Every Franchisor dreams of expanding its franchise system. But what is the most effective way to expand and how quickly do you expand? These are the two questions which plague most Franchisors. Picking the right format can make a franchise company the top player or the next casualty.
One method of expansion which has a consistently winning track record is that of multi-unit franchising. In fact, IFA studies have found that although multi-unit Franchisors make up a fraction of the total franchisee population, they account for more than 50% of all franchise units.But not all concepts are suited for multi-unit franchising. The following are pluses and minuses you should consider when deciding whether your company is a candidate for multi-unit franchising:
Pros:
- Accelerated Growth – The ability to expand at a much faster rate than through the sale of single units. This also enables a Franchisor to obtain a quick injection of cash into the system.
- Attract Potential Franchisees – Usually the multi-unit purchaser is more sophisticated with more liquidity and has an infrastructure already in place. This is especially true of existing multi-unit franchisees looking to expand via other franchises within an area they are already operating in.
- Operating Market Efficiencies – A multi-unit franchisee usually has a well-organized professional management team. It may take a single-unit franchisee years to obtain similar efficiencies.
- Market Penetration – Location! Locations! Location! A multi-unit operator often has a distinct advantage of obtaining prime retail locations with the liquidity to open multiple locations at the same time.
- Reduction of Training Assistance – Even if the first store opening requires the Franchisor to fully train the multi-unit operator, additional training and assistance for subsequent locations is normally minimal.
- Reward to Productive Franchisees – Perhaps no bigger win-win scenario can be found than to reward successful franchisees with the ability to open multiple locations. A productive franchisee can replicate success at other locations, thus enhancing a Franchisor’s chance of having more successful stores and greater royalty income.
Cons:
- Loss of Capital – There is no bigger detriment to a franchise system than a franchisee which is too big for a Franchisor to control. Litigation with a large multi-unit franchisee could destroy the franchise system.
- Loss of Prime Territory – Although the development of prime territories can be advantageous, the elimination of prime territory can be a distinct disadvantage. A Franchisor normally requires a multi-unit franchisee to develop a territory with a pre-determined minimum number of locations over a set period of time. The period for opening new locations is generally a number of years and thus the territory is taken off the market for years in the future. If a Franchisor has a number of long-term development contracts, large territories are not available and other potential franchisees will go to other competing Franchisors or other unrelated franchise concepts.
- Impact on System Franchisees, Vendors, and Suppliers – The franchising grapevine has no equal. When a dominant franchisee in the system creates ill-will, it permeates the entire franchise system.
- Problems Addressing Defaults and Terminations Quite often the multi-unit franchisee consists of multiple entities and without proper cross-default provisions, a Franchisor may find itself in a quagmire trying to address defaults and terminations. This becomes even more complicated when a multi-unit franchisee is conducting business in more than one state.
Conclusion:
So many Franchisors jump into multi-unit franchising without knowing the pros and cons of this method of expansion. The uniformed decision to implement multi-unit franchising can and sometimes does speak trouble. In our next post we will address “When is a Franchisor Ready for Multi-Unit Franchising?”; Qualifying Multi-Unit Franchisees; and More!