Expert analysis by Manzoor Ishani, senior consultant solicitor with Sherrards
Given that many new franchisors are fairly small businesses, it’s unlikely that they will come across prospective franchisees who far exceed their selection criteria in terms of management expertise and financial resources.
They are, therefore, encouraging those of their franchisees who have the potential to grow their franchised businesses to go beyond a single unit.
Cost effective
Why do franchisors allow franchisees to open more than one franchised unit? Multi-unit franchisees cost a good deal less per franchise unit opened than individual franchisees.
Once a franchisor has done the know-how/show-how bit for a franchisee for his first unit, second and subsequent units opened by the same franchisee require a good deal less input from the franchisor, thereby saving the franchisor valuable management time and expense.
Easier path
For franchisees, the path to opening additional units is easier. After all, the franchisee, having done it all before, will be familiar with the franchisor’s requirements with regard to site selection, fitting out, stock purchase, staff training, etc.
Furthermore, most ethical franchisors offer a discount on the initial franchise fee for second and subsequent units opened by the same franchisee - sometimes as an incentive for the franchisee to open more units, sometimes simply because it seems the right thing to do.
As franchisees begin to own and open more franchised units, their business experience leads them to be more sophisticated than their franchisee colleagues who operate only a single unit, both in terms of their business acumen and management and administration skills.
For franchisors, this is a good reason to encourage their franchisees to take on more franchised units.
Potential pitfalls
What are the disadvantages for a franchisee? Experience shows the main disadvantages for a multi-unit franchisee is that unless they’re extremely careful in the selection of their managers and keep a very close eye on them, the ill effects of poor management will have a profound effect on their business.
After all, a multi-unit franchisee cannot be ‘behind the counter’ of more than one franchised unit at the same time, so becomes reliant on their manager(s) for the performance of their other outlet(s).
For example, a manager will be anxious to go home at closing time, whereas the franchisee will serve his customers for as long as necessary and close up when the last one has left of their own volition.
Where a franchisor encourages its franchisees to open more units, a prospective multi-unit franchisee should look to the strength of his franchisor when planning a strategy for opening more franchised outlets.
It’s crucial to satisfy yourself that the franchisor has geared up its management and administration to meet the demands of its multi-unit franchisees’ growing and more sophisticated business operations.
Would-be multi-unit franchisees need to assess very carefully the quality, propensity to innovate and strength of their franchisor.
They need to access the future market trends for the brand and for the products/services being sold and the strength of the brand they are investing in and ask themselves how much of their future financial welfare they may be risking by putting all their eggs in one basket instead of diversifying.
There is no doubt that being a multi-unit franchisee can catapult a franchisee into a different league in terms of business ownership, but such a strategy needs to be carefully planned and executed if it is to be successful in the long term.
