If you own a single franchise and are wanting to expand to multiple units, or you’re considering investing in franchising with the aim of building a multiple unit empire, it’s entirely possible to do it successfully if you do things right.
But if you think running multiple successful stores is simply a repetition of the first, just ten or fifteen times over, you’re setting yourself up for serious growing pains.
Here we’ve gathered and condensed advice on how to grow, manage and supercharge your franchise empire.
10 Questions on multi-unit franchising
Carlo Gonzaga, CEO of Taste Holdings and advocate of multiple-unit franchising, answers your need-to-know questions on expanding to multiple-unit franchising.
1. How should my personal skill set and productivity behaviour change when shifting to a multi-unit franchisee?
The biggest change when expanding is a change of focus from managing processes of one store, to managing people to manage those processes.
As an owner-operator of one or even two stores, you can typically go in at month end and manage everything yourself. But when you have two or more stores, you now have to manage the people who are doing these jobs rather than doing it yourself.
The biggest change, specifically from a productivity perspective, is not just working in your business for 12 hours a day, but working on your businesses and people to make sure they understand what’s got to be done.
Top Tip: This is where you should expect support from a franchisor and where the franchisor’s perspective changes: As a multi-unit operator, you’re expected to know everything about the business and how it works, so the type of support you’ll need revolves more around managing a business from an HR perspective.
2. How should the management infrastructure be upscaled to support multiple units?
Typically in the restaurant business and even in some retail businesses, when multi-unit operators get past three stores there are new skills needed in terms of support structure, both for themselves and in managing stores. These could be bookkeeping and administrative support, for example.
In a concept with many administrative controls in place, a busy multiple store owner can’t always process the admin that needs to be done, so that’s usually the first area where a franchisee would begin creating their own support structures.
From about four stores onwards, though, franchisees may appoint regional managers to ensure there’s always somebody present at each store, and even serve as relief managers when necessary.
Top Tip: Growing franchisees must keep in mind they’re not going to be able to add on stores and not incur incremental costs building their own infrastructure. Big multi-unit operators that have 50 or 60 stores essentially become ‘mini-franchisors’ as they have their own HR, accounting and IT people.
3. Are there benefits to owning multiple brands under the same franchise group?
If you want to concentrate on one suburb or geographic area, it can be a great idea to have multiple brands belonging to one franchisor. But you need to choose the level of complexity that you want.
Growing a business through multiple stores already adds a level of complexity due to multiple locations. If you add multiple brands, you don’t just double the complexity, it goes up exponentially as you’re not able to quickly and easily move managers around, to give one example.
Top Tip: When you’re planning on growing to ten or 15 stores, it’s better to deal with one brand as you’re limiting your level of complexity.
4. Is it possible to be a hands-off multi-unit franchisee?
A growing trend in South Africa over the last 15 years has been ‘hobbyist’ franchisees – those who invest in but don’t manage franchised stores. It’s our opinion though with the business world being competitive and tough, that the route isn’t viable. You can’t just open your doors and expect to have a good business.
Franchisees need to be involved to the extent that it’s 85% of their daily focus. And for this level of focus you typically need to have multiple stores.
Top Tip: Are you prepared to devote 85% of your day thinking about your multiple stores?
5. How do I find great managers?
The real secret to being a multi-unit operator is having a pool of management depth in the businesses you own.
Managers resign, and you have to be prepared. But South Africa poses a tough challenge when finding good management as the talent pool is too small to have enough managers for all the single businesses out there. So you need to cultivate your own internally by providing opportunities and drivers to move up the chain of promotion.
Poaching managers isn’t advised as it just opens you up to being poached from by someone else. The most successful multi-unit operators are those developing people from within.
This attitude also promotes loyalty by creating a career path. Secondly, over time you build trust which is very important when you’re working with cash or are not available 24/7.
Top Tip: A big part of the development process is how best to incentivise managers. Shares are difficult to do properly and giving away shares in the underlying legal entity can become cumbersome.
That said, it’s not unheard of that some successful franchisees are where they are today because they were offered shares by their partner and eventually bought their partner out. Profit share is also a tested and successful incentivising strategy.
6. Does managing cash flow and finance become more important with more units?
The financial management of multi-units is very different to a single unit. Firstly, in a single store there may be one point of failure like theft, for example. So with five units you’ve now got five points of failure. Naturally, there needs to be an increased level of control when running the financial affairs of multiple units.
Secondly, cash flow is more challenging to manage. When running a single unit, it’s easy to keep tabs on where everything is going. With multi-units however, you’ve got so much coming in and out of your bank account that something like VAT or income tax can creep up on you, and across multiple stores this can tally to substantial amounts of money.
Top Tip: Business plans with detailed financial forecasting, particularly cash flow forecasting help. If the bulk of your business happens at a particular time of year, you’ll need to spread that profit across subsequent months. You’ve got to hone your financial skills as a multi-unit operator.
7. With multiple units, will one store support another?
One of the benefits of multiple-unit ownership is an element of diversifying risk – some stores will do well while others may under-perform.
If, for example, you own one restaurant and the mall decides to revamp, normally your entire investment would be at risk for the length of time the revamp takes. But when you have multiple stores you can diversify your risk to a degree.
Top Tip: For multi-unit franchisees, expect that you’ll hardly ever get all your stores performing well at the same time. That said, if you’re managing them right, they also all won’t under-perform simultaneously.
8. What are the economies of scale on a franchisee level?
Economies of scale with multi-unit operators typically follow a stepped rather than linear pattern, so you won’t necessarily incur costs across two or three stores, but when you hit your fourth, you’ll definitely incur extra costs from employing an area manager and book-keeper, for example.
You’ll also need to expand further before you get to utilise and spread those costs over six or seven stores.
It’s important to create a realistic forecast of when you’re going to incur those support costs because you’ll experience a slowdown in your profit growth. As you open more stores, you’ll grow into that cost base, which is why you need to get your timing right when growing.
Problems arise when franchisees either wait too long to incur the additional costs and support or they incur the costs and don’t grow any further, ending up with a structure that’s too big for the type of business they have.
Top Tip: Like any business, the biggest economy of scale is the salary your senior people take. You won’t be employing more senior people the more you expand, you’ll have one managing director whether he runs 20 or 50 stores.
9. What should I look for in my franchisor’s systems?
You should ask your franchisor if their systems make it easy for you to see all of your businesses at once. Because the South African market has grown largely on the back of single unit franchisees, most point of sale systems don’t cater for multi-unit operators, making it difficult to see accumulative sales, costs and profits of all your stores from your POS system, for example.
Top Tip: You need the ability to aggregate your stores to improve productivity. To achieve this can mean purchasing costly software, but is also currently available on Excel.
10. Should I set up a business to run the back-end of multiple stores?
Setting up various legal entities was more relevant when SARS had a few more loop-holes that you could utilise to reduce the amount of tax paid. Nowadays though, those benefits have largely disappeared and the complexity and cost of having multiple legal entities audited probably outweighs any benefits that you could get from tax.