Top Multi-Unit Franchises 2015

Successful Multi-Unit Franchising: How to Win at the Numbers Game

“Growth is never by mere chance; it is the result of forces working together,” said James Cash Penney, Founder of  JCPenney, who could easily have been referring to multi-unit ownership, although he lived long before the concept of  franchising was invented. Multi-unit franchise ownership in the United States, ranging from operations with only a handful of locations or territories to “mega-’zees” with many, sometimes hundreds, continues to grow. According to FRANdata, a research company that provides objective information, analysis and consulting about the franchising sector, 48% of the franchise industry in 2004 was controlled by multi-unit operators. Today 55% is. “We had 100 franchisees at our first Multi-Unit Franchising Conference in 2002,” says Therese Thilgen, CEO of Franchise Update Media. “555 franchisees attended last year’s conference and we anticipate that 10% more will attend this year.” (Download full FREE report as a PDF document.) For this report, we surveyed over 6,000 multi-unit operators with at least three units, who represent more than 300 leading brands. The reason for our focus is that the majority of franchisees’ operations and support needs do not change until they reach three or more units. Once they do, franchisees must change their mindset to working on, rather than in their business. “The hardest growth for franchisees is the move from one or two to three or five stores,” says Steve Jackson, President of Hungry Howie’s. “The transition is similar to that of having children. The first one you can manage easily. When the second comes along, you can trade off with your partner. Once you hit three, you’re outnumbered and have to figure out what to do. When you have four or more, the older ones help manage the younger ones.” Jackson began working for Hungry Howie’s delivering pizzas in 1973, when Jim Hearn, its founder, opened his first location. A variety of factors have contributed to the growing number of multi-unit operators. Top among them are more available financing and an increasing push by many franchisors to encourage multi-unit ownership. Essentially, multi-unit franchising allows brands to expand rapidly by enabling existing and successful franchisees to open more locations. “Franchisors used to be resistant to multi-unit ownership because they were fearful that multi-unit owners would have too much power. When the recession hit, they observed that many multi-unit franchisees did better than single-unit franchisees,” says Darrell Johnson, CEO of FRANdata. “The lesson systems took away from the recession is that placing their brand in the hands of experienced and well-financed franchisees can help accelerate growth, while keeping the number of franchisees they work with smaller and therefore more manageable.”

THE ALLURE OF MULTI-UNIT OWNERSHIP

For many entrepreneurs, the challenge and excitement of starting and growing a new business is akin to a moth to a flame. If you are like most people, you may be considering multi-unit ownership for this reason and with two goals in mind—more profitability and freedom. “I netted 20% out of my business last year,” says Ric Trahan, a ShelfGenie franchisee who owns six units in Houston and two in Austin, Texas. Trahan left the corporate world, where he spent 12 years doing food service packaging, sales management and product marketing, to open his first franchise, a window cleaning business that he grew and sold. He invested in his first ShelfGenie franchise in 2009. During his first year in business with ShelfGenie, he broke even. By the second, he was profitable. Trahan believes choosing a great and scalable concept, his business experience and opening his locations in a large metropolitan area have greatly contributed to his success. According to Allan Young, CEO of ShelfGenie, 37 out of 44 (or 84%) of ShelfGenie’s franchisees own multiple units. “Our business model is that of residual sales,” says Michael Plummer, CEO of Our Town America. “Our top-performing multi-territory owners tend to be incredible leaders who have an instinct for hiring great salespeople who in turn grow their territories. They can earn five times as much as our single territory owners.” The median annual pre-tax income of the multi-unit franchisees we surveyed is $88,000. 29% earn more than $150K and 16% earn over $250K. By contrast, only 11% of single-unit franchise owners earn more than $150K and only 4% of single-unit owners earn over $250K. In addition to the potential to earn more revenue and enjoy increased freedom, multi-unit ownership offers a variety of advantages over single-unit ownership.

Discounted Franchise Fees:

In the majority of cases, when you sign a multi-unit agreement up front, you’ll pay a discounted franchise fee for each unit you commit to opening after your first one. “We charge a franchise fee of $25,000 for a single office, $12,500 for a second and $7,500 for a third onwards,” says Philip A. White, Jr., President and CEO of Sotheby’s International Realty. Sotheby’s International Realty, like most real estate brokerage companies in the franchise sector, is a conversion franchise. This means it offers successful realtors the opportunity to convert their independent business into a franchise.

You Know the Drill: 

If you are already a franchise owner, you have the experience to successfully contend with acquiring new units or  territories and to effectively market and grow your business. In addition, you understand the most efficient ways to ensure that new employees are properly trained.

