Multiple Choice
Multi-unit franchising fulfils the ambitions of many of the top 20 per cent of franchisees in a network, who, after several years of building a successful franchise look for a new challenge. They do not want to sell up and start again but want something more than operating one location or area, says Rod Young from consultancy firm DC Strategy .
"Multi-unit franchising is a low-risk growth option often encouraged by franchisors who sweeten the deal with discounted franchise fees and other assistance to retain proven operators in their networks."
Kevin Bugeja believes the trend is nothing new. Indeed franchising pioneers like McDonalds have been encouraging franchisees to take on extra commitments since the 1970s. But it is becoming more prominent in other chains, he suggests, as the concept trickles down.
Very successful franchisees, and we're talking millionaires, are multi-unit franchisees who have built their fortunes not from their creation but from something they have bought, says eja. It's not just a dream shared by the younger franchisees entering the arena but an ambition, he adds.
"The new Generation X are informed applicants, university educated, earning above average incomes, probably $100,000 to $200,000 and they want to work for themselves."
These franchisees are accustomed to working Monday to Friday – earning a similar or lesser salary from longer hours and weekend work just doesn't add up, unless there is the opportunity to expand the business with a second and third outlet in a few years.
According to Bugeja, "They won't even buy one franchise without a level of comfort that if their performance is good they can get a second or third."
Certainly the Retail Food Group, with its brands such as BB's Cafe, Donut King, Michel's Patisserie and Brumbys, has a number of franchisees entering the systems with a desire to commission or acquire multiple franchised outlets.
The challenge for potential franchisees wanting to maintain their high level income is to ensure they do not pay over the odds in the first place to reap the benefits. For instance, says Bugeja, a franchisee paying $800,000 on a company owned franchise outlet may make $260,000 profit, but after the debt has been paid off, the only way he can be in front financially is by taking on a second or third franchise in three or four years.
However multi unit franchising is something to be undertaken with considerable care and planning, cautions Sergio Alderuccio, managing director of consultancy Franchise Developments. It simply does not suit all franchisors and franchisees.
However, he adds, there are successful examples in all sectors.
"Importantly, the multi-unit franchisee needs to be a proven operator and have the financial resources and acumen to expand into additional locations."
What's in it for the franchisor?
Franchisors are embracing multiple ownership. That existing franchisees are reinvesting in the brand rather than exiting and taking the profits creates a level of confidence in the brand.
"It shows commitment from long term players," says Bugeja. And of course franchisees are less likely to exit a system once they have multiple commitments. Selling off more than one franchise to a single buyer is highly unlikely – franchisors will not approve a multiple purchase to franchise virgins.
Good franchisees are always in demand and many franchisors are looking to multi-unit franchising to grow their networks, adds Rod Young.
"Franchisors are encouraging multi-unit franchising to help both solve the management problems of struggling stores and to open new locations with proven, capable operators rather than take a new risk every time they grant a franchise to a new franchisee."
For franchisors, multi-unit franchising saves both time and money as the issues of induction and training and high levels of mentoring and compliance monitoring in the early years of a new franchisee are avoided, he indicates.
"Proven players are low risk and potentially higher reward for franchisors."
Contrary to expectation, Alderuccio suggests, multi-unit franchising actually requires a closer working relationship between the franchisor and the franchisee, because they have more of a business partnership.
"There is likely to be more exchange of ideas, systems, market intelligence and a leadership role by the multi-unit franchisee. The multi-unit franchisee is more focused on business performance and growth and therefore is more interested in benchmarking, business development, marketing and the franchisor's vision.
"The multi-unit franchisee requires less in the way of operational guidance, compliance and reporting. With franchising maturing in Australia, multi-unit franchising will offer plenty of appeal to franchisors."
What's in it for the franchisee?
For those franchisees wanting to build on their success, a second or third franchise allows for expansion beyond the confines of the existing business. It requires the franchisee to have proven themselves to the franchisor, and to be ready to take on the challenges of an expanded business.
While buying a single franchise can realistically be like buying a job, a franchisee who adds to their portfolio is buying themselves a bigger business which requires a change of role.
Franchisees work on, more than in, their businesses once they take on additional franchises and this creates a new challenge – more staff employment, more logistics, more management, more business development – but these are set off by the hope of greater profit and the chance to fulfil ambition, and quite simply, the opportunity to prove their business skills.
Practically, economies of scale come into play for multiple franchisees within a single system. Bugeja cites a three-store franchisee who has invested in offsite storage which enables him to purchase goods at clearance costs, hold and distribute appropriately to the outlets.
One comfort for those franchisees distancing themselves from the original business as their portfolio expands is that working for a few years in the franchise enables them to spot the triggers for error.
What about buying into more than one system?
