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Sep, 01 2007

Multi-Unit FRANCHISING

A GROWING number of franchisees and franchisors see multi-unit development as a great way to expand systems and increase profits quickly.

A GROWING number of franchisees and franchisors see multi-unit development as a great way to expand systems and increase profits quickly. Fuelling the trend is the fact that most franchisors are seeing benefits in multi-unit franchising. Historically, multi-unit franchisees come from new franchisor programmes. In the beginning franchisor is desirous of expanding his business as rapidly as possible. In turn, the fast expansion gives the franchisee a great advantage in rapid brand awareness. A major movement in the franchising field is the development and utilisation of multi-unit franchising programmes. This most often occurs in urban areas or in populations which provide opportunities for multiple franchises.

What is multi-unit franchising?

Multi-unit franchising occurs when a franchisee operates multiple stores from one franchisor within a specific area. This type of franchising is popular, for instance, in the food industry. Entrepreneurs seeking a restaurant franchise will find a bounty of options. Although the multi-unit growth model is more easily implemented in some industries than others, it is found in most industries where franchising exists.When a franchise system undertakes growth changes, it requires changes in the way franchise agreements are constructed to address topics such as territories and operational support. Terminology again becomes important, although it is somewhat muddled at this stage, which is a clear indication that the multi-unit growth model is still evolving. Whether a franchise system is considering a growth model that includes multi-unit franchisees or a prospective franchisee is considering various franchise organisations offering multi-unit programmes, it is important to understand the details behind the type of programme offered, regardless of what it is being called, to better understand and assess the opportunities and risks. Some key entities that help the franchises grow in multiples are Area Developer and Master Franchisee.

Area Developer

Franchise companies actively seek strong franchisees who can develop an entire geographical area, hence the name, area developer. A very popular method of developing multi-unit franchises is when the franchisor offers an area development agreement to a prospective franchisee. This agreement allows the franchisee the opportunity of expanding to several stores within a geographic area over a specific time period, generally four or five years. The franchisor may require the addition of five, six, or ten stores during this time period.

Master Franchise

Another major method of developing multi-unit franchises is handled through a master Franchisee Programme. The master franchisee relationship is defined as a right to solicit prospective franchisees and to provide training and other services to them in exchange for a percentage of the initial fees and royalties paid by the franchisee to the franchisor. In a master franchisee relationship the individual has the right to develop, own, and operate franchise facilities within the territory, as well as to seek other franchisees who may operate individual units Probably the major use for the master franchisee arrangement is when the franchisor enters foreign countries and seeks out individuals or corporations to serve as master franchisees for the entire country or region wise.

Reasons for growth

A multi-unit franchisee generally begins with one unit and often utilises the profits from that unit to expand into the second, third, and fourth store. Many larger franchisors limit franchisees to two, or three independent units. However, some franchisors seeking rapid expansion and development encourage a franchisee to expand to as many as five, 10, 20, or even 40 units. The reasons for this growth are not far to seek and are as follows:

Economic pressure

There are economic reasons for owning multiple units and multiple brands. The positive side of that pressure is the advantage gained from having multiple units and brands in a given area, so that you can spread the risk. It is unlikely that all the stores and all the brands will have a down period at the same time. When times are slow for one, the others will pick up the slack.

Growing the brand

Despite the cautions, franchisors want the huge advantages that area developers can give them. Rapid expansion while conserving capital is a major one. Finding a strong area developer allows the franchisor to focus on protecting and extending the brand rather than dealing with the nitty-gritty of opening individual stores. Many area developers are larger than the franchisor. They are usually financially strong and sophisticated, and bring that strength to the system. They are not brand entrepreneurs, and are far more likely to follow the franchisor`s lead than single-unit owners. After all, at the multi-unit level, it is often a partnership of equals. Also increased profitability for both franchisor and franchisee is a strong contributing factor toward the steady rise in multi-unit franchising. Multi-unit franchising is on the rise as many entrepreneurs look for more ways to grow.

