Power Of One

A new breed of franchisee--the multiunit operator--is changing the face of franchising.
Magazine Contributor
10 min read

This story appears in the December 1996 issue of Business Start-Ups magazine. Subscribe »

When daniel del prete decided to purchase a Dunkin' Donuts franchise in 1972, his sole intention was to find a way to pay the rent and put some food on the table. He never suspected that almost 25 years later he would attain such success that he's come to symbolize franchising's latest trend: the multiunit franchisee.

What turned the tide for Del Prete, who now commands a virtual empire of 18 Dunkin' Donuts locations and three Blimpie restaurants? "I saw the potential growth and opportunity," says Del Prete, who has since witnessed many others forge similar paths. "Today, franchisors are definitely looking for multiunit franchisees. I think this is the way it's going to be from now on."

Many industry insiders agree. Brace yourself for a new breed of franchisee--more sophisticated, with bigger goals, privy to more resources, and partakers of all the benefits and the trappings that accompany corporate status.

"Over the past decade, we've seen the emergence of the sophisticated franchisee," says David J. Kaufmann, senior partner at Kaufmann, Feiner, Yamin, Gildin & Robbins LLC, a New York City law firm that counsels franchisors. "Whereas franchising has its roots in, and today still largely depends on, the mom and pop franchisees, today we're seeing skilled, educated businesspeople whose abilities extend beyond the operation of a single unit. It is a more sophisticated population in every respect: in education, in financial resources, in dealings with their franchisors, and in their political acumen."

Scaling New Heights

Though most of these franchisees own between three and six units, they are starting to pursue even more, blurring the line between franchisee and franchisor. "While the typical paradigm is a successful single-unit franchisee who is challenged by the franchisor to grow, at the other extreme we see the mega-franchisee, who almost resembles a large franchisor," says Kaufmann. "They're listed on the New York Stock Exchange; they have real estate, site selection, legal, operations and personnel departments." National Pizza Co., for instance, wears two hats: It's the franchisee of more than 300 Pizza Hut locations and the franchisor of Tony Roma's restaurants.

Confusing, perhaps; but in a strange way, it makes perfect sense for the franchising industry. No one knows exactly when the light bulb went on, though the trend has been gaining serious momentum over the past five years. According to a recent study by industry newsletter Restaurant Finance Monitor, the top 100 franchises operate about 9,100 restaurants, an increase of more than 2,000 units since 1991.

"[In the past,] franchisors reasoned that awarding only single-unit licenses would prevent any given franchisee from exerting too much power," says Kaufmann. That fear, whether justified or not, is being overthrown, as "franchisors come to understand the inherent advantage of granting multiple franchises to a single proven franchisee," Kaufmann adds. The obvious tangible benefit: economies of scale, as multiple-unit franchisees purchase equipment and supplies at better prices and share costs of computerization, advertising, product and service procurement and the like.

Yet just as significant a benefit is the fellowship shared by these franchisees and franchisors, a rarity in these days of tense relations. "It's always better to deal across the bargaining table and in day-to-day operations with a more sophisticated entity, one who already speaks the language," says Kaufmann. "Multiple-unit franchisees share the franchisors' opportunities and are also aware of the franchisors' problems, so by and large there's less friction between these franchisees and their franchisors. These are not people who don't know what to expect, who have pipe dreams that are far removed from the reality of the situation. They're businesspeople who understand what they can reasonably expect to obtain from a transaction."

Consequently, a growing number of franchisors are willing to put more of their proverbial eggs in one basket. "They now understand that between the single units at one end and the large franchisees at the other is a happy medium," says Kaufmann. "And the happy medium is this: Multiple-unit operators have a proven track record, have gone through the training, and, by virtue of their profitability, have the financial resources to establish future units--all of which benefits the franchisee and the franchisor."

Control Factors

Another equally logical question franchisors face regards the control they consider so precious. Aren't franchisors a bit concerned about whether the precarious balance of power might topple? "There's a fine balance to be struck," says Kaufmann. "As far as a concentration of power that will enable a single franchisee, or a group of very powerful franchisees, to lord it over their franchisor, that has been known to happen. The number at which the balance of power shifts too much and poses a danger to the franchisor varies from system to system and, more important, from industry to industry."

Kaufmann points out that while lines are inevitably being crossed, the franchisor must still maintain ultimate control over the relationship. "I have seen franchisors, in their haste to grow, grant entire large markets to franchisees, only to find out 10 years later that that market was vastly underexploited because the franchisee breached development obligations," he says.