The challenge for franchisees who purchase across brands is meeting expectation. You can't serve more than one master, Bugeja indicates, and so the natural result is that the best performing franchise will get the attention.
"The risk to a franchisor is that their system is not being favoured, so is not giving the best return. This hurts financially as many franchisors take a percentage of turnover in royalty fees."
In fact, he adds, some franchisors are following legal advice to add clauses forbidding the purchase of a franchise from another system.
Sean O'Donnell, a partner at Sydney law firm Cutler Hughes and Harris, says many well-established franchisors have what is called a 'full attention and devotion' clause that effectively limits franchisees to their existing system. And while this is proving successful for some franchisors who want to ensure they grant permission for any diversionary tactics such as secondary sites or systems, it doesn't work for all.
"The trend is to remove the clause for those systems looking to multi-unit franchise," he reveals.
He believes the issue of multi-unit ownership does polarise franchisors.
"It comes down to the particular system," he says.
Bugeja sees merit in complementary brands although theissue of dividing time and resources becomes a real challenge.
It is an issue being handled by franchise groups like Allied Brands and the Retail Food Group (RFG) who offer sibling systems to existing franchisees if there is not an appropriate franchise opportunity available in their existing brand.
According to Nigel Nixon, RFG director, the growth of RFG's franchise systems has not been as a consequence of cross system ownership but has, and is, helped by it.
"Where the opportunity for the acquisition of more franchises in an individual franchise system does not eventuate due to site competition, geographic limits or otherwise, then it is feasible and practicable for franchisees to develop franchises in other systems," he says.
"RFG has historically had concerns where franchisees became involved in other franchise systems due to fear of franchisee over-commitment both financially and or operationally. The fact that RFG can monitor and control multi-outlet and cross system franchise growth by individual operators mitigates to a larger degree these potential risks."
However the group does not prescribe or monitor the time spent by franchisees in the operation and management of cross branded franchises.
"There is no rule of thumb and franchisees are encouraged to develop through experience, the provisioning and allowance of their time and personal resources according to system, need and circumstance," Nixon explains.
Allied Brands has built its portfolio with the strategic goal of providing the company with a consistent revenue stream across the year, reducing the effect of the seasonal fluctuations that exist across the retail marketplace, explains managing director Peter Graham. Ice cream, unsurprisingly, is a better seller in the afternoons and in summer, while cookies and coffee area natural morning and winter purchase.
By co-locating the Baskin Robbins and Cookieman stores in some areas, franchisees benefit from two brands and revenue streams.
"Our plan is to continue growing these brands organically and to add further brands to ensure even greater diversity."
He admits that another benefit of this strategy is to provide potential franchisees with a diverse range of opportunities to suit their skills and requirements.
"We find most franchisees wanting to go down the multi-unit path stick to the brand they know and with all of our brands still going through an aggressive growth phase we have found it relatively easy to identify new sites which are geographically close to their existing sites."
Buying into ancillary brands means royalties are going to one place and there is more support and leverage. The franchisor needs only one head office to service several systems.
The experience and management skills of the better franchisee will mature as franchise systems mature increasing the pool of franchisees capable of operating more than one franchise, suggests Young. And the result will be a constantly growing number os franchisees opening more and more locations as mulit-unit operators and more franchisors assist them to do so.
However, multi-unit franchising is not an easy road to riches for either franchisor or franchisee, he warns. Careful development of multi-store criteria and the assessment of both the business plan and the franchisees capability are paramount if the benefits of this multi-unit trend are to be realised.
The key to successful multiple trading is, believes Bugeja, the training conducted by franchisors. Becoming a multiple franchisee is not just the next step but a move that requires careful guidance in the transition from working in the business to working on the business.
And charging a franchise fee for an additional business should mean excellent training on the transition , he says.
Alderuccio acknowledges multi-unit franchising defies traditional franchising wisdom but is working and growing.
Multi-unit franchising is creating small entrepreneurial groups that are providing efficiencies in management and administration for both the franchisee and the franchisor," he says.
Multiple ambitions
Multi-unit franchise holders are not investors, explains Rod Young of DC Strategy. 'They typically start their, franchise life owning and operating just one single unit franchise. Having learned how to make the franchise profitable they develop and train their staff to take more and more responsibility for the success of the business." This allows the franchisee to build a more substantial customer base, run a bigger location or better promote the business."
The emerging multi-unit operator has also learned how to develop good people and seeks the challenge of opening a second unit.
"Most good franchisors will have multi-unit criteria that a single unit operator will be required to meet before a further location will be granted. This may include having operated a profitable franchise for several years, meeting all obligations under the franchise agreement, developing a competent management team in the current franchise and having the available capital and management to successfully establish another location." 07.10.2008
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