by Greg Nathan
last updated 27/03/2020
12 Tips for multi-unit excellence
by Greg Nathan
last updated 27/03/2020
Greg Nathan of Franchise Relationships Institute explains how to tap into the power of multi-unit franchising as a growth strategy
Multi-unit franchising, where franchisees own and operate more than one business unit or territory, is increasingly popular. For example, a McDonald’s franchisee might own four or more restaurants, while many petrol stations are operated by multiple franchisees who might own 10 or 20 outlets in the same region. Even in the service sector, it’s not uncommon for franchisees to own multiple territories, while in retail the same franchisee might own 2 or 3 outlets in neighbouring areas.
This approach offers franchisees and franchisors an efficient path to boost sales, profits and market share. Offering good franchisees the opportunity to own several business units increases the appeal of a franchise through offering a path to growth, reduces the cost of recruitment and training for franchisors, and helps to overcome the current shortage of prospective franchisees which may be restricting expansion.
However, despite the benefits for both parties of being able to ‘grow with who you know’, there are also significant risks. In this article, I’ll share 12 evidence-based tips for franchisors from our years of research and experience at the Franchise Relationships Institute.
Create measurable expandability criteria
You need to know whether a franchisee is capable of running multiple units – especially if the potential for multi-unit franchising was not in your original plan, and existing franchisees were recruited for their ability to run single units. Create a checklist of the capabilities and resources known to impact on a franchisee’s performance in your network, particularly those relevant to running multiple units.
The expandability criteria should be linked to a rating system that enables the franchisor team to objectively compare franchisees against predefined standards, described using observable behaviours. This type of behavioural rating system brings a high level of internal consistency and is known as a Behaviourally Anchored Rating Scale or BARS.
Make the expandability criteria transparent
Transparency enables everyone in your network to have a shared understanding of what excellence looks like. It also places an onus on the franchisor team to ensure their criteria are clear, fair and relevant. This is particularly important if several franchisees are vying for the same business expansion opportunity. High potential franchisees will want to know what you are looking for so they can prepare their business operations for the assessment.
Don't say ‘No’, say ‘Not yet’
When a franchisee is assessed against objective expandability criteria, gaps in their capability or performance will inevitably be exposed. Some of these may not be easily rectified, or the franchisee may not be committed to taking action to change their approach. If a franchisee is rated as ‘not ready to expand’ but is still motivated and wants to improve their operations, provide coaching on how they can close their capability gaps, and encourage them to apply again at a future date.
Involve key executives in the expandability process
While growing a franchise network with existing franchisees is in many ways simpler than recruiting new franchisees, there will still be a number of issues to be considered. These include the completion of new franchise documents, leases or partnership agreements; pressure-testing the financial capability of the franchisee; and reviewing technology and management systems to ensure they are capable of supporting the expanded business. This is likely to involve several franchisor support office functions, so ensure relevant people are consulted for their expertise and support.
Pro-actively scout for franchisees with expandability potential
Regularly review the performance and potential of all franchisees. Identify those who run great businesses and want to grow, and discuss multi-unit expansion with them as a possible strategy. Ask if they’d like to be assessed on your multi-unit expandability process. While not all franchisees are ready or willing to expand, going through the process will help them to identify how they can run a better business – a win for everyone.
Engage franchisees so they own their development plan
As mentioned above, the expandability assessment process will inevitably identify areas for improvement. For instance, a lack of systems in a single-unit business can usually be addressed by a franchisee working harder. However in a multi-unit operation, systemic weaknesses are likely to result in serious business problems. A franchisee who wants to expand must be fully engaged and take ownership of their business development plan, with the franchisor acting as a coach to follow up and monitor progress.
Educate franchisees on the shift from working IN to working ON their business
Franchisees who have expanded from one to many units will tell you that, while you can run two units in a similar way to one, everything changes when you grow to three or more units. At this point franchisees can’t just work harder or share the load between family members. They now need to have an infrastructure and systems that enable them to step back and work on their business using financial reporting systems, performance management processes, and staff engagement programmes.
Check that funding plans are sustainable
As a franchisee’s business grows, the impact of their success or failure on the broader franchise network also grows, so franchisors should be particularly vigilant about the financial health of their multi-unit franchisees. Good expandability criteria should include a review of how the franchisee is funding their growth, and whether this is sustainable. The existing business should not be put at risk if the expanded operations are slow to grow or hit problems. Many franchisors also negotiate a tripartite agreement with banks so they can gain access to important financial data if they suspect a franchisee is getting into financial difficulty.
Support franchisees to gain access to capital
Lending institutions have their own language and processes for approving finance. Because many small business people don’t understand this, they often unintentionally sabotage their applications for finance by providing emotional or irrelevant information. They may also unwittingly enter into uncompetitive lending arrangements. Franchisors would be wise to facilitate access to competent financial advisors who can assist franchisees to prepare bank-friendly applications and shop around for competitive financial deals. (Greg wrote ‘finance brokers’, but we don’t really have any specialists working within franchising in NZ)
Ensure there are robust management structures and partnership agreements
It is not uncommon for franchisees to pool their resources and form partnerships or joint ventures to share the risks and responsibilities associated with expansion. Franchisors should ensure there are clear guidelines on who is accountable for key functions in the business and who will be the designated point of contact. Also, business partners will sometimes find it harder to work together than they thought, so there should be a professionally drawn up partnership agreement with guidelines on how the partnership will be dissolved if things don’t work out.
Provide targeted professional development support
Because multi-unit franchisees are typically running multi-million dollar businesses with large autonomous team structures, they will appreciate opportunities to develop their financial and leadership skills. Special multi-unit seminars and break-out sessions at conferences are a growing trend, as are facilitated performance groups where franchisees share data, goals and plans, and hold each other accountable. Higher calibre field managers with strong business acumen may be needed to provide relevant support for these larger businesses. Field managers may also need to get clear about what information they should be communicating and to whom, given the multiple people they are now dealing with.
Draw on their experience
Multi-unit franchisees often make competent and willing mentors for franchisees wanting to grow. Involve them as panellists and workshop leaders in your conferences and seek their views on new initiatives – but be prepared for strong feedback as they are likely to have high expectations and be direct and challenging. This feedback can be useful for franchisors if it is given and received in the right spirit.
In conclusion, multi-unit franchising is a growing phenomenon in most countries, including New Zealand. Not only does it create efficiencies for a franchisor team; it can also be the ultimate loyalty programme for rewarding quality franchisees who are keen to grow. I hope these 12 tips help you make the most of this excellent growth strategy.
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