unit that opens is highly successful before you allow more to open – controlling that piece of the puzzle is beneficial to both franchisor and franchisee.
With 30 years of franchising experience and more than 800 franchise owners representing 1,200 locations for five brands, Winmark Franchise Partners can help you plan for multi-unit growth. If you are interested in receiving additional information, contact us here or at (844) 452-4600.