multi unit franchising Archives - Duell

Sep 03

Part Two: Multi-Unit Franchising – Is It for You?

By Richard Duell lll Newsletter

Part One of this article analyzed many of the Pros and Cons of multi-unit franchising. In Part Two, we look at whether your franchise company is ready for multi-unit franchising and if so, how do you qualify multi-unit prospects?

Are You Ready?

Having weighed the pros and cons of multi-unit franchising, your company must now decide the best multi-unit strategy to grow. Depending upon the franchise concept, target market and available resources, Franchisors have traditionally looked at the following tried and tested multi-unit growth strategies:

Master Franchising – Used both domestically and internationally, this concept usually involves three parties: a franchisor/master franchisor, a master franchisee/subfranchisor and one or more single outlet franchisees. Master Franchise Agreements grant the master franchisee a prescribed territory and also establish a required development schedule. A master franchisee is usually responsible for single outlet franchise recruitment, site selection assistance, operational support and often training of new franchisees. Initial fees and royalty fees are generally split in an agreed upon formula that is set out in the Master Franchise Agreement. Generally, Master Franchising attracts a more sophisticated party with greater liquidity than the single unit operators and enables a franchisor to provide an infrastructure that it may not possess for the territory being developed. On the other hand, the wrong master franchisee can cause severe damage to a franchisor’s reputation if the master franchisee does not enforce the single unit franchise agreement or fails to carry out the Franchisor’s normal responsibilities. Master Franchising also poses a substantial financial risk to a franchisor if the Master Agreement is terminated.
Area Development – An area development franchise has attributes of both the single unit franchise and the master franchise. Unlike the master franchise, the relationship does not involve three parties but typically just two, the franchisor and area developer. The area developer usually must own and operate a prescribed number of franchises in a specific territory. An area developer also must have the financial and human resources to open and operate the required units in the territory granted. Generally, area development agreements provide the advantage of accelerated growth with less investment or capital demands placed upon a franchisor.
Area Representative – Typically, area representation involves: (i) three parties – the franchisor, the area representative and the unit franchisee; and (ii) two distinct agreements – an area representative agreement and the unit franchise agreement. Usually the area representative acts as a franchisor’s sales agent for individual franchise units and provides service and support to the franchisor’s franchisees. This arrangement is similar to Master Franchising, but unlike Master Franchising, the area representative does not contract with unit franchisees. Thus all fees are initially paid to the franchisor who in turn pays the negotiated split with an area representative. As with Master Franchising, both concepts now require specific FDD disclosures and virtually the same risks.
Other Forms of Expansion – Less popular multi-unit formats include Joint Venture Arrangements. This concept is not as popular as other growth strategies because the franchisor has direct liability for the actions of the joint venture entity. Another less favorable growth strategy is that of conversion franchising, by which an independently owned unit operates under the franchisor’s brand. Franchisor’s must always be wary of the motivating factor precipitating the operator’s desire to convert. Refranchising is another less embraced strategy but may afford a franchisor strapped for capital with a way of expanding its business and avoiding much or most of the cost and distraction associated with day-to-day operations of multiple stores. Put simply, refranchising is when a franchisor sells company stores to franchisees. Selection of the right franchisee to buy the company operation is, as one can imagine, critical to the success of this type of multi-unit expansion.
Conclusion – Before embarking on any multi-unit strategy, look at the cost associated with each growth strategy, the legal complexity involved with each concept, the target you are trying to reach and above all, make sure your infrastructure is in place to reach your goal. Our firm works with a number of successful multi-unit franchisors. When you’re ready, we’re ready to help you successfully work through the legal implications associated with each multi-unit growth strategy.

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Aug 13

Love0

Multi-Unit Franchising – Is It for You?

By Richard Duell lll Newsletter

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!