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Friday 7th October, 2022

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Multi-unit franchising: a complete guide

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Multi-unit franchising: a complete guide

A recipe for swift growth and expansion, multi-unit franchising is an excellent way for a business to develop their presence and multiply their holdings

The business of franchising is ever growing, with franchisees constantly opting to shift to multi-unit franchise ownership. A recipe for swift growth and expansion, multi-unit franchising is an excellent way for a business to develop their presence and multiply their holdings.

Multi-unit franchising differs from the traditional franchise model as one franchisee operates multiple franchise businesses, usually within the same region. The popularity of the multi-unit model has been on the increase in recent years and, according to the 2016 franchise report by the British Franchise Association (bfa) and NatWest, approximately 29 percent of all British franchisees now own more than one single franchise unit, with 50 percent proposing to open more.

Additionally, at least one in five of the remaining 71 per cent of British franchisees have plans to buy additional locations soon. However, many franchisee who have operated multi-unit, multi-brand franchise models often express that this route of ownership is not for everyone.

There are several factors, such as infrastructure, resource, franchise systems, appetite for growth and franchisee-franchisor relationship that franchise partners must consider when growing their holdings. Traditionally, multi-unit franchisees operate several units within one geographical space.

However, certain franchise partnerships have been known to transcend boundaries and borders. Multi-unit model works optimally within the retail and F&B sectors, as growth is optimal within these markets.

This model may not specifically apply to the service industry; the advantage of growing within the service sector is that a second physical set-up is not necessarily required to harness a wider market, thereby making a multi-unit model unnecessary for expansion.

There are many benefits of the multi-unit franchise model for both the franchisor and franchisee, which contribute to its attractiveness, leading to the growth in the multi-unit trend.

Advantages of multi-unit operations

Some benefits are apparent: for franchisees the easiest growth stems from familiarity and replication, reducing the time spent on brand immersion and training.

With a team in place, it is easier to develop within a known realm. A strong relationship with banks can ease the process of securing finance for additional units.

A well-fortified relationship with the franchisor means a stronger multi-unit franchise opportunity for growth given the existence of trust and communication.

Growth into new concepts and sectors can be costly and may not be beneficial in the long run. Similarly, franchisors benefit from brand growth with the ease of managing fewer franchisees owning and operating their units.

Whilst it is attractive to grow without a ceiling and continue to multiply holdings, it is easy to lose sight of important factors. An appetite for growth is not sufficient to secure success when growing to a multi-unit model.

More franchise locations, more success?

Multi-unit and multi-brand franchise ownership has increased dramatically over the past decade, with more entrepreneurs opting to open several units with a brand as opposed to a singular location.

In addition, franchisors are beginning to consider multi-unit expansion over master franchising when entering particular foreign markets; especially those where a more hands-on style of management lends itself to increased chances of success. This comes in the wake of horror stories where master development has gone awry; when franchisors can choose a route that minimizes risk, they will.

“On the international front, the knee-jerk reaction was always master franchising. But it was done in a way that left an awful lot of responsibility with the master franchisee to determine what was going to be done in a foreign jurisdiction,” says Edward Levitt, a partner at Michigan-based law firm Dickinson Wright.

“That had a lot of blowback when things didn’t work out so well – for both the master, as well as the original franchisor. Leaving an entire country or a large region within a country in the hands of one master is risky. Things could go wrong, or your decision may not have been a good one. You’re stuck solving that problem with the one-country master.

“If you have a number of multi-unit franchisees, you may have ways of shifting in one or more of those multi-unit franchisees to a territory that another multi-unit franchise owner was having problems with.”

Financial incentive helps deliver business objectives

As well as potential protection against problems caused by master mismanagement, multi-unit franchising edges out the likes of single location or direct franchising because of its financial incentive.

It costs a lot to onboard a franchisee. You need to ensure that they are correctly trained, and provide ongoing training months and years into their running of a location of your franchise concept. If you can choose between five individual franchisees who need training or one single multi-unit group that operates five sites, it becomes clear which one franchisors may want to align themselves with.

“Multi-unit has grown because of the cost of identifying, signing, training, and supporting individual franchisees, versus supporting multiple multi-unit franchisees,” says Bill Edwards, CEO of international focused consultancy Edwards Global Services. “You have to put an amount of support into every franchisee. And if a franchisee owns three, five, or 10 units, then you put your support into them. If they only own one, then you still put your support into them.”

Multi-unit and multi-brand operators

Alongside the rise of multi-unit franchising is an equal increase in the popularity of MUMBOs. That is, multi-unit, multi-brand operators that have a diverse portfolio of franchised locations.

“[MUMBOs] are becoming more prevalent; they’ve been in the U.S. for a while, but they are largely all in food. So a franchisee starts out with a burger brand, and then they want a chicken restaurant and then a seafood shop and so on,” explains Edwards.

“What’s the benefit of that? It’s very simple: economies of scale. They have built an infrastructure with people, real estate, vendors. It’s working for them, and they’ve built out 10 locations in a territory, and so they decide to pursue other brands.

“They then use that proven infrastructure to go to another brand and show that they can manage this kind of network and then bring on another concept. By and large, brands love this. Not only is it a proven operator, but it’s one that knows what the concept of franchising is.”

All of the above would give the impression that multi-unit and/or multi-brand ownership is set to completely dominate the franchising world. And yet, master franchising, area developments, and even single-unit deals are still very prevalent amongst all industries under the franchising umbrella.

