by Patricia Schaefer

"Historically unprecedented." That's what Darrell Johnson, President and CEO of FRANdata, says about the fact that about 50 percent of all franchise units are now owned by multi-unit franchisees. FRANdata has been tracking for years the incidence of multi-unit franchising. Johnson and others agree that multi-unit franchising is one of the industry's most dominating growth trends.

As the growth of multi-unit and multi-concept franchising intensifies, it is becoming part of the amazing evolution and maturation of U.S. franchising. A number of today's franchisees are highly experienced and savvy business professionals who are strategically building their own small franchise empires. At the same time, more and more franchise systems are seeking multi-unit development agreements as the best and sometimes sole way to grow their franchise concepts.
Factors contributing to the rise of multi-unit franchising

Profitability

Increased profitability for both franchisor and franchisee is a strong contributing factor toward the steady rise in multi-unit franchising.

An SBA Office of Advocacy April 2007 report on Income and Wealth shows that multiple business owners are "the most prosperous small business group, with nearly three-fourths of them classified as high income and nearly one-half classified as high wealth."

For the period from 1989 to 2004, this SBA report shows multiple business households increasingly earning a higher percentage of income and wealth. "In 2004, they constituted nearly 18 percent of all small-business-owning households; however, they now earned nearly 35 percent of total household income and held 47 percent of the wealth of small-business-owning households." This up from 16 percent in 1989; with 30 percent of total household income and 38 percent of wealth.

Eric Stites, President of Franchise Business Review, says, "multi-unit operators tend to be more sophisticated investors with stronger business backgrounds and more experience, and they tend to maximize the profits from their business better than owner-operators." Multi-unit candidates also have deeper pockets, adds Stites, which he says actually lowers their risk of failure during startup.

Dunkin' Donuts franchisee Gulam Choudhury, who started out 19 years ago as a single-store owner, says he is reaping far more profits now as a six-store multi-unit franchisee. Furthermore, Choudhury says having more than one store affords him certain savings that would not have been available with one store. For example, his five Long Island, New York, stores all share one kitchen: "I didn't have to build a kitchen in each additional store. This was a tremendous savings."

Today, Dunkin' Donuts offers its franchise investment opportunities to only those who can purchase development agreements for five or more restaurants. This, says Lynette McKee, Vice President of Franchising for Dunkin' Brands, is part of "an aggressive national expansion plan that will ultimately triple Dunkin' Donuts to 15,000 U.S. [restaurants] by 2020."

"Our expansion plan is made possible by working with qualified, experienced franchisees who will help us grow at the pace and in the places we want," says McKee. "Therefore, moving forward, we are moving away from a single store model to expectations that our franchisees will sign multi-unit store development agreements."

Like Dunkin' Donuts, a growing number of franchise brands are seeking vigorous and optimal expansion with multi-unit operators only. Certainly, it is easier and more cost-effective to interact with and manage, for example, 50 franchisees who own 250 units rather than 250 single-unit franchisees.

Business owners with a wealth of experience and knowledge

Many established franchise owners are finding multi-unit and multi-concept franchising as the next challenging and rewarding step in their franchise career. These savvy entrepreneurs have the know-how, confidence and ambition to successfully expand their franchise systems and multiply profits.

The U.S. Census Bureau's most recent Characteristics of Business Owners, released in September of ‘06, shows sixty percent of business owners as 45 years of age and older. With people living longer and healthier, the desire to work stronger than ever, and the aging of baby boomers, business ownership is increasingly appealing to those in this age category -- many of whom have years of experience, knowledge and skills in the business world.

A number of these business owners are former corporate professionals - whether the result of corporate layoffs, downsizing or a yen for their own entrepreneurial endeavor. Many of these individuals have found that their years of sophisticated business experience and acquired financial resources have made them perfect candidates for not only owning their own franchise, but for multi-unit ownership as well. In fact, many say the rise of multi-unit franchising is directly linked to the downsizing of corporate America, starting in the late 1980's.

Cost-effective use of financial, material and human resources

Having multiple units of a franchise can lead to greater overall savings. For example, a multi-unit franchisee with franchises in close geographic proximity could advertise a number of stores at virtually the same cost as one store. In fact, a single-unit franchisee of a popular fitness franchise recently complained about the flip side of this scenario: "If I advertise in my local newspaper, someone else in the franchise also has their territory in the paper's distribution area."

Some other potential savings include:

* Time: When opening additional units, less time is spent with a familiar system than the time it would take to learn an entirely new business, system and procedures.
* Staffing: Staffing problems or shortages can be assuaged with the ability to share employees amongst stores. Opportunities for advancement may also be more readily available, thus reducing turnover; i.e., Store manager positions for skilled employees striving for higher positions and pay.
* Greater Discounts on Equipment and Supplies: If a franchisee is not required to purchase all supplies or products from the franchisor or specific source, significant savings may be gained with the purchase of items in greater bulk.

Is multi-unit franchising right for everyone?

Not every franchisee is cut out for multi-unit franchising. It takes considerable financial resources, commitment, drive, and is certainly not suitable for an inexperienced business owner.

And achieving success as a single-unit franchisee does not always equate to achieving success with multiple units. A franchisee that takes on multiple units too soon can become overwhelmed and eventually bankrupted. There's also a chance that subsequent units may underperform and ultimately lower the average profit of each.

Stites of Franchise Business Review says for the average franchisee and owner-operator, multi-unit franchising is not very realistic. "They typically don't have the capital to make it happen. That's why systems that are focused on multi-unit operations target a completely different individual -- someone with business ownership experience and/or executive level management experience and a good amount of capital. This is typically going to be someone who is 40+, a successful business owner already or a senior level manager coming out of the corporate world, with a net worth of $500,000+ and enough liquid capital to float themselves for a couple of years until their business is profitable (Again, owner-operators usually need to start earning some cash within six to 12 months)."

At Dunkin' Donuts, McKee says they are looking for multi-unit developers with a strong organization and the ability to manage stores effectively and successfully. "Respect for the franchisee-franchisor relationship is vital as well. We stay in constant contact with our franchisees, from advisory council meetings to frequent visits to the market. Because we have no corporate-owned stores, and all new product testing is done in concert with our franchisees, that trust level with franchisees is critical. Finally, any candidate for multi-unit franchising should share the customers' own passion and love of the brand. At Dunkin', our franchisees have a loud voice in the direction of our operation unlike many other franchise organizations, and it is extremely important that they understand that we represent not just a stop for something to eat and drink, but a daily ritual for millions of people."

Successful multi-unit franchisee Choudhury says, "If you want to be a multi-unit franchisee, you have to work hard and love what you do. You have to love your business like you love your own child."

Patricia Schaefer is a staff writer for Franchise Trade. She can be reached by email at pschaefer@businessknowhow.com

Labels: Franchise Opportunity