Challenges involved

As with any rewarding investment, there are a few challenges to take into account, when considering a multi-unit franchise. Speaking about the challenges involved, Shaarada K. Sriram, Master Franchisee, Play Abacus, Malaysia, says, "To motivate and keep control over the manpower or sub franchisee is the biggest challenge, because you have to maintain uniformity in all the centres."Another challenge common to first-time franchisors is micro-managing. Certainly, you have a vested interest in how each outlet functions but much of the responsibility should be placed on an infrastructure of managers you hire. These individuals are responsible for the everyday operations of their stores and should be trusted to run these businesses as you would, if you were working there each day. Supporting this Rajiv K. Vij, Master Franchisee, Hertz International, says, "It is an issue of managing multiple units with professional manpower, able to build a customer base and revenue volumes which can sustain and justify multiple locations, and the biggest challenge is to ensure that each of the units that you have, maintains consistent service standards and also it is a profitable unit."

Advantages of multi-unit franchise

With the challenges come advantages that make multi-unit franchising worthwhile. Some of the advantages are as mentioned below:

Shared risk

One key advantage is that the risk is absorbed by several units. With multiple stores, you do not have all your eggs in one basket. For example, if a local government suddenly plans road construction near one of your stores, sales will inevitably dip. Fortunately, your remaining outlets will not suffer. In fact, some of the business may simply be diverted to one of your other locations.

More money

Furthermore, you will have access to more cash flow. Many multi-unit franchisees use the cash flow from other units to expand with additional units. And, the financial benefits do not stop here. You also have the option of reducing overhead costs by spreading them over several outlets, also gaining economies of scale.

Cost-effective use of financial, material and human resources

Having multiple units of a franchise can lead to greater overall savings. For example, a multi-unit franchisee with franchises in close geographic proximity could advertise a number of stores at virtually the same cost as one store Some other potential savings include:

Time: When opening additional units, less time is spent with a familiar system than the time it would take to learn an entirely new business, system and procedures.

Staffing: Staffing problems or shortages can be assuaged with the ability to share employees amongst stores. Opportunities for advancement may also be more readily available, thus reducing turnover

Greater discounts on equipment and supplies:

If a franchisee is not required to purchase all supplies or products from the franchisor or specific source, significant savings may be gained with the purchase of items in greater bulk.

In short, with multi-unit franchising more capital becomes available. Additionally, multi-unit franchisees provide efficiency because of their potential for shared labour. The advantages of multiple units are clearly compelling. Commenting on the advantages, Chandra Gopalan, Master Franchisee, Contours Express, says, "Multi-unit franchising creates the impetus for growth, increases the visibility of the brand and thus helps in business growth."

Is multi-unit franchising right for you?

Not every franchisee is cut out for multi-unit franchising. It takes considerable financial resources, commitment, drive, and is certainly not suitable for an inexperienced business owner. And achieving success as a single-unit franchisee does not always equate to achieving success with multiple units. Consider all the facts carefully before opting for multi-unit expansion rights. Vij says, "Setting up multiple units will involve huge investments, retail spaces are expensive, and unless somebody has the capacity to make those kind of investments whether on his own or through raising the required funds, it is not advisable to have multiple units but if somebody has a bigger vision than he can always look at the multi- unit franchise rights."

Should you be a multi-unit operator?

Thinking of taking the multi-unit route? Realise, it is a major decision that should not be taken lightly. Consider the size of the endeavour. Also first take a look at the concept and what it takes to open an individual store with regard to factors like finance, management and employees. Now multiply that by the number of stores you are considering. Is this feasible for you to undertake? In other words, do not get mesmerised by the idea of opening a lot of stores. If you are more effective at running one outlet over multiple units, you may find that a single unit in one chain can be more profitable than several franchise stores. Before taking on multiple units, franchisees also need to realise that bigger is not always better. People often see multi-unit franchising as this illusion in entrepreneurship that if you have more of something, it is better.

Advisory

Clearly, the multi-unit franchise model is a significant factor in the continued expansion of franchising. To be fair, it is not the unit-growth solution for all franchise brands. Even for those industries where the characteristics of multi-unit franchising are most aligned, some franchise companies continue to have very successful single-unit operator models. However, it is a trend that is influencing the future of franchising. Partaking in multi-unit franchising offers many opportunities. It is not for everyone, but can be quite lucrative. The most important thing to consider is doing research before making any definite moves. Match your best attributes with the right business franchise and ask yourself, could this expansion trend be in your fut

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