This is because as flexible and beneficial as multi-unit is, franchise growth is always best observed on a case-by-case basis. What works for the growth of one brand may not work for another, and franchisors need to be mindful of the potential downsides that come with multi-unit expansion.

“You may be one-and-done with the master franchisee, whereas you have to keep searching for and dealing with many multi-unit owners,” says Levitt. “Multi-unit territories may also be smaller, depending on your strategy. Let’s say that you’re dealing with England; it depends on how you may carve the territories. You may have just four multi-unit franchisees for the entire country, or you could end up having to deal with 20.”

Multi-unit: the death of the mom-and-pop establishments?

It can be easy for the traditional mom-and-pop form of franchise ownership to get lost amidst the discussion between multi-unit and master franchising. After all, a family passing down a single restaurant location through the generations is one of the oldest and most revered profiles of a franchisee that veterans of the industry still hold close to their hearts.

Thankfully, there’ll always be a place for this kind of franchising in the future – even as the corporate world becomes increasingly invested in multi-unit ownership.

“There’ll always be a space for mom-and-pop locations, but you might find that the multi-units will be in population centers, and single-units will be in smaller markets,” says Edwards. “That means the suburbs or very small towns that can’t support more than one unit. And I hope they don’t go away, because that’s the core of franchising: the single-unit owner that puts their life savings into a franchise.”

Seven considerations before growing your portfolio:

1. Finance: Money is, of course, the first question. Will banks be willing to lend you sufficient funds to expand? Do you have sufficient cash flow to continue running your current holdings whilst expanding? These are the basic questions franchisees must answer when considering growth.

2. Resource: When expanding to a multi-unit model, existing franchised units need to continue to run at a similar level. Franchisees need to ensure they have the right team in place to run the existing unit to standard whilst they focus on expansion. Letting go of control, and empowering your team to take charge is an important part of franchise growth.

3. Losses: It is common knowledge that franchisees expect a depreciation in business for their initial unit as they expand. What needs to be considered is the size of that dip – a significant depreciation can jeopardise both businesses simultaneously and affect franchisor relationships.

When expanding a brand, it is important to try and restrain the dip in performance to about 10 percent. Anything more significant than that could have significant ramifications for the business. Franchisees can mitigate this with checks and balances targeted at empowering staff to take ownership for the unit’s performance. These can include age-old management techniques such as bonus schemes, staff incentives and team-building exercises.

4. Own skills and expertise: The most important consideration is the franchisee’s ability to let go. Some multi-unit owners do not have the mindset to let go. The most important aspect of growth is empowering staff to make correct decisions in a constrained environment. Reneging control to promote staff accountability and ownership is the only way a franchisee can handle the added pressure of unit expansion.

5. Franchisor relationship: It goes without saying that the multi-unit model is only available to those in strong relationships of trust with their franchisors. Trust, however, can be a double-edged sword in the business of multi-unit franchising. Where franchisors entrust franchisees with running the brand, they can often slip into a comfort zone, sometimes taking their hands off the post. This is where communication is very important: multi-unit franchisees need to be much more pro-active when communicating with their franchisors, highlighting achievements and successes adequately so the franchisor is not just left to juggle numbers.

6. Capacity for growth: Expanding for the sake of expanding is not good enough. Franchisees must gauge the market’s appetite for the brand, assessing competition and auditing demand for the brand’s offerings. Multi-unit franchising is not for vanity and quantity is not the reward.

7. Infrastructure: Whilst strengthening the front of house teams at the unit is crucial, it is vital to build a solid back of house too. Franchisees need to secure the right people in the right places, from admin and human resource staff to loss prevention teams, in order to stay ahead of the curve. Similarly, it is important to resource adequately, a common problem is over-resourcing to the point where the business ends up hemorrhaging cash flow.

Multi-unit franchising: advantages for franchisors

1. Systemwide consistency

Franchising is built upon replicating a proven model. In turn, it is to the benefit of franchisors that they attract and maintain strong multi-unit franchisees. Multi-unit franchising facilitates operational consistency by offering franchisors a smoother training process and ensuring there is a well-structured business plan put in place across a particular region. By working with an owner who is a multi-unit franchisee, your franchise can better maintain high-quality customer experiences at the local level, which can have a positive effect on the brand’s reputation as a whole.

Some brands, in exchange for a per-unit development fee, allow area developers to receive exclusive rights to their territory and a reduced royalty fee, which provides the potential for a strong return on their initial investment. Enticing incentives help franchisors better attract developers who can grow a single region and enhance operational consistency.

2. Reach growth goals

Once you’ve secured a dependable multi-unit franchisee to expand in a particular region, your team will spend less time vetting an additional prospective franchisee for that area. Instead, franchisor teams can focus on developing additional new territories and dedicate resources to other needs within the company.

In turn, the franchisor will likely have less time between location openings in the multi-unit franchisees’ regions and you’ll be able to establish a routine and solid relationship with the franchisee.

Plus, when only one franchisee is involved in development of the market, the owner will often choose to work with the same set of local vendors throughout the build-out process, from site selection through construction and eventually opening day.

As your multi-unit operators reach the fourth or fifth location, the procedure becomes simpler for everyone involved. Ideally, if a lesser number of third parties are added into the mix, the projected growth plan stays on course.

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