Be a Franchise Mogul
Q: Three friends and I have decided to pool our investment dollars and buy some franchises. Our backgrounds are financial, sales and business administration. We have investigated several different franchise opportunities and have enough money to either buy six to10 locations from a single franchise or one to two locations from three different franchises. Is it better to own several units of one franchise or to own one or two of several franchises?
A: You may find that some of the franchisors you're considering won't allow you, under their standard agreements, to own or operate other businesses while you're a franchisee of their system. Many won't offer to sell you a franchise if they know in advance your full attention, at least in the beginning, won't be focused on their brand. Make certain all the options you expect to have actually exist.
All that aside, it sounds as if you've put together a formidable management team. Unfortunately, there is no "right" or single answer to your question. There are pros and cons to each option, and some tradeoffs in making your decision.
Many franchisors offer an area development plan to potential franchisees willing to commit to opening a specified number of units within a defined territory and in accordance with an agreed upon schedule. They often provide several benefits in exchange for the franchisee's commitment. Typically, these incentives include some of the following:
- An exclusive territory for a defined period of time
- Reduced opening fees. Generally, initial fees are reduced on a sliding scale. The number of units you commit to often determines the "average" fee you will pay.
- Reduced royalty if the franchisee provides support to their own units
- Reduced royalty based on total sales volume
- Ability to open additional units within the territory during the term of the agreement with no or lowered initial fees once the initial development obligations are met
With multiple units you may be able to realize significant operating efficiencies, including:
- Shared labor among the locations you own
- Commissary and internal warehousing and distribution costs
- Purchase and other cost of goods benefits
- Advertising efficiencies
- Critical mass benefits, including location and lease considerations from landlords
- Improved operations due to the ability to establish a strong internal management and training infrastructure
Also, multiunit ownership often enables you to provide a career path for key employees. This in turn eases the burden on staff recruitment and can increase your employee retention rates.
With more units, you're a bigger fish in the franchisor's pond. With more locations, you may have a louder voice with your franchisor and more influence among your fellow franchisees.
Of course, you'll be putting all your eggs in one basket. Remember that not all franchisors are created equal. Some franchisors succeed while others disappear from the marketplace. It's important to evaluate both the consumer demand for the product or service and the stability and track record of the franchisor.
Some franchise systems are truly only geared to single unit ownership. Sometimes royalty and other payments to the franchisor are too high for successful multiunit operations. Make sure the franchisor you select has a system designed to allow profitable operation by a multiunit owner.
Playing the Field
Selecting multi-concepts definitely allows you to spread your risk. You may also pick up intelligence and skills in one business that improves your performance in another. And you may realize a higher overall return with a diversified portfolio--one really hot concept can make up for a lack of performance elsewhere.
The multi-concept option may work best if the concepts you select either:
- operate within the same general industry, such as food, clothing or technology.
- create synergy, such as preschool and children's clothing, elder care and home services.
- are all service businesses or have other similar attributes that can be leveraged over the brands.
- have different peak seasons that can improve your internal cash flow
By leveraging concepts, you may be able to create efficiencies that can be used across brands, in areas of administrative support (payroll, etc.), warehouse and distribution.
Also, you may be able to maximize real estate. Landlords like to work with tenants that can deliver multiple concepts, because you can deliver efficiencies not possible from single-concept tenants. Consequently, they may be willing to subdivide larger space to fit your multiple brands.
If you decide on the multi-concept option, we suggest you read your agreements very carefully to make sure the franchisor allows you to operate other businesses during the term of your agreement. Make certain your definition of competing business and the franchisor's are the same. Work with a qualified franchise attorney who can coordinate and provide guidance on the differing requirements of the various franchisors. These types of transactions tend to become complicated.
One last piece of advice: Learning how to run any new business and managing the opening of that new business generally requires more time, effort, money and skills than anticipated. While your team may bring many talents and skills to the new business, getting one concept off the ground before you take on another concept is essential. Take your time and good luck.
Michael H. Seid is managing director of Michael H. Seid & Associates, a West Hartford, Connecticut- and Troy, Michigan-based management consulting firm specializing in the franchise industry. Seid co-wroteFranchising for Dummies(IDG Books) with Dave Thomas, the late founder of Wendy's, and serves on the International Franchise Association's Board of Directors.
Kay Marie Ainsley, managing director of Michael H. Seid & Associates, consults with companies on the appropriateness of franchising; assists franchisors with systems, manuals and training programs; and is a frequent speaker and author of numerous articles on franchising.