Efficiency of Scale:

Various tasks such as human resources and accounting can be centralized, which results in cost savings. If your  franchise requires purchasing goods, you can do so in bulk, store the goods in a central warehouse, and share them among units, which typically prevents having too many goods in stock and results in volume discounts as well as the ability to fill orders faster. In some cases, you can also consolidate phone and other fixed cost services to save money. Companies exist that will analyze your business for any potential fixed cost savings in exchange for a percentage of the savings they obtain on your behalf. In addition, you can market all your locations within a geographic area with a single advertisement, which translates into cost savings that can go toward additional marketing efforts or something else.

Market Domination:

Remember loving Monopoly as a child? If you choose to open several locations of the same brand within the same geographical area, you’ll no longer be playing at cornering a marketplace, you’ll actually be doing so since the more units you own, the greater your influence regarding pricing and promotions. Depending on the franchise you are involved in, you may be able to develop additional revenue streams for related service offerings in order to capture even more of your existing customers’ business. “Many of our franchisees offer additional, complementary services such as commercial or property management and mortgage and title,” says President and CEO of Coldwell Banker Real Estate, Budge Huskey.

Improved Employee Training & Retention:

When units are in the same geographical area, multi-unit franchising makes it possible to move staff between stores. This facilitates training in a variety of ways including teaming up new employees with experienced ones. It also makes for a less bumpy ride if staff members suddenly move on. In addition, multi-unit franchising provides more advancement opportunities for employees who are interested in staying with your business, which helps you retain skilled ones.

Profit Balancing:

If you have one franchise location that doesn’t do well, you may not be able to recover its losses. If, however, you have multiple franchise locations or territories, one or more may be having a banner month, while others are suffering. This profit and loss Yin Yang ideally results in being able to stay in the black while you concentrate your efforts on improving the revenue of your units that are doing poorly in order to maximize profits. “Out of my eight franchises, I never know which one will be the best performer,” says Trahan of ShelfGenie. “They balance each other out.”

Positive Brand Experience:

The multi-unit owners we surveyed are generally happier with their brand than single-unit owners in a variety of key areas including financial performance (10% over benchmark), which isn’t surprising since they are running a bigger business and feel valued and involved by their brand (8% over benchmark on both counts). When asked if they “would do it all over again,” multi-unit franchisees are 7% more likely to say yes. Although successful multi-unit ownership may seem like nirvana, it is important to consider the many challenges it poses as well.

Cash Flow:

Most businesses need time to be profitable. Will you have the money to open the additional units or territories your franchisor is expecting you to based on the Development Schedule you signed? “You’ll have to write a lot of checks before you’ll even have your first sale,” says Trahan.

Letting Go: 

Multi-unit operators must let go of personally controlling every aspect of their business. Can you? “Above all, multi-unit owners must be able to build an infrastructure and demonstrate leadership so their everyday presence is not necessary,“ says Huskey of Coldwell Banker Real Estate. “Many real estate companies are built on the personal charisma and close relationships with the founder. It is important that as they grow, founders develop the middle management necessary to ensure continued success once they elect to step away.”

More Headaches:

As businesses expand, so do their complexities. The more staff you add, the more personnel issues you will encounter. The more locations you open, the more landlords and municipalities you have to deal with. Bigger businesses,  therefore, require an experienced operator to manage them successfully.

Culture Clashes:

Corporate culture clashes can occur if you operate more than one brand. Some owners avoid the issue by keeping the employees of their brands separate. Others, however, see different corporate cultures as an opportunity that provides employees with more chances to cross-train and be promoted, which can help attract and retain talented team members.  

DO YOU HAVE WHAT IT TAKES?

Multi-unit operators are traditionally more sophisticated, better financed and need less day-to-day hand-holding than single-unit operators. “Franchisees are an optimistic lot, expansion-minded, on-the-grow, and always alert to new opportunities,” says Thilgen of Franchise Update Media. “For them, multi-unit franchising represents one of today’s most attractive opportunities.” Most franchisors only make multi-unit development opportunities available to an experienced franchisee. “When it comes to multi-unit operator candidates, we only consider those who have successfully developed a non-competing brand and have the necessary financial resources,” says Jackson of Hungry Howie’s. 42% of Hungry Howie’s franchisees are multi-unit owners. While the majority own two to five locations, a few own 50 to 70. As a group, Hungry Howie’s multi-unit operators own 79% of the brand’s locations. Can you become an instant multi-unit owner without previous franchise experience? Yes, if you privately own several locations of your business you may be able to convert your personal brand to a franchise brand within the same industry. “Successful realtors with multiple locations of their own opt to franchise with us because they realize they will be even more successful by doing so,” says White of Sotheby’s International Realty. “We provide them with exposure to high-end buyers in 60 countries via our web site, events, marketing, and public relations. As a result, they get more qualified leads with us than they would on their own. In addition, we provide them with tools to effectively train their staff and save them money by negotiating the best deals for a variety of must-haves such as insurance and office supplies.”  

