Franchise Buying Guide

Buying in Bulk

Whether good or bad, the surest way to quick growth--for you and your franchisor--is a multiunit deal.
Presented by Guidant Financial
Guidant Financial specializes in helping entrepreneurs purchase new franchises using their retirement funds.

"Total global domination." That was one new franchisee's response when I asked about his future plans. At the time, he hadn't even opened his first unit. In fact, I figured by his flippant answer that he'd never actually worked in a retail store. Yet this franchisee was on to something: The desire to "mint money" by becoming a multiunit franchisee is commonplace. Franchises are a lot like potato chips-it's hard to have just one.

Adrienne Davis, 46, a four-store owner in the Gymboree chain, is one franchisee who can't keep her hands out of the bag. As a former Gymboree teacher, she was well-qualified for growth within the children's activity franchise, and she learned she needed multiple units to make money.

"Synergy and economies of scale are the most compelling reason for multiple store ownership."

I myself have seen the prosperity that comes from developing multiple stores. One couple who specialized in opening restaurants in backwater towns that the company-owned chains wouldn't touch had a Maserati, a Ferrari and a personal airplane to gain access to their small empire.

As Davis has found, synergy and economies of scale are the most compelling reasons for multiple store ownership. Stores owned by the same franchisee can share supplies and transfer inventory, and employees at one store can cover labor shortages at another. And when your stores are not too far apart, you can split the cost of local marketing materials. Eventually, with enough units, a franchisee can create an entire administrative infrastructure and delegate day-to-day operations to managers. Some franchisees have hundreds of units in their personal networks.

Buyer's Market

Fortunately for you, franchisors want to sell multiunit franchise licenses as much as franchisees want to buy them. It's particularly good news if you buy into a relatively new system. Early in the development of a franchise concept, franchisors are hungry for multiunit developers, because it's often difficult for the franchisor to distinguish itself in the eyes of franchise buyers. Prospective buyers read franchise directories like Entrepreneur's Franchise 500® to see what's hot. When a concept appears to be stagnant, they stay away.

On the other hand, if prospective franchisees see rapid growth, they assume they're missing out and investigate further. Franchisors know this and love to sell multiunit deals early on. That way, they benefit from the early growth and only have to train one franchisee to get numerous locations open. Plus, franchisees who can afford to develop multiple units have probably been successful in business elsewhere and need less ongoing assistance.

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This article was originally published in the September 2001 print edition of Entrepreneur with the headline: Buying in Bulk.

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