Are you ready to be a multi-unit franchisee?

• Are you ready to be a multi-unit franchisee

Are you ready to be a multi-unit franchisee

If one franchise unit is good, does that mean two units are better? There is some evidence that the incidence of multi-unit franchising is growing and Australia is following the US in the trend, albeit years behind. So is multi-unit franchising something you ought to consider?

At present, approximately 75 percent of franchisees in Australia are single-unit franchisees, reports David Stafford of consulting firm DC Strategy. “This reflects the desire of most franchisors to harness the owner-operator effect – the almost magical effect on an individual’s motivation and performance that drives the franchise sector. There would be few who would argue with the benchmark that the owner- operator effect produces a 20 percent uplift in top line performance due to a range of behaviours which employees generally don’t exhibit,” he says.

In his view the question that must be asked when discussing multi-unit franchising is how much of the critical owner-operator effect is lost if the franchisor and franchise engages in multi-unit franchising? Is the influence of the franchisee diluted as more units come within his or her span of control? At what point does the owner-operator effect disappear completely? Are two units too many, five, or 10?

“There can be little doubt that single unit franchisees who work in their businesses have the highest potential degree of control over the performance of the business,” Stafford says. “As franchisees progress from one to two units, that level of control must logically decline but anecdotal evidence indicates that two units can be easily managed without any significant loss of control and performance.

“Whether or not the franchisee can continue to produce a strong performance as further units are added to his or her span of control is clearly an issue of capability. Some franchisees will be able to do so, some will not.

“This is the question that the prudent franchisor must address – to at least the same degree of rigour as when franchisees are selected in the first instance, if not more so. Inadequate consideration of this critical capability issue could easily see a decline in average unit performance to both the franchisee’s and franchisor’s detriment.”

The other key consideration relates to the franchisor’s motivation to engage in multi-unit franchising. Some franchisors hold the view that they are incapable of operating corporate-owned units and so choose not to do so. This results in both distancing themselves from first-hand knowledge of the customer and foregoing comparatively large profits from company-owned stores, Stafford suggests. And he says, some potential franchisees view such franchisors with a healthy dose of scepticism – “Why should I sign with a franchisor that isn’t capable of running its own stores?”

“Other franchisors take a contrasting view and believe that multi-unit operators can produce greater results by being significantly closer to each unit within their control than the franchisor could ever be. In some cases this is undoubtedly true; however, it raises further challenges for the franchisor,” he says. “Naturally, the multi-unit holder will want a different level of service and support than a single unit holder is likely to demand and the franchisor needs to accommodate this in its field support force if multi-unit operators are to flourish.”

The other issue, rarely discussed, but nonetheless important, is that of power and influence. This issue depends on the maturity of the network and the support provided to multi-unit operators. Stafford says “If multi-unit franchising is begun too early in the network’s development, a very small number of franchisees could wind up holding a significant number of units, and power, within the franchisee cohort. Adopted much later in the network’s development, multi-unit holders are unlikely to hold disproportionate power and influence.” 

Stafford cautions franchisees that while multi-unit franchising can be a significant advantage to franchisors, it presents its own challenges which many immature franchisors are generally unable to meet. “More mature franchisors, assuming they select multi-unit operators appropriately, can harness the capabilities of quality operators to build enterprise value for the franchisee and franchisor alike,” he says.

Franchisor views

FC Business Solutions general manager franchise services, Sergio Alderuccio, first noticed the growth of multi-unit franchising in the US in the late 1980s; multiple franchise ownership now in the US can reach mind-boggling volumes, given the country’s geography and demographics. It has taken a little longer to take-off in Australia, but indications are that for the franchisor it has become the number one way to grow a franchise network, and an increasingly popular way for a franchisee to build a strong business.

So Alderuccio posed a series of questions to four iconic Australian brands, Barry Plant Group (managing director, Mike McCarthy), Crust Gourmet Group (development director, Michael Rose), Pack & Send (CEO, Michael Paul) and Quest Serviced Apartments (national franchise operations manager, Peter Fiasco), seeking an insight into the growth trends of franchising.

What he found was a common thread among the franchisors: to achieve unit growth in the current environment, growth from within, from existing franchisees, was increasingly important.

However, what Alderuccio also uncovered was that there is a lot more to multi-unit franchising than simply granting additional franchises.

And in the majority of cases, franchisors get it wrong, he suggests.

“According to the four brands, a lack of strategic planning, discipline and sloppy execution can bring down multi-unit franchising. A multi-unit franchising strategy managed well provides the franchisee with the ability to build higher profits than with a single store.

“Return on investment (ROI) can be higher because of the synergies a franchisee can enjoy, particularly with staffing and administration. In many instances, the franchisee can also enjoy a concession on the initial franchise fee and project fees.

