Sponsored Section: Is Bigger Better?
If one franchise business opportunity location is good, then two is better. That's the basic premise behind the appeal of multi-unit franchisee operations versus single-unit operations. As Baltimore FranChoice consultant Britt Schroeter puts it, "If one franchisee location can net you $100,000, then five locations should be able to net you $500,000."
As is often the case, however, the arithmetic is simpler than the reality. While owning several units can be several times more lucrative than owning a single unit, franchisers often raise the bar higher for would-be multi-location franchisees in terms of financial resources and specific skill sets. Personality also plays a role. Some people are happier dealing with customers hands-on on a daily basis, while others prefer to manage from afar, delegating operational details to others.
Some franchisers discourage or even prohibit multi-unit ownership, requiring all of their owners to be personally involved with daily operations at a single location. Others, through the use of non-compete agreements that keep owners from engaging in other businesses, can sometimes require their franchisees to open multiple units if they want to continue to grow.
To further complicate matters, multi-unit franchises come in at least three different varieties, each of which places different demands on the franchisee. Some franchisers allow franchisees to open up multiple locations using an agreement similar to the one used for a single-unit operation. Another type of multi-unit franchise, area development, grants an owner exclusive rights to a sizable territory, and usually a discount on franchise fees, in exchange for the area developer's commitment to open up a specific number of units over a period of time.
A minority of franchises also offer regional or master agreements, Schroeter says. These special agreements call for the franchisee to recruit other owners to the brand in his/her target market. The master franchisee may not have any company-owned operating units, but focus entirely on engaging and supporting the owners of the actual locations. Fees charged for master franchises are often higher, Schroeter says. "In exchange for higher fees and their work, the masters often receive half the net franchise fee and half the ongoing royalties of franchisees they help place and support," she adds.
Owning multiple units is significantly different than owning a single unit. That's why, Schroeter says, multi-unit owners require special skills. In particular, they need to be comfortable leading and allowing others to do their jobs, rather than micro-managing, and selling and delivering products or services themselves. "As a multi-unit franchise you'll be focused on managing managers as opposed to managing operations," Schroeter says. "So it can be a better fit for executives and individuals who bring management skills to the table." Also, multi-unit franchisees frequently must have greater net worth, so they can help fund the expansion of larger operations, and must have more risk tolerance, since they are betting more and being required to do more.
The business opportunities suitable for multi-unit operation also display distinct qualities. The best are simple options: tanning and hair salons, coin laundries and car washes are a few examples. Opportunities requiring intense customer focus fit better with single-unit ownership.
Perhaps the best way to tell if a franchise concept is likely to work well for a multi-unit ownership is to see how the franchiser tailors its marketing. Franchisers have to take into consideration not only the concept, but the availability of suitable franchisees, and that can change.
At Tasti D-Lite, for example, CEO and Chairman Jim Amos began growing the Franklin, Tenn., retailer of frozen treats using the same model Amos employed at Mail Boxes Etc. "There we were able to scale to nearly 5,000 centers using a combination of single-center development, multi-center development, as well as area developers and international master franchisees," Amos says.
Then the last recession's credit crunch caused small-business lending to dry up and keep most potential franchisees on the sidelines. Amos found that Tasti D-Lite still was able to attract well-heeled applicants. "The caveat was that these candidates were less interested in single-unit development, and more interested in multiple centers or even areas to develop," he says.
Today, Tasti D-Lite focuses on multiple center sales, area development, and international master franchises as much as single unit development. Amos is ready to change again, if the lending situation improves. "When there is some loosening we will once again begin more single unit development as well," he says.
Tasti D-Lite has leveraged the near-cult status of its flavorful and healthful offerings to expand far outside its New York City origins. The company currently has 50 locations, including 47 in the U.S., two in South Korea, and one that recently opened in Mexico. For 2010, Amos has new domestic locations opening in Connecticut and Florida, as well as a new international market in the United Arab Emirates. For future development, the company has targeted Boston, Dallas, Southern California, Florida, and Seattle. "And we have our sights set on several new countries and regions outside the U.S.," Amos adds.
International expansion also highlights growth plans for Candy Bouquet International, Inc., which franchises retailers of chocolate and other sweets packaged in festive, floral-type arrangements. Founder Margaret McEntire says most of the Little Rock, Ark., company's franchisees have a single outlet. "But I have a real progressive lady that has 17 stores," McEntire says. "And a lot of internationals have more than one as well as several master locations. They're definitely leaning toward multiple units. And our international growth is just crazy."
Candy Bouquet has 575 franchises in 38 countries and plans to add at least 150 stores, many of them internationally, in 2010. "We have many new initiatives, mostly related to our Internet marketing," McEntire adds. "And we are co-branding with some large national chains, as well."
