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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?

This story appears in the June 2004 issue of Entrepreneur. Subscribe »

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 owners. For these ambitious entrepreneurs, 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 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 and fixes existing franchises. "These people come to the table with 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 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 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.

The Big Picture

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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