WHAT KIND OF MULTI-UNIT OPERATOR DO YOU WANT TO BE?

The definition of “multi-unit” varies depending on the franchise concept. In the food and retail industry, it usually means you own multiple physical locations. For service-related sectors, it can mean you serve multiple territories, but maintain one central office address. Some brands define bigger territories while others break their territories up into smaller, population based sections. This can mean that someone who meets the definition of “multi-unit franchisee” actually has a smaller business numbers-wise than a single-unit franchisee who owns a big territory. On the opposite end of the spectrum are multi-unit franchisees who own so many units they are actually bigger than many franchisors. “Our franchisees purchase rights of territory for sales,” says Plummer of Our Town America. “Most do not have a physical location because they and their sales team spend their time meeting with existing or prospective clients. If they need to hold a meeting, they typically rent a space or meet at a coffee shop.” 20% of Our Town America’s  franchisees own two to four territories. Area development can be another form of multi-unit ownership and also has several definitions. Typically it entails signing a multi-unit agreement that commits you to opening a new unit or territory on a set date within a specific time frame. In return, the franchisor cannot let anyone else open a store in or take on your protected geographical area. Another form of area development requires agreeing to develop a number of units within a territory within a specific time frame by selling franchises within that territory to additional investors, training and supporting those franchisees, and getting paid a percentage of the royalty from those units. Most area developers own franchise units themselves, but in some systems, they simply perform a support role for franchisees in their area. Others are simply charged with selling franchises, and support is handled through the corporate office. Since the exact definition and role of an area developer varies from franchise to franchise, its important to research the specifics if this is something you are exploring. Another consideration of multi-unit franchising is whether or not to invest in a single franchise brand, or diversify into several. Traditionally multi-unit operators open additional units of the same franchise, the logic being that since they were already familiar with its operational processes and procedures they could expand more smoothly and faster into additional markets. Franchisees, however, are increasingly operating several franchise brands in order to mitigate the risk having all their eggs in one basket presents and to facilitate keeping their locations in close geographic proximity. In response, some franchisors are now offering multiple concepts to franchisees in order not to lose potential revenue and to increase the chances of their concepts being successful by working with proven franchisees. Being able to diversify under a single corporate umbrella with which they are already familiar, often makes it easier for franchisees to expedite the opening of units. Some of these opportunities even co-brand multiple concepts under one roof. For example, Dunkin’ Donuts and Baskin Robbins Ice Cream are both part of Dunkin Brands and frequently operate together in a single store. “Out of the 140 franchise brands we surveyed in 2014, 68% said they have franchisees in their system who own other brands,” says Thilgen.  

CHOOSING THE BEST BRAND

Whether you are a franchisee looking to expand the brands in your portfolio or a first time franchisee with an eye towards quickly adding more units or territories, there are many things to consider. Are you comfortable with the product or service? Can it be sold profitably? Do you agree with the brand’s vision? Is the brand scalable? Does it have the resources and systems in place to specifically support multi-unit operators? Does it offer discounts on franchise fees to people buying multiple units? Are the brand’s business plan, marketing, systems, corporate management, and culture set up in a way to manage stores or employees within a territory remotely or at least not from the premises on a daily basis? When it comes to training, will the brand accommodate enough people from each of your units? “Prospective franchisees should consider the culture and personality of a brand and if it can get them where they want to be in five or ten years before joining it,” says Randy Shacka, President of Two Men and a Truck. “Although a handful of Two Men and a Truck’s franchisees have more than 10 locations, the majority own between two and four.” The biggest gripe multi-unit operators we surveyed had with their brand was technology, which makes sense because it impacts their ability to effectively manage their units or territories without being on-site. From our interviews, it is clear that many systems are busy rectifying any technology short-comings they have in order to support their franchisees. They are stepping up by providing training, financial tracking, appointment setting, inventory tracking and a variety of other services that function across multiple platforms 24/7. Many platforms facilitate reviewing unit or salesperson performance both individually and collectively in real time and benchmarking against a franchise’s branches as well as fellow franchisees. “Our centralized cloud-based software system was designed from the bottom up to allow our multi-unit franchisees to run their entire business as a single organization” says MaidPro CEO, Mark Kushinsky. “One of the big benefits we’ve seen is that owners have become much more likely to open additional units, often in other states, due to the ease with which they can now manage a multi-branch business. In addition, MaidPro offers an array of optional services such as pay per click advertising, social media management, automated e-mail drip systems and service reminders. Our centralized call center can handle a franchisee’s entire sales process.” It is crucial to investigate what multi-unit franchisees are saying about the brand you are considering. Any franchise system can promote itself as a multi-unit opportunity, but the only way to know if it delivers on promised resources, processes, training, and technology is to ask for and carefully review its franchisee satisfaction report, preferably from a third party, and to speak with multi-unit operators within the system. “We share our franchisee satisfaction reports with all of our potential franchisees,” says Plummer of Our Town America. “Doing so ensures they have an unbiased and thorough understanding of what being a member of our organization entails.” Generally, franchisee satisfaction among multi-unit owners runs slightly higher than satisfaction among single-unit franchisees. As mentioned earlier, this isn’t surprising since profitability tends to play a role in satisfaction, and multi-unit operators are typically more profitable. Both multi- and single-unit franchisees rank their system highest in the areas of overall enjoyment they get from  running the business and being a part of their franchisee community, respect for their franchisor, and willingness to recommend their system to other prospective franchisees.  

