September 17, 2014

Multi-Unit Franchising: What You Need To Know

Multi-unit franchising sure has a nice ring to it. Especially if you happen to be the franchise owner of 3-4 units. It’s a stunning visual.

drive-thru

You can drive around and see what you own. That could be why a lot of prospective franchise owners get quite energized when looking at opportunities. They picture a growing business, and with it, multiple locations.

According to an independent research firm, (FRANdata) 52% of all franchises are now multi-unit operations. The top 50 multi-unit franchisees increased the number of units they operated by 10% between 2005 and 2007. Fast food continues to be the most popular industry, claiming 35% of all multi-unit franchises, with the restaurant, beauty and baked categories each capturing 28% of all multi-unit operations.

Multi-unit business owners seem to be able to create some wealth, too. A 2007 research study by the Small Business Administration showed that multiple business owners still appeared to be the most prosperous small business group, with nearly three-fourths of them classified as high income and nearly one-half classified as high wealth.  (But that did vary a lot during down times in our economy.) Here’s the SBA report.

Are you familiar with the famous sentence “You have to spend money to make money?” In multi-unit franchising, it’s really true.

I am going to use a fast food franchise as an example. Let’s call it “Frankie’s Franks.”  The total investment for this hypothetical casual fast food franchise is about $375,000. Your initial investment will include:

  • Franchise fee
  • Training and travel
  • Computer/point of sale systems
  • Leasehold improvements
  • Rent and utility deposits
  • Food fixtures
  • Other equipment and fixtures including, furniture etc.
  • Inventory including food and supplies
  • Signage-graphics
  • Advertising
  • Insurance
  • Working capital

Hot Dog! Your first Frankie’s Franks is going gangbusters, and it is almost time to open your second unit.

But first let’s revisit your franchise contract. Most multi-unit franchise contracts  have what’s called a development schedule. This means that you agree to open a new store on this date every year, or sometimes every year and a half.  It depends on the franchisor. The point is that you can’t just open another store when you are totally comfortable doing so. You own a geographical area when you sign a multi-unit agreement up front. The franchisor cannot let anyone else open a store in your protected area. You are obligated to open a certain number of stores in a certain amount of time.

One great thing about signing a multi-unit agreement up front is that in most cases, the franchise fee is discounted for every unit you agree to open after your first one. But, you pay all the franchise fees up-front, not as you go. Still, it’s a nice deal for both parties. The franchisor locks up a certain geographical area that he or she knows will have a certain number of units, and the franchisee gets a discount, and a great opportunity to own an area.

I talked with Mike Bursminski, who is a multi-unit owner of Batteries Plus, a retail battery store (which has a commercial component to it). He shared some positives and negatives with regards to being a multi-unit franchise owner, and I’ve included them, below.

The Positives

  • You’ve been through this before and you are much more ready for most of the surprises with the new store expansions.
  • You have a much better feel for how to market and grow your business.
  • Economies of scale (i.e. marketing and inventory purchasing) start to work in your favor.
  • Your training of new employees is more honed in.
  • You are treated with more respect from the franchisor (more units, more revenue, more importance)
  • You have a much greater revenue (and hopefully profit) stream.

The Negatives

  • Cash flow can initially become more of a critical issue.
  • You no longer have the time to devote to any one unit or store…you have to really let the control go to your managers.
  • Personnel issues and risks magnify.
  • Risk/Reward comes into play more strongly.  You now have a lot more of your investment into the business and therefore have more of your money at risk.  However, you hope that with that risk, you also have the opportunity to reap the rewards of a larger and growing business.

I also talked with a large multi-unit franchisor. Here is what Jay Mitchell, the Franchise Sales Director at Fantastic Sam’s told me they look for in a prospective multi-unit franchisee:

“As a multi-unit franchisor, we seek multi-unit operators with the desire and ambition to expand from a single location to multiple stores within (or ahead) of a defined development schedule.  Many successful multi-unit business owners have had a progressive careers within the corporate world with an emphasis on financial planning, business development, developing/implementing marketing strategies and developing people.”

So, could multi-unit franchise ownership be right for you? Is it worth exploring? Do you like the visual? Do your due diligence, which must include talking to several multi-unit franchisees. Good luck!

* * * * *

Joel Libava on 2008 franchise trends About the Author: Joel Libava is President and Life Changer of Franchise Selection Specialists. He blogs at The Franchise King Blog.

9 Comments ▼

Joel Libava - Franchise Expert


Joel Libava Joel Libava is the Franchise Expert for Small Business Trends. Joel, The Franchise King®, equips today’s prospective franchise owners with time-tested, proven techniques designed to increase odds of success. He does this through one-on-one coaching, and gobs of useful content that can be found on places like Small Business Trends, SBA.Gov, and his award-winning franchise blog, The Franchise King Blog . He’s been featured in Entrepreneur® magazine, and is frequently called upon by national media outlets and publications for his no-spin insights into the world of franchising.

9 Reactions

  1. This is a really well-written piece that definitely should make potential franchisees sit up and take notice. It also highlights what I preach all the time — know what you’re getting into before signing anything.

    Scott M.
    http://www.financialfuturecfo.com/blog

  2. Joel, Why is it that the fast food franchises are so popular to have as a bundle of multiple units?

  3. Martin,
    The answer to your question probably goes back to Ray Kroc. Think of all the wildy successful McDonald’s franchisees. They own multiples.

    The Franchise King
    Joel Libava

  4. Scott,
    Thank you for reading this article, and commenting on it!

    The Franchise King
    Joel Libava

  5. Locking up a geographic area is great and you would be further along the learning curve the second time around, but committing yourself to the schedule takes a lot of courage. Do your homework first and then jump in with both feet.

  6. Hi Joel,

    Ive seen some food franchise systems implement the MU tactic as part of their overall growth strategy…targeting former corp execs as franchisees. Who have been some of the most/least successful at accomplishing this?

  7. Hi Ed,

    When I think of successful multi-unit franchise companies, Great Clips, Checkers Drive In’s, and Hungry Howie’s come to mind.

    These franchisors have done a nice job attracting lots of multi-unit franchisees.

    I have lots of personal experience with Great Clips, and they seem to have a lot of downsized execs in their ranks, including a few that I’ve helped get in myself.

    The Franchise King

  8. Thanks for the feedback and Linkedin nod Joel.
    I may be heading out to Cleveland in nov and would love to chat if you have some availability.
    Ed

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