The opportunity appeals to many middle-aged people leaving previous professions in search of a business opportunity they can operate in several different ways. Franchisees often start their businesses out of spare bedrooms and garages in their homes before growing gradually into separate retail locations, McEntire says. One master franchisee in Brazil is placing small kiosks in shopping malls as a way to distribute the offering rapidly and inexpensively.
The difference between master franchisees interested in multiple units and those happy with single, perhaps part-time operations often comes down to personality. The more entrepreneurial, energetic, single-minded people who are interested in building empires are more interested in multi-unit, perhaps master, operations. "It kind of depends on who's doing it," McEntire says.
No matter who's getting into a Fiesta Insurance Franchise, President John Rost says multi-unit is a good option. The Huntington Beach, Calif., franchiser of insurance and tax preparation centers offers would-be entrepreneurs a low-cost way to get into business with a single unit. And because the concept scales well, Rost says, that initial modest investment can turn into significant income for those who open several locations.
The franchiser likes it, too, so the company encourages franchisees to go that direction. "We are set up to be multi-unit franchises," Rost says. "Our royalty rate goes down if you have a second location, and it's lower again if you have at least three locations."
In addition to generating more revenue, having multiple locations increases individual franchisees' operational efficiency, Rost says. And since Fiesta already handles many critical tasks such as cash deposits through its automated system, it's relatively simple for a single franchisee to oversee several locations. The company does encourage multi-unit franchisees to keep their locations within a single geographic market, however, because it simplifies management and allows for flexible staffing. Fiesta also encourages franchisees to visit each location daily or every other day.
In addition to people who start with a single unit and gradually add more in the same area, Rost will grant opportunities covering larger markets, such as major metropolitan areas, to owners who commit to opening a certain number of stores during the next three years. Today, about 25 percent of the company's franchisees have more than one location. "And probably a total of 50 percent of our franchisees are coming in with the idea of having multiple locations," Rost says.
The company has 60 active locations in eight states and plans to open 120 to 150 more this year. They still have "plenty of space," Rost says. "We're looking at about 2,500 across 20 states sometime over the next eight to 10 years. We're just getting started."
A very different opportunity requiring more investment and the chance to work with one of the world's best-known branding organizations can be found in Hampton Hotels, a unit of Hilton Worldwide. But Phil Cordell, global head of focused service and Hampton brand at the Hilton Worldwide Memphis headquarters, says many franchisees begin similarly, opening up one unit of the hospitality chain and adding more as time goes by.
Part of the reason for that is financial -- each franchise requires an investment of $7 million to $8 million. Another is that Hampton Hotels provides a relatively cost-effective entry to the hospitality industry, and its mid-price offering appeals to budget-conscious consumers even during recessionary times. "For folks that are new to hospitality industry, they build their first, and then they very quickly turn into multi-unit developers," Cordell says.
Franchisees exposed to the Hilton Worldwide system often use Hampton as a stepping stone for other Hilton concepts, such as Hilton Garden Inn and Homewood Suites, each serving a different consumer segment. Hamptons, for instance, don't have restaurants or bars. Garden Inns have restaurants, bars, and small meeting spaces. Homewood Suites offer extended-stay, full-suite accommodations with a dishwasher and kitchen in every room. Home 2 Suites is similar to Homewood but at a lower price point.
Hampton Hotels has about 1,758 locations and will open another 100-plus hotels this year and next. "It just keeps chugging along," Cordell says. "It's a machine here in the U.S. We're just starting to get some traction outside the U.S. and now we're really placing some emphasis on international expansion."
A similar vision of growth powered by a strong brand that gains momentum from extending its original market appeal with additional products and services exists at Seniors Helping Seniors. The Reading, Penn., franchiser of in-home, non-medical care services , however, decided to focus from the beginning on selling master licenses to franchisees. "At that time, there was no one else out there that we were aware of that was utilizing a master franchise approach in this particular industry," says CEO Philip Yocom, who co-founded the company with his wife, Kiran.
Yocom, with an extensive background in franchising, felt that senior in-home non-medical care and master franchising were a good match. "The senior in-home non-medical business model is really a very simple business model, which lends itself to utilizing a master licensing approach," he says. However, having seen many franchising organizations take an either-or approach to master franchising and single-unit franchising, he felt a blended approach was suitable in this case.
Most of Tutor Doctor's territories are based on ZIP codes, with each territory representing 75,000 to 100,000 people. The company also sells national licenses. These enable franchisees to market their services to unclaimed territories. Multi-territory operators represent a different arrangement, and one that calls for additional investigation of the franchisee. "We just spend a little more time up front with the qualification and making sure the fit is really good and the competencies are there," Milner says. "That's something we do in any case, we just take it to another level."
"One of our principles has been and always will be that we will be in the business ourselves to keep grounded," he says. With that in mind, rather than grant master licenses to develop the entire country, the company chose to retain the ability to grant franchisees, as well as to continue to operate corporate locations.