“It helps to build the wealth of the franchisee by growing within the brand, as opposed to seeking external, unknown opportunities.

“Multi-unit franchising can build longer term careers for the franchisee’s staff, offering a variety of roles at different locations. Franchisees are provided with a greater opportunity to retain talented staff as a result of the additional opportunities of management, or even shareholding in an additional franchised outlet.

“The benefit to the franchisor is that the franchisee understands the systems and processes — they know your business.”

According to Peter Fiasco, multi-unit franchising is part of Quest Serviced Apartment’s growth strategy.

“This strategy has allowed the franchisee to overcome potential complacency by allowing them to achieve business growth, to build wealth and to grow within the brand,” Fiasco says.

At Pack & Send, chief executive Michael Paul believes multi-unit franchising has contributed to the expansion of the retail network. it has also reduced costs associated with franchise recruitment, reduced compliance, uniformity and support costs, as well as reducing the risk of recruiting a new franchisee.

“The capabilities of an existing Pack & Send franchisee are well known to us, which certainly plays a major role in multi-store ownership,” Paul says.

Alderuccio found that the level of support did not alter for franchisees once they became multi-unit franchisees.

“The focus of the Quest Serviced Apartments’ support team is on the individual property and its performance, as opposed to the individual franchisee,” he says. “However, the reality is that multi-unit franchisees seek a different focus and attention by virtue of the fact that they have a bigger investment in the brand.”

At Barry Plant all franchisees are treated the same, says Mike McCarthy, but the relationships with multi-unit franchisees tend to differ because of their experience in the business.

He believes that multi-unit franchisees are operationally strong and are more focused on key business elements, such as strategy, local area marketing and motivating their people.

“The success of a multi-unit franchisee is their ability to develop, motivate and retain experienced, long-term, loyal staff,” McCarthy says.

Michael Rose confirms relationships with multi-unit franchisees are “essentially the same”, however, he believes that circumstances change when franchisees became owners of three or more stores.

“Franchisees with three or more stores need to ensure they maintain and continue to develop their systems and processes, as opposed to single-mindedly focusing on business growth,” Rose advises.

It’s a view Michael Paul agrees with, saying that multi-unit franchisees require different advice and guidance, such as taking a more strategic focus, rather than an operational one.

“They need to be stronger in areas including financial disciplines and human resource management, such as staff recruitment and management development,” he suggests.

Michael Paul advises caution over the initial step to becoming a multi¬unit franchisee, believing it wise that a second unit is granted only when the franchisee has proven themselves with a single unit over a period of time.

“It is very important to have a thorough selection process in place for each additional franchise licence granted in order to protect the interests of the brand, the franchise system and the interests of the franchisee,” Paul says.

“This includes the submission of a business plan that addresses the issues of the proposed management structure of the new outlet and a detailed financial plan.

“The franchisor management team and the Board of Directors should approve the franchisee’s application for an additional store. Essentially, we seek to thoroughly understand whether the franchisee is ready to expand.

“That is, do they have the financial and human resources and the skills to drive profitable growth through a multi-store enterprise — or alternatively, can the franchise best maximise their profits by focusing efforts on their existing store or stores?” Paul asks.

For Alderuccio the key message is that multi-unit franchising cannot be achieved without a strategy. As Peter Fiasco highlights, without a strategy, mistakes can he difficult and very costly to correct.

A multi-unit strategy needs to address some key fundamentals, such as a proven performance from your existing outlet, including the quality of your team, management ability, delegation strength, the potential impact on your existing businesses, percentage of market penetration, proposed management structure, local marketing skills and business and financial planning.

Alderuccio strongly believes that it is essential that both the franchisor and the franchisee work to a comprehensive multi-unit strategy.

“The franchisor’s strategy must be built on a robust franchise system that already has successful and satisfied franchisees.

“I wouldn’t think that there would be an instance where a franchisor would begin with a multi-unit franchising plan. The successful franchisors have evolved into the strategy from having built successful single unit franchise systems first and foremost.

“It would be unlikely for the franchisee to be successful without careful planning from the franchisor, especially in the key area of the franchisee’s past performance. 

“The franchisors with a successful multi-unit franchising strategy are prepared to reject an application for an additional franchise, especially if they are of the opinion that a franchisee will achieve more from remaining a single franchise.

“The less mature and more opportunistic franchisors do not generally display the same discipline and commitment to strategy. If franchisees get out of their depth, the franchise system, the brand and the franchisee’s investment can all he damaged, and possibly be put at risk.

“The business leadership must come from the franchisor.”

 

DC Strategy is your business growth specialist. For more information in relation to franchising, please contact:

David Stafford 
Executive Consultant
david.stafford@dcstrategy.com
03 8615 7207