MUMBOs have been a long-established feature of mature markets, but there are some important pros and cons that franchising professionals need to consider.
According to the most recent BFA-NatWest survey of the franchising sector in the U.K., around a third of franchisees now run more than one franchise business, compared to just a quarter of franchisees in 2013. The trend is not just towards multi-unit franchising, but also towards multi-unit and multi-brand franchising.
Multi-unit, multi-brand operators (aka “MUMBOs”) have been a long-established feature of more mature franchising markets, such as the United States. MUMBOs have often honed their skills by operating a single brand for a number of years, developing their understanding of the franchise model, and evolving their managerial and operational infrastructure.
It is common that a MUMBO will have started as a family-run business, and by the time the second generation is ready to take over the reins, they are looking to expand the business both with their original franchise and by diversifying and taking on additional, non-competitive franchises.
Diversification advised
Diversification is a sensible decision, particularly in these uncertain times. By operating a number of different brands, a MUMBO can protect its overall investment from the adverse effects of economic downturns or changes in consumer demand by operating franchised brands in different sectors or sub-sectors.
A number of established MUMBOs in the U.K. operate coffee shops, QSR food outlets, gyms and hotels. Operating a diverse portfolio can enable a MUMBO to build up and sustain a real estate portfolio, supply chain and maintain a multi-skilled workforce.
Of course, there is another category of MUMBO, which is exemplified by the likes of SSP, Welcome Break, and Sodexo, which are specialists in ‘closed’ or ‘captive’ retail environments such as airports, train stations, university campuses and sporting venues.
A franchisor’s perspective
MUMBOs provide franchisors with access to experienced operators, familiar with the needs of operating a franchise system and possessing an established infrastructure and financial resources.
Their operational efficiencies and cost reductions due to shared facilities allow for greater profitability and more rapid expansion. Appointing MUMBOs can be particularly beneficial to foreign brands looking to establish themselves in the U.K., or domestic brands which hitherto have grown through corporate expansion but which now wish to accelerate their growth through franchising.
The inclusion of MUMBOs reduces the number of individual franchisees in the network, requiring less training/support from the franchisor, without diminishing the rate of expansion.
MUMBOs may achieve critical mass by acquiring poor-performing franchisees or corporately owned stores, which in turn should increase revenue and profitability.
“MUMBOs have often honed their skills by operating a single brand for a number years, developing their understanding of the franchise model”
Possible downsides
A MUMBO’s increased influence and bargaining power can disrupt the traditional franchisor/franchisee dynamic – at least domestically.
For some brands, MUMBOs have become almost “too big to fail”, so conversations over breaches need to be approached differently. Franchisors should consider placing limits on unit growth and alternative remedies to termination, such as requiring divestment or withdrawing incentives.
Also, there could be potential adverse effects if the MUMBO’s other operations create controversy and/or encounter financial difficulties. Franchisors need to consider if there is a sufficiently strong contractual ‘firewall’ between the MUMBO’s operation of the franchisor’s brands and other franchised operations.
Conflicts of interest can arise between the different brands, particularly in terms of the allocation of resources between them in areas such as personnel, site selection, and capital.
Brands should consider requiring approval rights over any future brands that the MUMBO might operate, and consider imposing clear site requirements. This can ensure that the franchisor is given access to the best locations, thereby preventing the MUMBO from favoring other brands on site selection.
They should also consider requiring that the MUMBO makes an agreed amount of capital available throughout the term for investment in the brand, to avoid capital being directed towards its other brands.
In addition to the points mentioned above, other aspects which need to be recognized and reflected in the agreement include:
- A binding development schedule which is usually tied to some form of territorial exclusivity
- Incentives for growth, such as reduced fees, costs, and rebates
- Increasingly complex funding and investment arrangements can affect the typical contractual positions, which regulate personal guarantees, changes of control, transfers of interest and business sales. Some MUMBOs might even be contemplating floating on a public stock exchange (which has happened in the U.S.), and the impacts of a listing on the brand and the franchisor’s own share price need to be considered
- Requirements for unit-level and group level key performance indicators
- Any obligations requiring the franchisee to devote its full time and attention to the franchisor’s brand must be relaxed, recognizing that the franchisee’s management will be operating additional franchise systems. Any noncompete clauses must be reviewed and, potentially, relaxed to ensure only specific competing businesses are covered
- Cross default provisions that enable a franchisor to terminate all stores if one or a number of units are not operating in compliance with the agreement
A MUMBO’s perspective
On the other side of things, the rewards for MUMBOs include operating multiple brands that allow the franchisee to diversify its position and become less reliant on a single brand. There’s also the opportunity for fixed costs and overheads to be spread or shared over multiple locations, increasing unit profitability.
- For particularly savvy operators, there’s the potential ability to move employees between different brands, and gain insights into different operating systems and carryover/internalize operational innovations. Additionally, there is more opportunity for career progression and savings in recruitment costs, as well as the ability to cross-promote brands. Taking all of this into account, the obvious risks include:
- Increased reliance on different layers of management means that a MUMBO owner cedes control and raises the risk of a rogue employee putting the business in breach. By creating a large workforce, a MUMBO may achieve the unintended effect of becoming less entrepreneurial
- An overzealous cross-default clause could mean the business is occasionally faced with the threat of termination
- Ensuring there is adequate protection before investing the capital to grow. Has the MUMBO secured exclusive rights or other territorial protections? Is there sufficient growth opportunity in the allocated territory?
- Greater personal liability – as the portfolio grows, personal exposure to banks in the form of secured lending and franchisors in the form of personal guarantees can mean that individual shareholders taken on a significant level of personal risk should the MUMBO ever find itself in financial difficulty.
THE AUTHOR
Gordon Drakes is a partner at European law firm, Fieldfisher LLP. He has over 15 years of experience in advising brands on their expansion through third-party models such as franchising, licensing and joint ventures.
