Franchisors need to grow! What better way to grow than to sign multi-unit development agreements.
How do you find multi-unit operators to create growth in your franchise system? Well, you have to recruit for growth by matching talent and capital.
Some franchisors recruit established existing franchisees of their own brands who possess the operational expertise, development know-how, and who are also well-funded.
Dunkin Donuts just used this strategy in California: "Dunkin' Donuts, America's all-day, everyday stop for coffee and baked goods, and one of the fastest-growing quick service restaurant (QSR) brands based on unit growth, announced the signing of a multi-store development agreement with existing franchisees, Harry Patel and Parag Patel, to develop 18 new standalone restaurants in North Orange County and the Central Inland Empire."
Dunkin Donuts likely have a great feel for what the Patels can achieve.
But, what about recruiting multi-unit operators from other brands?
Three Myths about Multi-Unit Operators Expansion
First, there is the standard or run-of-the-mill franchisor expansion myth:
Just go and find the multi-unit & multi-brand operators, sign them up for your concept and watch the development territories build out as new units come on-line.
Like clockwork.
The franchisor only has to collect the upfront area development agreement fees, the unit franchisee fees, and the expected the windfall of royalties and advertising fund contributions.
Don't let the multi-unit operators fool you into believing this myth. Brand expansion doesn't happen that way.
Second, when you talk to those multi-unit operators you'll be told straight away they won't need all the hand holding, training, and guidance that those attention stealing needy newbie first-timer franchisees demand. Those experienced operators will manage themselves! You will likely be told that you could learn a thing or two from these highly experienced operators.
Again, the reality is different.
The reality is that many development agreements are not strictly complied with, according to the terms the agreement.
Searching the SEC corporate filings from publicly traded franchise companies you can find that many area development agreements are in default, technical default, terminated, or re-negotiated.
You may need to review the historical Franchise Disclosure Documents, FDDs, which may be harder to access.
The third myth is that experienced multi-unit operators are easier to manage. There are four reasons why this may not be true, either.
1. Multi-unit operators are further away from the day-to-day operations. They may require or even demand more training and support from the franchisor.
2. Multi-unit operators may challenge your training, support delivery systems, or standards.
3. They may have different ideas on site selection criteria and who has final say on site approval -despite what the agreement states.
4. A seasoned multi-unit operator may change your concept, menu, build-out, equipment package and they may not ask your permission. Again, despite what the agreement states.
So, recruiting mult-unit operators from other brands does require a bit more due diligence. Here are four tips to get you on your way.
1. Access to Capital: Do they have access to capital to build out the development schedule for your new concept?
Many multi-unit operators look more profitable than they are. Their development schedule may have been drafted in a moment of enthusiasm. Their capital maybe entirely locked-up in their current brands.
Don't automatically assume that a 40 unit operator has sufficient capital or access to capital to commit to your project.
Don't fall into the trap of getting excited about signing up a large multi-unit operator for your brand, unless they show you the money.
2. Other Development Obligations: What are their development obligations, including remodel commitments, to their other concepts?
Just knowing that they have the money isn't enough. You need to know about their development obligations to their current brands. You have to pay to attention to their remodel commitments. Much of their capital may already be spoken for.
Can they build the stores and remodel the units that they are already committed to without exhausting their capital? Is the multi-unit operator meeting its current lender obligations and staying within their loan covenants?
3. Compliance with Schedule: Are they in compliance with the schedule in their current development agreement(s)?
The mulit-unit operator may have sufficient capital to expand your franchise system. But, are they dragging their feet in their current development agreement?
Development schedules can be slowed if operating revenue has been reduced. Beware of the multi-unit operator who uses a slow development tactic to extract territorial concessions from you mid-deal.
4. Compliance with Operations: Are they in operational compliance under their current franchise agreements?
Not all multi-unit operators are actually great operators - despite what they would claim! Don't be fooled by a multi-unit operator who is merely tolerated in the system because they own great locations or control the underlying real estate.
Check to make sure that they are exceeding the franchisor's standards.
Conclusion
Franchisors need to grow. And you should recruit from established existing franchisees of other brands. But they need to possess the operational expertise, development know-how and be well-funded.
Always stay focused on building a durable and sustainable franchise system.
2 Comments
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Good article, Joe.
One question to ask the franchisor: of the total number of franchise opening agreements for sites in the future, how many haven't or never did open? Listen to the answer carefully, like a politician was answering you.
Two suggestions to the readers about the only semi worthwhile Franchise Disclosure Document (FDD):
(1) check out how much litigation, and for what. The FDD doesn't contain all of it, but its a start.
(2) check out how much franchise "churn" there is--units opening and closing each year. Look at the termination/closure number carefully, and divide by the prior year's ending unit count to get a percentage.
While no number can be absolute, 5% or more is worth digging into further as to why.
John A. Gordon
restaurant analysis and advisory
www.pacificmanagmentconsultinggroup.com
@John
Thank you for your compliment.
Of course, the exchange of pertinent information is a two way street and while the FDD has a lot of information it certainly doesn't complete a prospective franchisee's due diligence.
You may agree with me that road Multi-Unit franchising nirvana is littered with broken development dreams. And is mostly attributable to unrealistic expectations by both franchisors and franchisees.