Yet franchisors aren't the only ones taking risks in this relationship. "The franchisee has to be very careful that the franchisor doesn't promote growth just for the franchisor's benefit," says Del Prete. "There's a lot of pressure from franchisors to force single-unit operators, or even multiunit operators, to expand further or faster than they're capable of. And when the franchisor is doing it for its own advantage, to generate more sales and open more locations, that produces failure. Every franchisee should [think] carefully about growing, and not get caught up in [the furor]."

For better or for worse, the furor won't likely die down any time soon. And the fate of single-unit franchisees, those who just want to pay the rent and put food on the table? They aren't necessarily headed the way of the dinosaur, though Kaufmann points out that these opportunities may eventually be restricted to certain systems, industry segments or geographic locations.

Some might argue that it's a small sacrifice for the good of franchising as a whole. "I see this as extraordinarily healthy," says Kaufmann. "Franchising is moving to a much more sophisticated plane."

Whats New

By Lourdes Aguila

United Energy Partners

3333 Iowa St.

St. Louis, MO 63118

(800) 467-8887, (314) 664-0300

DESCRIPTION: Energy-efficient light-ing and controls for commercial use





ROYALTY: 2-8.5%

SEEKING: Nationwide, Canada, Mexico and Europe

In today's cost-cutting climate, United Energy Partners (UEP) is a natural. "Thousands of dollars are wasted every day due to inefficient lighting," says company president Tony Portell, 39.

UEP helps customers see the light by offering to initially pay for retrofitting their lighting systems. UEP projects the energy savings each client should see, then lets them pay from that monthly savings. If the company saves less than projected, UEP refunds the difference. That guarantee has put UEP and Portell on the road to a bright future.

"We've never had a client save less than projected," says Portell. Clients including the U.S. Postal Service, JC Penney and McDonald's accounted for 1995 systemwide sales of $3.5 million.

Franchisees do the building analyses; the home office prepares the proposal and handles all the administrative work. No engineering background is needed, says Portell; franchisees just need to be comfortable selling.

The Tax Man Groweth

Franchising adds up for Jackson Hewitt.

By Holly Celeste Fisk

John T. Hewitt had seen H&R Block competitors come and go by the time he founded Jackson Hewitt Tax Service in 1982. So what made him imagine he could create a franchise system that could compete with such a household name?

"I brought a number of things to the table that no one else did," says Hewitt, 47.

For starters, Hewitt began his career at H&R Block, becoming its youngest regional director in the country before he left in 1981 to develop a proprietary tax software program, called Hewtax, with his father.

The two were still developing the software when Hewitt purchased the six-store Mel Jackson Income Tax chain in 1982. Even then, he had no qualms about tossing his hat into the ring with his former employer. "In fact, that was our goal from day one," says Hewitt.

And he immediately recognized the advantages he'd created for his new company with Hewtax. The program walks tax preparers through the tax preparation process, guiding them in asking the right questions, making good decisions and doing the math. The comprehensive software allowed Hewitt to concentrate on hiring good employees without requiring them to have extensive backgrounds in tax preparation.

"Traditionally, accountants are boring," says Hewitt. "We can hire people who have more personality because of the extra foundation we're giving them, based on the computer program."

The customer service Hewtax allows him to provide is key to Jackson Hewitt's success. "There's no question in my mind that whoever offers the best service is going to win," says Hewitt. He's confident Jackson Hewitt will "win" in the next 10 to 15 years. "It depends how quickly [H&R Block] reacts to our competition."

That competition comes mostly in the form of franchisees. Indeed, so sold on franchising is Hewitt that only about 90 of the 1,600 or so Jackson Hewitt outlets are company-owned--and, if Hewitt has his way, that won't last for long. "We think of [the company-owned units] as a sort of inventory, waiting to be sold to a quality entrepreneur," he says.

And plenty of quality entrepreneurs are recognizing the advantages of the tax preparation industry. "Some people look at this industry and say you can't make money because it's only seasonal. Our systemwide revenue is $70 million a year," says Hewitt. "It isn't hard to calculate that it's better to get that in three months than it is in 12 months. Normally, when you start a business, you have to work 70 to 80 hours a week, 52 weeks a year. In this business, you only have to do it for a few months. The rest of the year, believe me, is not very taxing."

Hewitt believes franchising gives his company the edge it needs to be a serious competitor. "Most of our stores are franchised," he says. "So if I have one of my franchisees facing one of [H&R Block's] corporate representatives, I have an advantage. Certainly someone who owns their business is going to try harder than someone who's a corporate employee."

Hewitt's philosophy is summed up in a quote from a favorite book, Carl Sewell's Customers for Life: "If you're not improving, your competitor is gaining on you."

And Hewitt has no plans to stop improving his company--especially if it means gaining on his biggest competitor. "We're the Avis to their Hertz," says Hewitt. "We're number two, so we try harder."


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