Franchising offers entrepreneurs an accessible path to business ownership. They can reap the benefits of a well-established brand while enjoying the business's autonomy. The International Franchise Association (IFA) projects a growth of nearly 15,000 franchise units by 2023, reflecting the popularity and potential of this business model.
To foster franchise growth, broadening business footprints, diversifying risks, and maximizing potential profits are crucial. The multi-unit franchising model excels in these areas, with over half of all franchise businesses operating under this model, demonstrating its effectiveness and appeal.
However, introducing new brands to this model’s portfolio requires careful assessment to ensure compatibility with the existing portfolio and future growth prospects.
In this blog, we delve into how multi-unit franchisees can navigate this complexity and effectively assess their next franchise brand. These insights will empower multi-unit franchisees to make informed, strategic decisions about their future franchising empire.
What is a multi-unit franchisee?
A multi-unit franchisee is an individual or business entity that owns and operates more than one franchise unit from the same franchisor. The multi-unit franchisee agrees with the franchisor to open and manage multiple units, often within a specific geographic area. Prominent multi-unit franchisees today include
- Flynn Restaurant Group (2,355 units across multiple brands),
- Carrols Group (1,085 units),
- Sun Holdings (1,045 units),
- KBP Foods (895 units), and
- Dhanani Group (824 units).
This agreement between the franchisor and a multi-unit franchisee outlines the rights and responsibilities of each party, including the number of units the franchisee is expected to open, the timeframe for their opening, the geographic area in which they'll operate, and the specific terms and conditions related to the operation of the franchises.
Factors multi-unit franchisees should consider when assessing a new franchise brand
In July 2019, Sun Holdings, Inc., the USA's second-largest franchisee, marked a significant milestone with the opening of its 1000th store—a new Popeyes restaurant. The company's success lies in maintaining brand consistency across all the chains. How did they achieve this?
While several elements played a role, let's focus on the primary factors that aided their success and will potentially guide your evaluation of future franchise brands.
1. Do your homework: Conduct a thorough market research.
When assessing a new franchise brand, conducting thorough market research becomes paramount. You can do this using various methods such as surveys, interviews, data analysis, and competitor analysis. Look at current trends, growth rates, and the projected future of the market.
It's also important to understand the geographical dispersion of your prospective customers and the success of similar franchises in those locations. Understanding this competitive landscape allows you to develop strategies to differentiate your brand and capitalize on untapped market segments. It also aids in benchmarking against industry best practices and identifying areas for improvement.
2. Count the money: Evaluate financial performance.
A financially sound franchise is more likely to weather economic challenges, support its franchisees effectively, and maintain a competitive edge in the market. Understanding the franchise's financial health allows potential franchisees to gauge its stability and potential for long-term success.
As you consider investing in a new franchise, don't overlook the importance of assessing the initial investment requirements. It's essential because these upfront costs, including the franchise fee, equipment, real estate, and other expenses, will significantly impact your financial planning and overall success. Assessing them will help you avoid any surprises along the way.
Give equal weightage to the ongoing fees, like royalties and marketing contributions. Take the time to evaluate these recurring expenses to measure their effect on your profitability and whether they align with your expected returns.
3. Build a skilled team: Emphasizing Support and Training.
The International Franchise Association (IFA) reported that 2022 labor difficulties impeded the growth of more than 81% of franchise brands.
A franchisor that prioritizes comprehensive training sets the stage for a franchisee's success. Initial training often includes broad aspects, from day-to-day operations, customer service, and product knowledge to point-of-sale systems, administrative tasks, and, if relevant, food safety practices. This foundational training helps the franchisee's team hit the ground running and establish best practices. Furthermore, ongoing training keeps teams updated on product launches, technology updates, marketing strategies, or changes in operational protocols.
Support from the franchisor may span beyond training. Their team can help you with site selection—a crucial factor affecting your new franchise's success.
To streamline your support and training programs effectively, partner with Delightree. Their solution facilitates building a proficient team with task management, training, and performance-tracking features. This improves communication and ensures compliance across all franchise locations.
4. Study the working: Review the franchisor's operational standards.
“Franchisees who closely followed company practices had the most growth and profit.”
-Dennis Waldron, Area developer for Ruby's Diner
Understanding and adhering to the operational standards set by a franchisor is a vital part of a successful franchise relationship. These standards often embody the brand's image, culture, and customer expectations.
Franchisors' operational standards usually envelop their proven standard operating procedures (SOPs), which include a variety of day-to-day tasks ranging from store opening and closing procedures to inventory management. Delightree’s platform simplifies this implementation process by providing user-friendly tools and features to create, manage, and monitor SOPs across multiple locations.
In addition, customer service guidelines are essential too. McKinsey indicates that improving the customer experience can increase sales revenue by 2-7% and profitability by 1-2%.
Quality standards ensure that the franchise's products or services meet certain requirements. For instance, for a food franchise, a franchisor may have specific guidelines about the ingredients used, their sourcing, or the preparation method.
When opening a new franchise unit, ensure these operational standards align with your values and capabilities. If your business is committed to local sourcing, partnering with a franchisor whose standards require global sourcing may not be feasible.
Non-compliance with these standards can lead to legal disputes and damage the brand's reputation, resulting in lower customer satisfaction and ultimately affecting your bottom line.
5. Carefully do the paperwork: Focusing on legal and contractual aspects
Legal and contractual aspects should never be overlooked. Read your Franchise Disclosure Document (FDD) carefully. The FDD, mandated by the Federal Trade Commission in the United States, contains 23 sections providing detailed information about the franchisor, the franchise system, and the obligations of both parties.
It includes specifics about the franchisor’s history, bankruptcy or litigation history, fees involved, initial and ongoing investment requirements, and other crucial information. Attention should be given to franchise and royalty fees, which can significantly impact profitability.
Territory rights are another important aspect. These define the geographical area where you can operate and may limit competition from within the brand. Renewal rights inform how and when the franchise agreement can be extended. Termination clauses specify the circumstances under which the franchise agreement can be terminated.
Another important document is the ‘Multi-Unit Development agreement’ or “Area Development Agreement.” Less complex than the FDD, this contract permits a franchisee to establish and manage several units of the specific franchise.
Given these documents' complexity and importance in the franchisee-franchisor relationship, you should consult with legal and financial professionals before signing.
Multi-unit franchising is dominating the franchisee-franchisor business model.
The trend of multi-unit franchising became popular in the late 1980s. Two factors primarily driving this shift were a new generation of franchisees pursuing new ways of growth driven by a shift in the "buy a job" mindset to multi-unit growth strategies. Second, franchisors shifted from fearing franchisee dominance to deliberately creating multi-unit development plans. This shift in mindset and approach has played a pivotal role in shaping the current landscape of the franchise industry, promoting a culture of growth and innovation.