Franchise Buying Guide

Go Forth and Multiply

The Big Picture
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Guidant Financial specializes in helping entrepreneurs purchase new franchises using their retirement funds.

The Big Picture

Will this appetite to expand franchise empires affect or even hurt the average guy who wants to buy a franchise?

Though many franchisors happily trade the problems that accompany multiunit development for the bonus of faster growth, prospective franchisees who aren't necessarily interested in building a chain don't need to worry about being squeezed out: There are franchisors who believe single units still provide plenty of opportunity. AlphaGraphics franchisees typically own about 5 percent of the market share for their regions with their printing centers, and the parent company would rather see franchisees increase that share than open additional stores doing the same amount of business.

"There has been a standing offer to pay anybody $100 on the spot who can demonstrate he or she has more than a 5 percent market share. Nobody within our system has collected it," says Keith Gerson, vice president of global development for the Salt Lake City franchise. "If all you're doing is knocking down 5 percent of the market, why would you want to go out and open additional units when you haven't maximized the velocity of assets within your store?"

That's not to say AlphaGraphics doesn't have any multiunit operators. Currently, 8 percent of franchisees in the system operate more than one unit. "You can split your time, but you can't split your focus," says Gerson. "Sometimes people pursue multiple unit ownership because they're unhappy with the economics of the first unit. I say take care of what's inside the box before you go outside the box. [If you want to be a multiunit franchisee], make sure you're really wired, you've got the capital, you're a good developer of people and you've got a proven track record."

Prospective franchisees aren't the only ones who need to make sure they're fully prepared for multiunit development. Shane says it's fairly common for new franchise systems to sell only multiple units or area developments for quick growth. But that doesn't necessarily mean franchising in general will go in this direction. "New franchises that use multiunits all the time are really risky," says Shane. "My research has shown that 10 years [down the road], only about a quarter of them will still be alive; it's high risk, high return."

Pagani and Neil understood the additional risks involved in opening multiple units, but they weren't intimidated. "We never thought about owning just one. We have all this experience in the restaurant business, and this is what we want to do," Pagani says. "I never felt like three was a problem for us."

Slavin, who has helped create franchises for businesses like Mrs. Fields' Original Cookies and Bally Total Fitness, is himself a Chicago area multiunit operator for El Taco Tote Real Mexican Grill, a franchise his company consults for. Despite his obvious affinity for multiunit franchising, Slavin doesn't see single-unit operators languishing in their wake. "There will always be a place for [single-unit operators]," Slavin says, noting tertiary markets where geography allows for single units to backfill particular areas.

Falconi concurs and doesn't think any prospective franchisee should be discouraged or feel limited. "There are so many opportunities for somebody who wants to make it, as long as they have the fire in their belly and a plan."

Multiple Personalities: Should You Be a Multiunit Operator?
Thinking of taking the multiunit route? Realize it's a major decision that shouldn't be taken lightly. Consider the size of the endeavor: George Krotonsky, president of Wild Noodles Franchise Co. LLC, advises you to 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're considering. Is this feasible for you to undertake?

Economics professor Scott Shane, with Case Western Reserve University in Cleveland, says that, in building a bigger organization, you must not just select management, but also be able to create the right structure for your business's hierarchy. And don't think that because you have more than one unit of one franchise, you'll automatically make more money. Shane suggests you look carefully at the best brand or product you're considering becoming a multiunit franchisee of-your focus should be quality over quantity. Take the time to consider different franchises and the varying profitability of outlets. Says Shane, "I would urge potential franchisees to look at the earnings claim disclosures."

In other words, don't get mesmerized by the idea of opening a lot of stores. If you're 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 of another type of franchise.

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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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