YOU’RE READY TO BECOME A MULTI-UNIT OWNER. NOW WHAT?

Once you have selected the brand you wish to invest in, how can you prepare to make the multi-unit plunge? Financing When it comes to multi-unit franchising, youtruly do have to spend money to make money. Whether the money you invest is your own, from investors or a combination thereof, you’ll need a lot of it. Keep in mind that if you choose to take on an investor, they most likely will have a say in what you do. Beyond a traditional bank loan, there are several ways you can obtain funding in order to purchase additional franchises:
  • Security-backed loans: Enable you to take a loan using a financial portfolio, such as a mutual fund, as collateral. There are several potential advantages to doing so. First, you can leave your portfolio in place, which enables it to grow. Second, because the loan is backed by your portfolio’s value, the interest charged will be lower than for an unsecured loan. It is important to note that the risk of borrowing against the value of your securities is that if your investments fall in value, the money borrowed will emphasize your losses.
  • Rollovers as Business Start Up (ROBS): You can invest up to 100% of your retirement funds into a franchise without taxes, penalties or a loan via ROBS. You must have at least $50k in eligible retirement accounts such as an IRA, 401(k), or 403(b). Your retirement funds can be combined with a spouse’s, partner’s or traditional business loans. Since the money is yours interest free, ROBS can increase your chances of being profitable sooner. That said, the fees to a ROBS rollover can be high relative to the amount of money you are accessing. And like any collateral-based loan, you are putting your retirement savings (the “collateral” in this case) potentially at risk if your business is unsuccessful.
Pulling the Right Team Together Effective delegation is the most crucial aspect of multi-unit ownership. It is also, for many franchisees, the most difficult thing for them to do. In order to be able to delegate so you can be freed up to work on rather than in your business, you will initially need to spend a significant portion of your time hiring the right people. “One of the most challenging aspects of my business is finding the right staff and training them. When interviewing  you have to have a good instinctual feeling for a candidate and understand what their expectations are,” says ShelfGenie franchisee Trahan. “I look for people with a solid value system, who are team players, good at  customer service and able to effectively communicate.” Build a Supportive Network Seek out other multi-unit owners within yourbrand in order to benefit from their experience and support. “Our franchisees are able to share ideas, best practices and challenges during our global networking events, annual leadership forum and at any time with each other,” says White of Sotheby’s International Realty. Patience Pays  In order to overcome the absence of an owner-operator, generate sustainable revenue and maintain a positive culture, it is important for multi-unit business owners to take the time to ensure that their existing units are operating smoothly and profitably prior to investing in another. “Too fast is worse than not fast enough,” says Johnson of FRANdata. “A failed unit is a blemish for both franchisees and franchisors.” Shacka of Two Men and a Truck agrees, “The most destructive decision that can be made is expanding before you are ready. In fact, we help ensure that an existing operation is operating at peak performance prior to approving an expansion opportunity. We work with our franchisees to create a business plan of the new location that addresses the capital needed, marketing plan and staffing as well as budgets and projections. This approach has led to stronger starts out of the gate, happier customers and clearer expectations of what success should be.” The rewards of taking time to strategically build your franchise “empire” so each of your units opens and runs  smoothly every day without your presence, will ultimately be increased profits, freedom and long-term security. Due Diligence If you are considering multi-unit ownership, be sure to do your due diligence in order to find a proven system that is the right fit for you—one with the support, technology and leadership in place to facilitate multi-franchise ownership. A good place to start is with the 50 top brands on our list, which are broken out into the Top 25 Brick & Mortar businesses and the Top 25 Service businesses, since only those with highest multi-unit operator satisfaction rankings are featured. Each has a proven track record of supporting multi-unit operators and many share their full franchisee satisfaction reports, which provide an honest look at their leadership, culture, training and support, financial outlook, culture, and more at www.FranchiseBusinessReview.com.
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