Franchise Buying Guide

Go Forth and Multiply

Multiunit franchising is on the rise as many entrepreneurs look for more ways to grow. Could this expansion trend be in your future?
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Guidant Financial specializes in helping entrepreneurs purchase new franchises using their retirement funds.

Lately, the modest dream of running a single franchise location seems almost passé. Multiunit development appears to be taking over as the primary goal of savvy business owners. For these ambitious entrepreneurs, franchising is less about making a living than it is about increased growth, power and money.

"The number-one reason we went to a multiunit agreement is, obviously, in business you want to make more money," says Bob Pagani, a 48-year-old D'Angelo Sandwich Shops franchisee. Pagani and partner Bob Neil, 37, both experienced restaurant operators, hope to have three stores up and running within the next two years in Manchester, Glastonbury and South Windsor, Connecticut. Pagani and Neil aren't alone. A growing number of franchisees and franchisors see multiunit development as a great way to expand systems and increase profits quickly.

"We thought by buying in an area where three or four stores would be concentrated, we would have some benefit to the marketing of the stores," says Pagani. "There's one newspaper that covers the market in that area, and that applies to radio advertising as well. You can cover more with multiunit locations."

Cream of the Crop
Fueling the trend is the fact that more franchisors are seeing benefits in multiunit franchising. One benefit is the caliber of franchisee that generally seeks out a multiunit opportunity. "You certainly get people who are more financially qualified, who have more experience running large businesses or have experience with other multiunit concepts," says George Krotonsky, president of Scottsdale, Arizona-based Wild Noodles Franchise Co. LLC, a fast-casual noodle concept that began its franchising push last year by seeking only multiunit operators. "As far as we're concerned, the benefit is that we're working with people who are more experienced."

Many of these experienced operators turn to franchising as an alternative to life in the corporate world. "You have a lot of white-collar workers and middle managers who've been laid off," says Craig Slavin, president, CEO and founder of Franchise Architects, a Chicago-area consultancy that develops new franchises and fixes existing franchises. "These people come to the table with management skills, financial resources, business acumen and a lot of drive."

Slavin sees many ex-corporate professionals fitting the profile of the "achiever," the behavioral match for a multiunit operator. Where the single-unit franchisee, whom Slavin calls a "belonger," needs more guidance, the multiunit franchisee has far greater demands: "They want more sophisticated business systems, greater measurement tools and ways they can grow their businesses."

But even with all their abilities, these franchisees can't realistically find a way to be in all their locations at once and, in some cases, may be taking on a little too much. "When [I] see a person take on several centers, [my] big concern is to make sure they don't overextend themselves," says Robert Falconi, president of Precision Tune Auto Care Inc. Falconi saw one of Precision's franchisees open several shops, only to lose sight of running the business and go bankrupt. "That's where franchisors [need] the ability to pick good people."

And just because a franchisee may be a top performer in the system, that doesn't mean he or she can necessarily translate that success to multiple units. "Sometimes, the success of the shop becomes a function of the individual franchisee," says Falconi. "Without him there, the shop would not be as successful because of his [management] skills."

Before taking on multiple units, franchisees also need to realize that bigger isn't always better. "People often see multiunit franchising as this illusion in entrepreneurship that if you have more of something, it's better," says Scott Shane, professor of economics at Case Western Reserve University in Cleveland. "But for many businesses, owning multiple units of something means the average profit on each unit goes down dramatically."

Shane points to fast-food restaurants as an example where this can happen. While opening a second location in the same area would still be profitable if there is a high demand for your first outlet, the real issue is how much business the second store will service. If the second store can relieve the long lines from the first and doesn't decrease demand, it can mean a boom. But if you're only cannibalizing sales, that's a bust. And remember, with multiple units, franchisees are multiplying not only profits, but expenses as well. Each operation has its own store, equipment, management, employees and so on.

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This article was originally published in the June 2004 print edition of Entrepreneur with the headline: Go Forth and Multiply.

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