April 2009 Franchising World
The benefits far outweigh the challenges.
By Carolyne Chalupnik, CFE
When building a franchise system, there are several ways to grow: by single-unit franchising, multi-unit franchising, or a combination. Multi-unit growth can provide accelerated growth of the brand versus single-unit operations, as well as other significant rewards that can be realized.
What are some of the potential rewards of multiunit operations?
• Accelerated growth,
• Supported market-penetration strategy,
• Stronger business acumen of franchisees,
• Reduction in training and assistance needs,
• More consistent operations, and
• Greater financial strength.
The more multi-unit franchisees a company has in its system, the more likely growth will be hastened. The multi-unit franchisee may be able to expand a new market more quickly than the company because of the geographical proximity to the company’s core markets and support resources. Also, having two or more multiunit franchisees growing in a territory simultaneously helps to penetrate the market faster than the company might. For instance, in a major metropolitan area, with development opportunities, it could be advantageous to secure area development agreements with a number of multi-unit franchisees. Selling or granting of these agreements to four to six groups will afford the luxury of achieving growth objectives much faster than one, 24-unit deal or two,12-unit deals.
Through their circle of influence, multi-unit franchisees can greatly affect the recruitment effort of other experienced multi-unit franchisees.
Look for multi-unit franchisees who are attempting to diversify their portfolio of brands or concepts to expand their holdings. Opportunities may no longer exist with their existing brand. These multi-unit franchisees have a focus to grow the brand and follow an established system. They are interested in a brand that has sufficient systems and is well established. In addition, these individuals have a proven record as franchisees and compliance with a system’s standards. Their experience can expedite growth for a system while also bringing new ideas to the table.
Supported Market-Penetration Strategy
Multi-unit franchise development agreements help fill the pipeline for future development. They help support growth strategies by developing territories that cannot be easily developed by the company or a single-unit franchisee. Knowing that the franchisor has a strategic-growth plan can be attractive to the potential multi-unit franchisee. Also, knowing that existing franchisees are growing is an additional attraction.
Another potential opportunity is to tap into existing multi-unit franchisees who have “built out” their territory, yet still have the desire to grow. They may be interested in capitalizing on the strategic-growth plan and establish new penetration in a different part of the country.
Having a long-term market penetration strategy can benefit franchisors. By having a plan in place, in addition to identifying and solidifying your development pipeline, an organization can plan for their internal growth and execute a solid succession plan for support infrastructure for these franchisees. Whether it is learning and development, marketing, operational support, and so forth, planning ahead can enable your organization to experience this growth with few bumps.
Stronger Business Acumen of Franchisees
Another benefit is the business acumen that strong, multi-unit franchisees possess. They have a greater depth of infrastructure and knowledge and look at the franchise opportunity in a more sophisticated manner. These individuals will have a better understanding of the effort involved in building a successful business utilizing the available tools provided by the franchisor while operating within the constraints of the franchise system. Multiunit franchisees will likely have a more realistic understanding of the commitment, investment, sacrifice, passion, skills and time it takes to build a solid, successful business.
The level of involvement of the multiunit franchisee depends on the culture and attitude of the franchisor and its leadership. Active communication and involvement from the multi-unit franchisee can create dynamic brands with versatility and energy.
Top achievers in any franchise system become role models for new and existing franchisees. Best practice sharing strengthens the entire system. They can influence aspects affecting the entire system, and be involved in testing and development of new products and systems. Their experience and backgrounds can lend valuable input to the entire system. They can help direct decisions and provide insights that drive strategic initiatives.
Reduction in Training and Assistance
As they grow, multi-unit franchises become more self-supporting. They generally are stronger operators requiring less support. This fact will benefit not only the individual franchisee, but other less-sophisticated franchisees as they may be able to share their resources, in addition to the franchisor since these expenses could be absorbed by the franchisee and the multiunit franchisee assumes much of the ownership of their success or failure. They also typically generate higher-total revenues, therefore generating a greater royalty revenue stream.
Franchisees can become essential in recruiting, mentoring and training of new franchisees into the system, thus reducing the training and assistance necessary from the franchisor. A successful multi-unit franchisee typically possesses high standards and also has the benefit of viewing operations from a different perspective than the franchisor. This becomes an invaluable resource when identifying prospects with potential, as well as mentorship, which the franchisor may not be able to provide.
The benefits far outweigh the shortcomings as the multi-unit operator is engaged and involved in the system. The franchisor has assistance with identifying potential prospects, the newer, less-experienced franchisee gains a mentor and all of these items will potentially reduce costs to the franchisor while strengthening the brand.
Having multi-unit franchisees allows for bigger groupings of units with consistent operations. It is very common for a multiunit franchisee to employ an individual to oversee their business. Assuming that these people possess the same passion and commitment to that brand as the franchisor and franchisee, they will be leading with consistency. As a result, these operations/units will tend to continue to perform at or above system averages thus providing the desired consistent favorable execution. Although it is possible to create a system of very competent single-unit operators, the efforts and oversight can be demanding and the chances of having more consistent operations throughout becomes much more of a challenge.
Perhaps one of the rewards most evident in the current economic climate is the financial strength multi-unit franchisees bring to a brand. Most of these franchisees are experienced operators and they usually have stronger financial stability and resources.
• They are more likely to continue with their development schedule,
• Have greater overall cash flow,
• Tend to have a stronger balance sheet,
• Can usually secure the financial resources needed to fulfill demands of lending institutions as it relates to money-down,
• Can leverage their overhead thus directing more dollars to the bottomline making them a more desirable candidate for a lender,
• Will usually have a better and longer track record of servicing their debt,
• Possess knowledge that can be tapped by newer franchisees looking for alternative methods of financing, and
• Could possibly partner up with newer, smaller or financially-strapped franchisees.
Carolyne Chalupnik, CFE, is director of franchise sales, Buffalo Wild Wings, Inc. She can be reached at 602-696-2912 or firstname.lastname@example.org .