It’s a natural evolution. A one-location franchisee gains traction with customers and its franchisor and aspires to grow. There are many considerations around expanding in a way and pace that fits a franchisee’s situation without running the business into trouble. This is a high-level look at expanding within the same franchise system as well as becoming a multi-concept franchise operator.
Why do you want to become a multi-unit operator?
Besides the hope of financial success, there are other considerations. You’ll need confidence in yourself, your team, systems, processes, and procedures, and excitement around the brand, its momentum, and what it stands for.
Think of insights and experience you have that can set you apart. You’ll need solid financial results from your existing unit and a vision for where you see yourself in one, three, or 10 years. You’ll also need access to financing sources, internal or external, that will support growth.
Ask yourself these questions:
- Are you happy with the brand, franchisor, and the system?
- Are you receiving the support and interaction you envisioned when you started?
- Are you aligned with the franchisor around brand positioning, operational rules, and expectations?
- Do participants in the franchise system – the franchisor and individual franchisees – work together or against each other?
Gauge the ability to grow and how that fits your current situation. Consider geography, number of units, and methods you can use to expand your number of units. Do you have the team and access to financing necessary to build and grow? Can you build, develop, and work with people on a continuous basis?
Becoming a multi-unit operator should include writing a development plan with your franchisor. This is a legal agreement spelling out how many units you should open and when. Be warned: missing your goals could result in a loss of your development rights and a sale of your development territory by your franchisor.
Research cash and operational needs
Many operators fail when expanding quickly without proper financial support. Research the working capital needs of supporting multiple locations, site managers, landlords, payrolls, and taxing authorities.
Work with your business partners and lenders to gauge whether you have enough cash to survive in downtimes. Have more cash in the bank than you think you need. Keeping a minimum of three months’ total payroll cash costs in reserve can be beneficial. Understand all the costs and timelines associated with building and operating a new site until it’s cash self-sufficient.
Consider what it means to you personally to run two, five, or 20 units day to day. Ask other multiunit operators in your system about things they did well and what they would have approached differently.
Do you have the right people at all levels to manage multiple units? You won’t be able to do everything yourself, so what do you need to add or change? What do your best people need to grow? What do they need to learn and what will you need to pay them? Would you ever consider giving your best people an equity stake in the business?
Assess yourself. Are you the right person to maintain many locations under your leadership? Can you delegate without worrying about how business is handled? Can you give managers latitude in applying their decisions and creativity? Does your family understand how your lifestyle could change?
How to expand the number of units
There are numerous ways to grow with your existing franchise system. You can open new locations if your franchisor includes that in a development agreement.
If the decision is based on geography, ensure your territory is clearly defined. Understand how other franchisees can and can’t develop around you.
Units can be acquired from company-operated locations or other franchisees. Find out the seller’s motivation for selling, and the market rate for acquiring locations.
Some financial and operational records should be made available to you prior to committing to a purchase. Detailed financial results should be inspected carefully to ascertain what’s in the numbers. Often, franchisees might include other expenses in their profit and loss statement that you might not.
Gauge whether employees are happy and effective, and whether they might leave if you buy. It’s important to work with the seller to protect the confidentiality of an impending transaction, because employees could become fearful and depart prematurely when a sale becomes public knowledge. When it is disclosed, manage the message carefully.
Reasons to become a multi-brand operator
Franchisee growth can come through enhancing performance of existing units, expansion of existing brand operations, and adding new brands.
Owning and operating multiple brands can generate more complexity and leverage efficiencies and synergies between concepts.
The approach to adding a brand can be similar to choosing your first brand. You should consider excitement around the brand, track record of the franchisor and system, willingness of existing operators to provide positive references, fit with your experience and knowledge, and potential for positive financial outcomes.
Check the terms of your existing franchise disclosure documents (FDD) carefully. Not all brands permit franchisees to operate additional brands.
There can be well-founded concern that franchisees will become competitors, or lose focus. However, some franchisees more recently have become large, equity-backed entities with many brands.
Have a solid business plan. Lenders and prospective equity partners will be looking for cogent business reasoning to add more brands to your portfolio of businesses.
Identify synergies between the existing brand or brands and a new one. Look for a trajectory in the new brand that makes combined businesses financially positive. Consider how the operational elements – people, purchasing power, systems, administration – will work together.
Overall recommendations
- Grow your infrastructure and capabilities ahead of your unit growth
- If not, you can fall behind, which can drag down morale and performance
- Choose outside advisors who can grow with you for your systems, insurance, legal, finance and banking, accounting, and real estate needs
- Consider your staffing. Hire and train ahead of growth. Anticipate turnover before it happens
- Promote leaders. Support underperforming people with extra attention. If they don’t meet the needs of the business, consider making changes
- Assess whether your systems will support your needs as your business expands
- For some period of time, don’t focus on your exit – the sale of the business.
Focusing on an exit in the near term can lead to running the business with a short-timer’s mentality, impacting the quality and nature of the performance of the business, as well as the attitudes of employees. Work to generate a great business with great people and outcomes. At some point, your exit could take care of itself with great performance.
Desire to expand and improve is natural for ambitious and effective franchise operators. Do your homework, ask a lot of questions, and don’t be afraid to ask for help. Support gained through a franchise system is a key benefit of that business model.
The author
Michael Cullom leads the restaurant and hospitality consulting practices for Moss Adams. Michael has served in these industries in financial, operational, and board leadership roles for concepts ranging from early-stage to large, multi-national organizations. He can be reached at (303) 226-7002 or michael.cullom@mossadams.com
