The Advantages and Disadvantages of Multi-Unit Franchise Operation - dummies

The Advantages and Disadvantages of Multi-Unit Franchise Operation

By Michael H. Seid, Joyce Mazero

You are a successful franchisee. Your business is doing well, it is showing great promise, your relationship with your franchisor is outstanding, and you are having no problems servicing your debt or in meeting your payroll. The question you are now asking yourself is: Is it time to expand?

It might be, but first ask yourself the big questions: Will my success continue, and should I expand the number of units I’m operating to take advantage of my success? The answer is: It depends. The reality is that acquiring more units can have advantages and disadvantages..

The advantages of multi-unit franchising

Intuitively, you know that the more businesses you own, the more potential you have to get more customers, increase sales, and make more money. As a multi-unit franchisee, you may have the opportunity to build equity in your business faster than you could as a single-unit operator. Because of your increased sales volume, you possibly can negotiate better prices on supplies and maybe even get a better deal with landlords or even your franchisor. Being a larger franchisee may also yield benefits in your ability to obtain more favorable financing.

Marketing your new chain is going to be simpler because with more than one location, you might be able to afford to run radio and television spots that would be financially difficult for you to justify or afford if you only had one location. Even the cost of obtaining customers goes down because as a regional player your costs begin to fall into a lower range on a per-unit and per-customer basis.

Think of the benefits to your employees who now can see career opportunities in your growing organization. You may qualify for lower rates on health-insurance plans and might be able to construct better benefit packages to attract and maintain your management and staff. You may also be able to offer candidates choices on where to work closer to where they live.

The benefits continue — a single manager could take on responsibility for multiple locations, and you can float employees between units as demand dictates. If the new manager at your pizza franchise makes a mistake with the cheese order and runs out of cheese on the very day that the town’s soccer teams are having pizza parties to mark the end of a brutal season, she can rush over to another one of your units to replenish the supply — and satisfy lots of little customers (who will grow into big customers someday).

You may also be able to set up a warehouse or a commissary (a central location where you can prepare some products for all the units) and ship products to all your units in a prepared or semi-prepared fashion. This approach is acceptable in some franchise systems and restricted in others, so be sure to check with your franchisor. Participation in a buying group or purchasing cooperative with other franchisees can also facilitate similar cost savings.

Consider pricing too. Although franchisors can establish retail pricing, in most franchise systems they generally allow franchisees to set the prices they charge to their customers. But with multiple franchisees in a market, as a practical matter prices for products and services may be inconsistent from one franchisee to another as there can be important legal restrictions that prevent franchisees from agreeing together on the pricing for the products and services they sell. When you own all the units in a geographic area, that won’t be a problem for you or the franchisor.

As a multi-unit operator, your influence with the franchisor and with other franchisees expands as does your ability to manage your costs. Franchisors tend to listen to the people with the loudest voices, and those are the franchisees with the greatest economic power. That’s just human nature.

The disadvantages of multi-unit franchising

With more units you’re going to have more at risk than smaller franchisees in your market, and the performance of those franchisees will affect your performance. Don’t forget that consumers view you all as part of a chain and even though you have a sign that says “locally owned and operated,” the lack of performance by one franchisee impacts all the franchisees.

Make sure you stay informed on how your neighboring franchisees are doing. If necessary, consult with them on improving your market’s performance.

To be an effective multi-unit operator, you’ll need a great internal organization. You will need staff, systems, and the financial capabilities necessary to succeed. Having a plan is essential because it will allow you to grow at a pace you can support. Without a plan, and without your leadership and management skills, operating successfully can create some serious problems for you as you expand.

Planning is critical, and you might even think of bringing in other businesspeople as joint venture partners and advisors. This approach may make your piece of the financial pie smaller, but a smaller share of a bigger pie is much better than 100 percent of a sliver.

“The critical areas of focus in becoming a multi-unit franchisee are capital and management,” says David Barr, founder of PMTP Restaurants and second vice chair of the International Franchise Association. “Specifically, in many systems, being a multi-unit franchisee that achieves economies of scale requires managing at least $6 million of revenue from all units. This scale then allows the hiring of additional multi-unit management, other than just the franchisee.

Thus, it is important that franchisees take an inventory of their available capital as well as their management in order to assess if they are ready to add units and achieve scale. Many franchisees provide the analogy that when managing one or two units, they are playing man-to-man defense. However, when managing multiple units, they must play zone defense, and one person cannot play zone defense. Be sure to have your capital and management plans in place as you begin the multi-unit journey.”

Don’t think that you won’t have to play an active and engaged role in managing your business or that you can take liberties with the franchise system requirements. Doing so can have serious consequences on your business and your relationship with your franchisor and the other franchisees in your market. Take your time and realistically proceed with caution.