Advantages and disadvantages of a multi-unit franchise

A successful franchise organization grows in financial performance and the number of locations. For franchisors, this is called organic and strategic growth. Strategic growth involves the franchisor adding new franchisees, while organic growth focuses on improving the profitability of existing locations. This way, they may get the opportunity to open a second location, becoming known as multi-unit franchisees. This can be very attractive to the franchisor since an extra location requires much less training and support than a new one. But what are the advantages and disadvantages of multi-unit franchisees for a franchise organization?

Advantages of Multi-unit Franchisees

1. Experience from the first Location

A franchisee gains practical experience and knowledge from their first location, which they can apply to subsequent locations. The entrepreneur, for example, is already familiar with location requirements, setup, staff training, daily operations, etc. Doing something for the second time is always easier than the first. In other words, the franchisee is better prepared to tackle any surprises and challenges when setting up a second or subsequent location(s).

2. Economies of scale in multi-unit franchising

Multi-unit franchising offers franchisees the opportunity to lower their costs per business. The fixed costs can be spread across multiple locations. These economies of scale make the company more profitable and efficient over time. Economies of scale such as inventory purchasing, marketing, advertising, staffing, and training will be greater with multiple locations compared to managing a single location by a franchisee.

3. Risk diversification with multiple locations

Owning multiple franchise businesses offers stability in terms of growth and success. The chance of success will not be solely dependent on one location or business. Given all the cost savings, benefits of economies of scale, and a greater chance of success, franchisees with multiple locations often earn a higher return on investment.

4. Support from the franchisor

Multi-unit franchising also impacts the time the franchisor needs to devote. One franchisee with four locations requires less time in terms of support than four with each having one location. Once a franchisor has transferred the know-how to a franchisee for their first location, the second and subsequent locations opened by the same franchisee require much less input from the franchisor. This saves the franchisor valuable time and costs.

5. Staff potential

In terms of staff, there are also several advantages to be gained:

• Staff from the first location can train staff at the second and subsequent locations.
• The franchisee can offer the staff more growth opportunities, such as the position of location manager.
• In case of illness, the franchisee can rely on the entire staff pool of all locations.
• The franchisee may get discounts on employee insurance as the staff numbers increase.

Disadvantages of multi-unit franchisees

1. Reward vs. risk

A franchisee with multiple locations has more to lose if they or the franchisor go bankrupt. Although having multiple locations can eventually be more profitable, it may take longer to achieve this profitability due to the higher investment and the franchisee's divided focus. It is therefore important to prevent the franchisee from suffering serious cash flow problems, as a large portion of the money is invested in the locations. There must be enough financial cushion to withstand slower revenue growth in the new location or a downturn in revenue at the existing location(s).

2. Staff risk

A franchisee with one location often works directly "behind the counter." This is not possible for a franchisee with multiple locations. Thus, a franchisee becomes dependent on their location managers. This can bring inherent risks. An entrepreneur typically works harder for the business. For many franchisors, this is one of the primary reasons to franchise. A less committed manager, for example, might leave right at the end of their shift. An entrepreneur will serve their customers for as long as necessary and only close when the last customer has voluntarily left. Therefore, selecting the right location manager becomes essential.

3. Management skills

Not only selecting a good location manager is crucial but also developing one's management skills. The franchisee must ensure they can be missed in the daily operations. Managing the stores is now a priority, requiring a well-organized internal structure. The franchisee needs staff, systems, and financial resources to succeed. Having a plan is essential, as it enables the franchisee to grow at a realistic pace. Without a plan, and without leadership and management skills, expansion can present serious problems for the franchisee.