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Buying in Bulk

Whether good or bad, the surest way to quick growth--for you and your franchisor--is a multiunit deal.
September 1, 2001
URL: http://www.entrepreneur.com/article/43284

"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.

What It Takes

But do you fit the profile of a multiunit franchisee? According to Robert Nathan, who opened his first Mail Boxes Etc. store in 1985, "a multiunit developer has to be multifaceted as a businessperson. When we see a leader who's well-capitalized with a strong business sense and excitement about the business, we know we have a candidate we can grow with."

Nathan knows what he's talking about-he's owned eight Mail Boxes Etc. locations, and his organization now provides support for 138 franchised locations in the chain. He has also signed an area development deal with haircutting franchise Sport Clips. Nathan attributes his multiunit success to having the proper mind-set...and the proper staff to delegate to. "The right person has to be willing to give up something, including power and money, to his staff," he says. "The successful multiunit franchisee cannot be a total control freak."

You also need the right kind of concept for multiunit development. "Look for a strong brand with an established marketing system," advises franchise attorney Pamela Mills of Baker & McKenzie in Chicago.

Are you a people person? If so, multiunit franchising may not be for you. The concepts that play to your strengths are typically those that don't work well with multiunit franchising, says Gayle Cannon, an attorney with Dallas-based Thompson & Knight LLP. (See "Will It Work?" below.)

Reality Check

As in any business endeavor, many earnest franchisees have negotiated development rights and then failed to produce the results they imagined. Typically, development deals require franchisees to develop on a schedule. If you don't open stores on time, the penalty can be a loss of any further development rights and a forfeiture of the territory you've already paid for.

To succeed as a multiunit franchisee, you must have a reasonable game plan. Determine whether you have adequate capital by researching when a store becomes profitable. Franchisors typically try to negotiate a rapid rollout of territories, but the last thing you need is to be pondering the deadline for store number three when the first two are still losing money as part of their start-up phase.

If you're looking at a younger chain, you may be able to negotiate an option or first right of refusal for additional units, so you won't part with a lot of cash before you learn whether you like being in that business.

And though it may sound paradoxical, a good multiunit franchisee is able to think small-not necessarily in terms of total global domination. Though your eyes may be on the multiunit prize, every multiunit developer I talk to has the same piece of advice: Take the time to ensure that each location can stand on its own.

WILL IT WORK?

Todd D. Maddocks is a franchise attorney, small-business consultant and founder of Franchisedecision.com.