He also realized that not all franchisees were suitable for master licensees. Again, whether a single-or multi-unit operation is best depends on the franchisee as much as the concept. "The person who makes an ideal master license owner is someone who wants to help other people succeed in building their businesses," he says. "Whereas our franchise partners enjoy doing the actual activity."
Seniors Helping Seniors currently has 10 master franchise agreements in the U.S. Its plan for 2010 is to bring on two more master licenses, bringing the total up to 12, which will cover a little more than half of the U.S. Yocom eventually plans to bring out additional offerings to his senior market, something that he thinks will be easier to do with master franchises than with an organization of single-unit owners. "By having the master license organization and structure in place, we are going to be positioned to introduce other products and services very efficiently, effectively, and economically."
Tutor Doctor of Toronto, Ont., takes a different tack. The educational franchise chain prefers that franchisees become actively involved in their communities, which can limit opportunities for multi-unit operations. However, says President Frank Milner, about 30 percent of Tutor Doctor franchisees do have more than one territory. "We're cautious about it, meaning we want to make sure we have the right franchisee," he explains.
Most multi-territory operators in the Tutor Doctor chain start with a single territory and expand. The company does, however, sometimes grant more than one territory to the same franchisee from the start. So far, no franchisee has had more than two territories. The policy doesn't appear to be appreciably limiting Tutor Doctor's growth. From 120 franchised territories now, Milner expects to expand to 250 or more by 2011.
Some franchise organizations choose not to favor multi-or single unit operators. 1-800-GOT-JUNK?, a franchiser of clutter-removal services based in Vancouver, B.C., tries to capitalize on the appeal of both options. "It is a franchise that offers flexibility," says Jaime Ayres, franchise development manager. "If you wanted to use it as an investment and have somebody oversee it, you have the option. If you want to be an owner-operator, it gives them the flexibility to do that as well."
1-800-GOT-JUNK? bases much of its appeal to consumers on bringing professionalism to the junk-hauling businesses. It also stresses its environmentally friendly approach, setting a standard of recycling a sizeable majority of the discards it removes from homes and businesses.
The ideal franchisee for 1-800-GOT-JUNK? does not need hauling or environmental expertise, however. Ayres says the company first looks for sales and marketing skills: Owners focus on getting customers and do not do any junk removal themselves.
Potential customers are segmented into geographic territories of 62,500 populations. This means a multi-unit operator can operate several territories, usually in a single major metropolitan area, or he/she can operate a region consisting of multiple markets each with territories. "The service area is really depending on the population," Ayres says.
Today, 1-800-GOT-JUNK? has blanketed nearly all of the major metropolitan areas in the U.S. and Canada with approximately 200 franchisees. Now the company is focusing on international expansion. It hopes to add operations in Adelaide, Canberra, and Perth to its existing Australian franchisees. "After 2010 we hopefully will be recruiting in Auckland," Ayres says. "For 2011 we're focusing on the United Kingdom."
Another big initiative for 2010 is the development of a new model suitable for smaller metropolitan areas. "That would be hands-on, owner-operator, involved day to day," Ayres says. These owners even may be going out with the trucks, picking up junk themselves, but the lower-cost approach would open up a number of new territories in North America and elsewhere.
These different approaches to franchising open up the business to a number of different types of entrepreneurs. And, according to Francine Lafontaine, a professor who has taught the economics of franchising at the University of Michigan's Ross School of Business, the relative appeal of each model is so evenly balanced -- at least in the perception of the industry -- that it's not clear whether multi-unit or single-unit franchising will establish dominance and whether one will become more popular than the other.
"My first answer is we don't really know," she says about trends toward multi-or single-unit models. The reason for Lafontaine's lack of certainty is the lack of objective industry-wide data. Government record-keepers don't track much information on franchising, she says, so what is available tends to come from industry groups that may have agendas.
But when you look back, some trends do become clear. "My other answer is that I do know in earlier times in the history of franchising there was a lot of multi-unit ownership and a lot of big territories," she says. In more recent times, there has been a shift toward having more owner-operators. Given that shift, Lafontaine thinks that things might have gone back toward multi-unit operations. "Some companies still continue to think about single units and sequentially growing franchises," she says. "But there are a number of companies that are trying to grow through big territories as a way of growing fast."
Undoubtedly, granting master licenses and area development multi-unit franchises can help a young and growth-minded franchising organization harness the power of others to assist in driving expansion. However, franchising consultant Schroeter says that another force -- consolidation and the growth of ever-larger business empires -- may be driving increasing emphasis on multiunit franchising.
Having fewer owners reduces the complexity of running a franchising system, she notes, and allows franchisers to be more selective about franchisees, and pick those who are more committed and capable of sticking to the format and system. As franchise systems get bigger, she sees franchisees getting bigger, too, especially in the number of units each owner has. "The future of franchising will focus on consolidation," she says, "and move more aggressively toward multiple-unit ownership."