Michael Einbinder discusses the rise of ‘big business franchisees’ who are starting to acquire larger and larger chunks of the franchising market.
More and more franchising is being dominated by multi-unit franchisees. When I started practicing in this field, a significant percentage of the franchise population were single unit businesses. But as franchising became more popular, many brands – especially those offering quick service and fast food restaurants – began licensing multiple unit networks.
Another area to have grown significantly in recent years is multi-concept franchising. This is where operators obtain the rights to acquire multiple brands within the franchising industry. Many large, and some smaller scale, franchisees have taken on different franchise brands to complement their existing portfolios.
Multi-unit and multi-concept franchising is certainly big in the United States, and it is growing internationally too. So why has multi-unit franchising become the norm? The answer is simple: The benefits are significant. Unlike single unit operators, multi-unit franchisees are not ‘buying a job’. Owning a network is different. These franchisees are big business.
Many such operators have tens, or even hundreds, of millions of dollars in annual revenue. There are, of course, many smaller multi-unit networks, where operators own five or six outlets. And even if they remain ‘small’, they are still larger than a one-off business, such as a family restaurant. Whatever the size, owning multiple units allows franchisees to grow their businesses and to extend across a broader geographical area.
In multi-unit franchising, an investor obtains an Area Development Agreement (ADA), allowing them to build multiple stores over a specified region and period. A successful franchisee may have, for example, a network of restaurants in a single geographical area. These operators often start out small but acquire the rights for more units in their territory. They may also add new additional locations outside the initial, agreed region.
Many multi-unit operators also acquire networks from other franchise businesses to accelerate their growth. Multi-unit networks allow operators to increase revenue and thus enjoy a greater return on investment. Unlike single unit operators, a multi-unit franchisee receives revenue from multiple stores. This, in turn, allows the operator to obtain goods and/or services at lower costs – by purchasing in bulk.
The size of the business allows for better financing terms from lenders, especially in legacy brands. Multi-unit operators also leverage their management staff, by creating district level management teams. This helps to spread administrative and operational costs over the network, meaning greater profits.
Multi-unit operations have the added advantage of creating a work environment where there is potential for employee-advancement. This acts as an incentive for employees to work hard and helps to create a culture where businesses retain their best members of staff. It will also help to attract good quality new employees.
However, it is not only the franchisee that benefits from creating a larger network. For franchisors there are advantages too. Franchisors receive large upfront fees from area developers. Franchisors require that franchisees pay 100% of the initial fee for the first unit, and up to 50% for each additional unit under the ADA agreement. The remaining balance is paid at a specified time in the future.
Franchisors also benefit from dealing with established and sophisticated operators who already have greater experience of the brand. This helps to improve uniformity within the system. This makes it simpler when marketing to a well-established network of operators, while reducing the overall number of franchisees which the franchisor has to support. And this, in turn, reduces the franchisor’s total cost. Crucially, franchisors can also penetrate markets more quickly and supercharge their system.
Multi-concept franchising is a trend that’s becoming more popular as well. Many franchisees are opting to acquire franchises in multiple brands. For example, a franchisee may own 25 pizza restaurants before acquiring the rights to develop 10 breakfast shops.
This may happen after franchisees saturate their territories with their first brand, but wish to remain local, yet grow further. By growing into a multi-unit/multi-concept network, this will benefit economies of scale which arise from leveraging resources.
This will help the operator when dealing with suppliers and service providers. They can also spread staff across multiple brands, while continuing to operate in one geographical area. These franchisees may also enjoy better terms from lenders, since they have already proved themselves to be successful operators.
But one word of caution for operators who are considering buying into a second brand: They need to review their existing franchise agreements to make certain this is not prohibited – and restrictions are more likely to occur within the restaurant sector.
In many cases, franchisees who own numerous stores in more than one brand can be extremely large businesses. The Flynn Restaurant Group has over 2,300 restaurants, across six brands, generating over $4 billion in annual revenue. Flynn is the largest operator in this space, but there are many other franchisees controlling hundreds of restaurants in multiple brands. And this type of consolidation is accelerating fast.