by Win Robinson
last updated 27/10/2011
FAD OR STRATEGY?
by Win Robinson
last updated 27/10/2011
The impact of the financial crisis on business confidence and the difficulty of raising finance for new ventures have made franchisee recruitment a challenge for franchisors around the world. One of the ways that franchisors have turned to get around this problem is by granting second or multiple units to existing franchisees. After all, if a franchisee is already running one outlet well, they know what they are doing and are probably able to persuade their bank to finance a second outlet.
Single-unit franchising is the most common form of franchising in New Zealand, where a person purchases a franchise which they operate as a hands-on owner operator. Multi-unit franchising has always been strong in the US and is a growing trend in Australia, so there’s increasing interest in it here in New Zealand. It’s something that needs to be approached cautiously, though – operating multiple units doesn’t suit every franchisee – or every franchise system.
What Is Multi-Unit Franchising?
Very simply, multi-unit franchising means that one franchisee operates more than one franchise outlet. A common approach allows a franchisee to purchase a second franchise outlet if he or she has operated their first outlet successfully, complying with the franchise systems and operating according to the manuals and franchise agreement. This franchisee may even be allowed to buy a third and a fourth outlet one at a time if they make a success of each preceding outlet. This is called sequential franchising.
Another approach is to appoint an area developer who operates multiple outlets usually by purchasing a franchise territory that is capable of supporting many outlets from the outset. An area developer is usually a substantial business person or a company with substantial capital and expertise, but finding the right associate is essential. McDonald’s once made the mistake of granting to one person the rights to a territory that included all of Canada. Although the franchisee began to build units, he lacked the resources to develop a territory that large. The competition quickly moved in, bought what would have been prime locations for McDonald’s units and began opening stores. Within a few years McDonald’s recognised its error and bought the rights to the territory back – but for ten times the original price!
The profile of the ideal area development candidate must require them to have the funds to open multiple units on an accelerated schedule, without relying upon the first unit to generate enough cash flow to fund the second and so on. A multi-unit franchisee should be able to abide by a mutually-agreed expansion schedule to ensure competent and well-instituted development. They should also possess a high level of operational expertise.
One of the major advantages of multi-unit franchising is that it can be a very rapid method of expanding the network. Rapid expansion can be very advantageous to a franchisor (and indirectly to the franchisees) as it can beat the competition to the best sites and attract the best customers, thus impeding the competition’s progress. And, of course, the quicker the franchisor has larger numbers of franchisees up and operating, growing their turnovers, the more royalties the franchisor collects, the more money there is for marketing and the sooner they can bring new services on line.
A significant advantage for the franchisor with the sequential form is that they know that the franchisee has already been successful. He or she doesn’t need training or inducting into the franchise system and they will be up and running quickly. From the franchisee point of view, taking on another outlet can also seem like a good idea. They can potentially double their profits, reduce staffing problems by being able to swap staff between outlets and perhaps even increase their margins slightly through additional economies of scale.
However, although there are benefits there can also be big dangers in multi-unit franchising if the franchise is not properly structured to allow for it. These dangers have been highlighted in the recent hard times as increasing numbers of franchises have experienced the problems that can arise from having too many eggs in one basket. Our consultancy has received many requests for help from franchisors who have found that they are having real trouble with disgruntled multi-unit franchisees. In many cases, these franchisees had been quite happy and operating satisfactorily in the good times before the recession started to bite. As times got harder, their performance got worse. There have been franchisees who have tried to take the franchisor to court for lack of support and for not advertising enough. They are blaming all their problems on to the franchisor – a perfectly normal reaction, but not always a helpful or realistic one.
The real root of the problem was not that the franchisor did not support the franchisees (although in some cases we have seen a big gap between what some franchisors should have been doing and what they were actually doing). The main cause of the problem had its roots long before, when the franchise development was first being undertaken. In many cases, the franchise was planned to be a single-unit franchise and not a multi-unit operation. When the profile of ‘the ideal franchisee’ was being constructed, it directed everything towards finding an owner-operator franchisee – someone who would be working hands-on in the business rather than someone with the skills to manage several different outlets simultaneously.
But during the good times, the franchisees were doing so well that they greedily harassed the franchisor into allowing them to have another territory or outlet – and in some cases two or three extra outlets. It all ‘sort of happened,’ rather than being the result of a considered growth plan. And herein lies the cause of the problem. The owner-operator could look after his or her single-unit outlet very well but found it very difficult to manage several outlets. Apart from anything else, the operating manuals were usually written for owner-operators who had been through the franchisor’s full training programme at the beginning and understood the reasons why things had to be done a particular way to retain quality or margins. The manuals weren’t written for managers, and the franchisees had to do all the training themselves without all the same training routines.
That doesn’t mean there was anything wrong with the actual outlets: we have seen cases where a new franchisee selected for their potential as a multi-unit franchisee and trained accordingly has taken over three outlets previously owned by a franchisee originally selected as a single unit operator, and has resurrected those failing outlets back to full health – thus proving the point.
The above examples demonstrate that although multi-unit franchising can be very attractive to both franchisors and franchisees, it’s important for the security of both parties that the franchisor plans for it in the first place rather than just responding to requests. The franchisor must create a suitable franchise format as well as carefully build the profile of the ideal multi-unit franchisee.
If the system is planned and implemented correctly, a franchisor can include both forms of franchisee in their network and be very successful. It is also possible to convert single unit operators into multi-unit owners providing they have the right skills in the first place and receive the right training. But the way that training and ongoing support is given to the multi-unit owners needs to be different from that of a single unit franchisee.
Of course, there is another aspect to the development of multi-unit franchisees. In the USA, where multi-unit franchising is very common because of the nature of the country, the multi-unit franchisee can actually become a bigger company than the franchisor and can use that power to gain unfair advantage. Such franchisees can become so powerful that they dictate to the franchisor and, of course, that sort of behaviour usually leads to major problems. Even in New Zealand, we have seen cases where one multi-unit franchisee has close to fifty percent of the network revenue. In the event of a disagreement, that gives a single franchisee considerable muscle – and they may not use it to benefit other franchisees, either.
So if you are interested in the possibilities of multi-unit franchising either as a franchisor or as a franchisee, don’t assume that what works for one can work for many. Get good advice and make sure the multi-unit structure has been properly designed and implemented before making the move.
This article was first published in Franchise New Zealand magazine, Volume 20 Issue 2.
Read also: Beware the Multi-Unit Franchising Love Affair by Greg Nathan
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