Franchising – Deploying A Multi-Unit Franchise Strategy.

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Many aspiring entrepreneurs, whether fatigued by their day job or anxious to implement something new in their lives, each year enter the franchise arena, giving them an opportunity to own their own business and invest their equity into something that they actually own.  This opportunity still exists among many franchise opportunities.  However, history has revealed an inclination among franchisors to reward existing, successful franchise owners with additional units, whether a new one is planted, or an existing one is up for sale.

Rewarding franchise units to proven franchisees makes sense, since the risk to the franchisor is reduced.  It does, however, raise the bar on acceptance into the franchisee pool – not the list itself, which only requires a passing application form, but the real one, containing the short-listed names that franchisors are inclined to offer units to.

As franchisees, you may want to consider a growth strategy to secure the ownership of multiple units.  The reasoning is that if you’re successful in your franchise unit, then the benefits of duplication are self-evident: use the template in your successful unit and repeat in the new unit.  This theory of duplication, however, does not necessarily present itself as reality, due to population differences, cultural differences, or even the staff at different locations

There are a few issues, however, that arise in a multi-unit environment that merit some attention and discussion.

1. A New Perspective

When graduating to a multi-franchise business, owners should realize that their responsibilities change.  With only 2 hands and 24 hours in a day, the owner can’t be in 2 places at once, and can only be in each of those places for only so long.  The importance of determining what to spend your time on takes precedence over how much time to spend in the store.

In our Business Growth Model, which we outline on our Facebook page, the example given is one where, over the course of a 15-year period, the owner purchases 3 franchise units.  The intention of the owner is to sustain a 20% net income level before taxes, and utilize the equity in each preceding franchise owned to leverage the purchase of the next one.

An important element in the successful implementation of the plan is the hiring of assistant managers.  Hiring management has its own series of factors to consider, not the least of which is compensation to maintain motivation.  Studies reveal that, when given to the right person, equity ownership in the franchise unit is a leading financially related motivating factor in long-term employment and satisfaction with your franchise organization.

In our example, assistant managers employed at each unit are provided with equity payouts, but the numbers show that the remaining profit to the owner remains substantial.   To ensure that this model is viable, due diligence is required to be confident that the net income numbers are attainable to pay all compensation arrangements.  Here we’re trading hours for dollars, or course, but if the responsibility for running the unit is given to the right person, both you and the manager win.

For some, the re-think from operator to executive is a hard, sometimes an impossible one.  However, to make a multi-unit structure work, the owner needs to excuse himself from the trees of operations, and oversee the strategic forest of the organization as a whole.

2. Becoming a Sub-franchisor

There are now organizations globally that operate in excess of 200 franchise units; not necessarily all from the same franchisor.  This possibly confirms the trend of the ability of successful, proven franchisees to secure additional units based on their track record.

Owners don’t necessarily have to be conglomerates to employ this grand strategy.  We know of one individual franchisee who currently owns in excess of 20 franchise units of a food franchisor, and has implemented the assistant manager-equity strategy to build his corporation while at the same time maintaining a livable work schedule.

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We know of another individual multi-unit franchisee who owns 5 units of the same franchise, and has established a separate “command centre” to oversee overall operations.  All units are networked together, and daily statistics from each unit are fed automatically and seamlessly into a firewalled network and used to compile automated reports the following morning for analysis on metrics from inventory levels to the effects of weather conditions on sales to optimal periods to sell various items.

3. Allocate Rather Than Operate

When deciding to operate multiple units, and assuming the intent of the owner is to achieve growth and equity with multiple units. The owner should begin concentrating on 3 areas:

1. Asset Allocation

If the main function is to drive growth, then more attention, and hence actions, should be geared towards that goal.  This means investing the funds in the company to maximize growth and return on investment.  Whereas the owner previously invested time as well as money into operating the franchise unit, now he/she is paying someone else to invest the time.  So, in order to succeed in the role of asset allocator, the owner needs to be comfortable that the existing franchise is making enough of a return for the perceived value retained by the owner by stepping away from operations to outweigh the additional costs of the assistant manager.  Second, the owner needs to find another franchise investment that will provide an acceptable return, based on his/her desired growth rate.

       2.  Staffing

At the executive level, possibly the main task to fulfill successfully in order for the strategy to work is to fill main positions with the right people.  For the multi-unit owner, this obviously means getting the right managers in to operate the units.  Owners may want to engage in behavioral analysis at this point to ascertain what truly motivates the manager so that both owner and manager can be satisfied in the relationship. More of a people position, the owner as executive now needs to consider being the leader of a “team of leaders”, and seriously implement on a day-to-day basis what he/she has to do to maintain top performance among his/her “key people”.

Liz McGill, a holder of multiple territories for Get in Shape For Women, states that going from an operator to a delegator can be the most frightening, and hardest, part of becoming a multi-unit franchisee[1].

According to McGill, ‘' ‘good' employees will put me out of business," she adds. "If they are good and just do their job, I will fail. I need people who share my passion for the business, and make it fun. You have to have superstars everywhere. You have to teach managers to improve B players or get them out of the organization.

Darrel Lamb, who owns 28 Express Oil Change and Service Centres, agrees.  "People are the most important thing," he says. "You can't start opening stores without people. You need to start building a bench of potential managers within each store, people who can take over the next store you build or step into a manager spot. Bench-building costs money, but you have to have a team in place to maintain what you've got, and so people can move forward."

3.       Strategy

The owner has always worn the hat of Chief Strategic Officer; now, however, the strategy may change from one of operating optimally, making the most money out of the unit, and paying off the business loan, to one of maximizing return on investment.  This change in strategy brings with it a different set of parameters to gauge success.  With managers in place and a bonus structure forming an incentive base, you as the owner need to lead an organization that can deliver on those incentives.  You need to have a clearly defined marketing and sales strategy in place to facilitate growth and return in investment so that the managers can remain motivated, yet you also need to have the cognizance to understand the difference between a failed strategy and the faulty implementation of a correct one.

The jump from single to multi-unit franchise ownership presents its own issues requiring substantial thought and consideration.  Successful multi-unit franchisors understand that, at this level, the soft skills of human resource management and insights as to where growth lies are the factors that determine whether or not the strategy will succeed.

Multi-unit ownership is not for everyone.  The single unit owner who decides to jump into the multi-unit fray yet not change his/her methods of operation will invariably run into staffing problems, customer services complaints and excessive fatigue because he/she is trying to do too much with only 2 hands.

Biography:

Nicholas Kilpatrick is a partner at the accounting firm of Burgess Kilpatrick in Vancouver, B.C.  A previous franchise owner, he now concentrates his practice on assisting franchise owners with accounting services, tax and estate planning and overall business and franchise development.

[1] Daley, Jason, The Unique Challenges and Benefits of Multi-Unit Franchising, www.entrepreneur.com, July 19, 2013.