The Advantages and Disadvantages of Multi-Unit Franchise Operation

You are a successful franchisee. Your business is doing well, it shows great promise, your relationship with your franchisor is on hold, and you have no problems servicing your debts or meeting your payroll. The question to ask yourself now is:
Is it time to expand?
It may be so, but first ask yourself the big questions: Will my success continue, and should I increase the number of units I work with to capitalize on my success? The answer is, it depends. In fact, the acquisition of more units may have advantages and disadvantages..

Advantages of a multi-unit franchise
Intuitively, you know that the more businesses you own, the higher your chances of getting more clients, increasing sales, and making more money. As a multi-unit franchisor, you may have the opportunity to build capital into your business faster than you can as a single-unit operator. As your turnover increases, you can negotiate better prices on supplies and maybe even get a better deal with realtors or even your franchisor. Being a larger franchisor may bring benefits in your ability to obtain more favorable financing.
Marketing your new series will be simpler because with more than one website, you may be able to incur costs to run radio and TV shows that you would be difficult to justify or afford financially if you only have one. Even the cost of acquiring customers is going down because your costs as a regional player start to fall in a lower range on a per unit and per customer basis.
Think about the benefits to your employees who can now see career opportunities in your growing organization. You may qualify for lower rates on health insurance plans and may be able to create better benefit packages to attract and keep your management and employees. You may also be able to offer candidates choices about where to work near where they live.
The benefits continue – one manager can take charge of multiple locations, and you can assign employees between units as demand dictates. If the new manager at your pizza franchise makes the mistake of ordering cheese and they run out of cheese on the same day the city’s soccer teams throw pizza parties to celebrate the end of a tough season, she can rush to another one of your units to replenish supplies—and satisfy plenty of young customers (who They will grow into big customers one day).
You may also be able to set up a warehouse or mall (a central location where you can prepare some products for all units) and ship the products to all of your units in an prepared or semi-prepared manner. This approach is acceptable in some franchisors and restricted in others, so be sure to check with your franchisor. Participating in a buying or buying co-op group with other franchisees can also facilitate similar cost savings.
Consider pricing, too. Although franchisors can set retail prices, in most franchising systems they generally allow franchisees to set the prices they charge their customers. But with so many franchisors in the market, in practice, prices for products and services may be inconsistent from one franchisee to another as there can be significant legal restrictions preventing franchisees from agreeing together on the prices of the products and services they sell. When you own all units in a geographic area, it will not be a problem for you or the franchisor.
As a multi-unit operator, your influence with the franchisor and with other franchisors expands as does your ability to manage your costs. Franchisors tend to listen to the people with the loudest voices, and these are the franchisees with the greatest economic power. This is just human nature.
Disadvantages of multi-unit franchise
With more units, you will be more at risk than smaller franchisees in the market, and the performance of these franchisees will affect your performance. Don’t forget that consumers see you all as part of a chain, and even though you have a sign that says “locally owned and operated,” the underperformance of one franchisee affects all franchisees.
Make sure to stay on top of how the franchisees next door to you are doing. If necessary, consult with them on improving market performance.
To be an effective multi-unit operator, you will need a great in-house organization. You will need the personnel, systems, and financial capabilities necessary to succeed. Having a plan is essential because it will allow you to grow at a pace that you can support. Without a plan and without your leadership and management skills, operating successfully can create some serious problems for you as you expand.
Planning is critical, and you may consider bringing in other business people as joint venture partners and advisors. This approach may make your portion of the money pie smaller, but a smaller portion of a larger pie is much better than 100 percent of a small piece.
“Critical focus areas in becoming a multi-unit franchisor are capital and management,” says David Barr, founder of PMTP Restaurants and second vice president of the International Franchise Association. “Specifically, in many systems, being a multi-unit franchisor generating economies of scale requires managing at least $6 million in revenue from all units. This metric then allows for additional multi-unit management to be hired, other than just the franchisor.”
Thus, it is important for franchisees to make an inventory of their available capital as well as their management in order to assess whether they are ready to add units and achieve scale. Many franchisors offer the analogy that when running one or two units, they are playing a man-to-man defense. However, when managing multiple units, they must play zone defense, and no one person can play zone defense. Make sure you have your capital and management plans in place as you embark on the multi-unit journey.”
Do not think that you will not have to play an active and involved role in running your business or that you can take advantage of the requirements of the franchise system. Doing so could have serious consequences for your business and your relationship with your franchisor and other franchisees in your market. Take your time and communicate cautiously and realistically.