What is multi-unit franchising?
There are two main types of multi-unit franchising. The first is sequential (or incremental) multi-unit franchising, whereby franchisees begin with one unit and gradually purchase additional units over time. Franchisees usually must display competence in operating their current unit(s) before the franchisor will entrust them with additional outlets.
Sequential multi-unit franchising benefits both franchisor and franchisee: selecting an existing franchisee to establish a new unit removes the difficult and often costly process of finding high-quality, reliable new franchisees; and the franchisee is rewarded for their hard work with additional units and, in turn, the opportunity to increase their revenue.
The second multi-unit franchise model is Area Development, which involves the franchisor granting the franchisee the rights to an exclusive territory where they will be expected to establish a specified number of units within a certain timeframe. The predetermined nature of area development agreements typically means that franchisees will own a larger number of units under this system than with sequential multi-unit franchising. The area developer will pay the franchisor a development fee for the exclusive rights to their territory as well as a franchise fee each time a subsequent unit is opened; however, they are typically rewarded for their success in expanding the brand with financial incentives such as reduced fees.
Benefits to Franchisees
Although being a multi-unit franchise operator is undeniably challenging, owning more than one outlet provides a number of advantages to franchisees. These include, but are by no means limited to:
- Greater earning potential: an obvious benefit of owning multiple units of a franchise is the potential to earn considerably more money than can be earned from owning just one, and the greater the number of units a franchisee owns, the more profit they can potentially generate. This also offers franchisees added security – if one of their units underperforms, this can be compensated for by higher sales in other units.
- Lower costs: franchisees operating multiple units will save money in several areas of their business. Not only will they have the advantage of financial incentives provided by the franchisor e.g. discounts on fees and royalties, but they will get more for their money than single-unit operators in other vital areas such as marketing, paying the same amount to advertise multiple units as they would pay for only one.
- Staffing efficiency: for single-unit operators with only a small team of staff, unexpected absences can cause a great deal of difficulty and stress. Multi-unit franchisees benefit from having access to a larger pool of staff, making it easier to find cover in case of absences. This has the added bonus of allowing staff more flexibility when choosing holiday time and annual leave, resulting in happier employees.
Benefits to Franchisors
The increasing popularity of multi-unit franchising has been in no small part due to the large number of benefits it provides to franchisors. These include:
- Less training required: when each new unit is opened by a different franchisee, each of these individuals will have to be given in-depth and time-consuming training to ensure they are properly equipped to operate their new business. However, if one franchisee operates multiple units, only one initial training course is required for several outlets, saving the franchisor a considerable amount of time and money.
- Lower risk of adverse selection: if a franchisor chooses to grant additional units to an existing franchisee who they know to be reliable and efficient, they avoid the potential pitfalls of selecting franchisees who they have had no previous dealings with and who may ultimately prove to be ineffective in running their business.
- Faster growth of the business: as a result of the time saved on essential processes such as recruiting, screening and training of multiple new franchisees for each unit, multi-unit franchising allows a business to expand much more rapidly, leading to greater brand awareness and higher profits.
Things to consider
While multi-unit franchising clearly has a wide range of advantages for everyone involved, like any business venture, it can pose difficulties which people entering the world of multi-unit franchising should be aware of, such as:
- Greater responsibility: it goes without saying that owning a large number of units is more demanding than owning just one. Multi-unit franchisees must ensure the smooth running of numerous outlets, effectively acting as a mini-franchisor monitoring the performance of several store managers. This may lead to great stress and anxiety in some franchisees, and it may be difficult to find a healthy work/life balance when operating multiple outlets.
- Risk of oversaturation: as multi-unit franchisees will typically be expanding their business within a relatively small geographical area, it is important that they thoroughly research the market before opening additional outlets or signing an area development agreement to ensure that they do not oversaturate the area and put their financial success at risk as a result.
- Greater detachment: some argue that, as the number of outlets owned by a franchisee grows, so too does their level of detachment from the operation of their units. This is a potential drawback both for franchisees, who may wish to take a more hands-on approach in the day-to-day operation of their business, and franchisors, who may find that owner-operators with a large number of units become less efficient in creating profit for the company.