If you have ambitions to build a multi-unit business, franchising can help achieve your goal. But a strategic approach is essential for success
The story of franchising is a complex one when you start to discuss multi-unit franchising. The franchise industry’s fundamental belief is that being a hands-on franchisee will develop and grow a business to greater levels and to a better standard and quality than an employee.
The paradox of multi-unit franchises is that often they’re operated on a day-to-day basis by an employee and not the franchisee directly.
However, multi-unit franchises do seem to work and benefit the hands-on employees, the franchisees (multi-unit owners) and the franchisor. As a result, we often see this strategy being used by master and global franchisors.
Profile of a multi-unit franchisee
A would-be multi-unit franchisee is often an ambitious individual or a group of investors, family or friends coming together to invest and pool their experience and skills to start their own business and see franchising as a quicker route to returns.
They may have more funds to invest and more equity to secure finance, so are able to consider larger investment franchises or development agreements with multi-site openings.
In many cases, the franchises that attract multi-unit franchisees are those with management structures in place, so that the franchisee doesn’t have to be hands-on from the off.
These businesses may have been developed to support more investment-style franchise models, so the employees within the franchise units also get the benefit of a strong support structure and training programme from the franchisor.
In many management franchise models, the franchisee starts directly within the business, but very much in a management role. The model allows for the growth of a staffing structure around them to build themselves out of the day-to-day operation.
Some franchisees even start as multi-unit owners, as some franchises operate a development agreement model - often in the quick service restaurant/food sector - where a franchise agreement says the franchisee has to open a number of units within a particular time period.
Some franchisors want to ensure the franchisee has access to the capital to fund the agreed number of outlets from the start and others will plan the growth within the business planning, so knowing that when unit one gets to a certain size it should be able to fund the investment in unit two and so on.
In other networks, multi-unit franchises are more organic and weren’t part of a strategic plan.
They often came about because of an ambitious individual who had grown their original business substantially and had built a team that allowed them to take on a neighbouring area or buy an additional business, either from within the franchise network or an independent one that was brought under the umbrella of the franchise brand.
This can only be done with the agreement and support of the franchisor and the franchise network and also at a time when the franchisee and their team are ready. In my experience, it has to be planned and the timing has to be right, as the first unit needs to be able to have the franchisee less hands-on.
In sectors such as fast food, an outlet might be open 24/7, meaning the franchisee can’t be there all the time, so already a structure of staff delegation to managers is in place, allowing the franchisee to be less directly involved in the business. In other sectors, it might take more time to build that team structure and get to a point where the business has a manager in place, allowing the franchisee to think about another location or unit.
What can often happen is that neither the new unit nor the existing one grows as the set-up wasn’t right or the timing wasn’t planned.
So a franchisor ideally will be looking to work with the franchisee, providing advice about the plans, and expect the franchisee to present their proposal for growth, rather than just ‘selling’ them another area. This approach makes for longer-term stability for both parties to support the expansion.
Multi-unit franchising from a franchisor’s perspective
Multi-unit franchisees can be easier to manage from a franchisor’s point of view.
As an example, rather than having 200 franchisees, having 100 with two units each means benefiting from potential economies of scale when it comes to support, training and communication.
Financial institutions, such as the major banks, view multi-unit franchising in a positive light too.
The initial investment may be higher than a hands-on franchise, but for them, there are cross-selling opportunities for loans, asset finance, payroll support and business insurance.
In addition, many lenders will consider loaning money to multi-unit franchisees who have a portfolio of investment across different or complementary sectors, such as gyms and beauty or therapy businesses, because it reduces their risk.
Multi-unit franchising looks like a great way to build a sustainable business that benefits from economies of scale. But, like many things in business, there are potential pitfalls.
For the franchisee, there is a danger of becoming overextended when it comes to resources and finance or not having the right staff in place that allows for the successful management of both trading and new locations.
On top of this, a multi-unit franchisee may have put all their eggs in one basket and become reliant on one sector and one franchisor.
A strategic risk to the franchisor is if a franchisee ends up owning a significant proportion of the network.
During my time in the industry, I’ve witnessed the management service fee that was paid by a franchisee who owned five sites become a significant amount of the franchisor’s income, which started to give them not only power and influence, but became a risk if the business failed or the franchisee sold up. Also, some franchisees in fast food chains have formed collectives and opposed decisions made by the franchisor, leading to conflict in the network.
In summary, multi-unit franchising can be a great way to run a business from both a franchisee and franchisor standpoint, as long as it’s strategic, planned and monitored.
Pam Gordon is franchise recruitment and development consultant at The Franchising Centre.