Brand Diversity: The Growing Allure of Operating Several Concepts

Franchising continues to grow--not only in size, but in complexity--and in recent years, a huge part of that growth is attributable to multi-brand franchising.

Makes sense. If following the system works for one successful brand, it will most likely work in another, then another--if you choose wisely. And if your unit economics are strong, more profit will flow your way with each passing year and additional brand.

Diversification, a recommended strategy in designing an investment portfolio, is a big part of the thinking behind the growth in multi-brand franchising. As savvy investors know, no matter how good your ROI may be from a single holding, it's not wise to put all your eggs in one basket. And as multi-unit franchisees seek new avenues for growth, an increasing number are adding second, third, and fourth brands to their portfolios.

"There is a definite interest in growth through multi-concept operations," says Darrell Johnson, president of FRANdata. "It's continuing to expand and grow, and we see the trend continuing upward."

Franchise attorney Lane Fisher observes: "From a franchisor's perspective, multi-unit franchising provides opportunities for accelerated growth; a vehicle to penetrate new markets; capitalize on certain market efficiencies; reduce the training, opening, and operational assistance typically provided to single-unit franchisees; and is a means to attract and reward productive franchisees."

One dynamic propelling multi-brand growth is the combination of 1) expansion-minded franchisors seeking multi-unit operators successful with other brands with 2) successful multi-unit franchisees evaluating new concepts to diversify their organization. This alignment of interests has been accompanied by a rise in the number of franchisors offering several concepts from under one corporate umbrella--usually limited to a single industry segment (fast food or home repair services, for example).

For franchisors offering multiple brands, it means working with franchisee organizations they already know, saving countless hours of relationship-building, recruiting, investigation of finances, etc. For franchisees, adding a new brand from their current franchisor does the same. It means working with a known, trusted management team, saves time, helps them open units sooner, and also can mean discounts on franchise fees, sometimes even royalties for a limited time.

Franchisors seeking new multi-unit partners are looking for a proven track record managing multiple units, relevant industry experience, positive cash flow, strong unit economics, and a solid management team and infrastructure. And, of course, signing multi-unit or area development deals also means dealing with fewer franchisees to sell more units. Franchisees seeking a new franchisor partner look for pretty much the same: a solid management team, strong unit economics, a well-known and respected brand name, and an opportunity to develop a territory over the long term.

Taken alone or together, there are many reasons that inspire successful multi-unit franchisees to seek out additional brands:

• Geography. Adding a new brand can be the perfect path to continued growth in their region for a single-brand multi-unit operator or area developer who has built out their territory, or for a franchisee of a brand with no local opportunities to build more units--without having to travel to new or distant locales. Familiarity with the territory and the dynamics of their market, combined with local connections and a solid grasp of local real estate, developers, and zoning requirements is a real home-court advantage.
• Financing. A successful track record with one franchise concept demonstrates your ability to lenders who can help you launch that next concept. Thriving multi-unit franchise operators typically have high net worth, extensive contacts, and access to financing to open successful units quickly. These are powerful assets to have. Your existing operation and the value of your real estate can help you acquire a second or third concept, without putting a stranglehold on your cash flow.
• Infrastructure. Multi-unit franchisees with their own accounting, human resources, and other internal departments often have excess capacity. Adding brands can take advantage of that capacity, growing profits without expanding the home office staff. With a strong infrastructure in place, a multi-brand franchisee has a built-in advantage in building brand awareness in their territory and more easily, rapidly, and successfully penetrating their market with a new brand.
• Training and retention. With two or more brands, a franchisee can offer employees cross-training, flexibility, promotions, and a clear growth path as their skill sets improve. This helps in attracting and retaining top talent as you build your organization, always a challenge in any business. And with better-trained employees, unit economics improve.
• Economies of scale. Once an organization attains a certain size, several things get easier and, often, less expensive since you're "buying in bulk": marketing and advertising, supplier costs and services, administrative and back-office functions, and more. For example, one vendor may be able to service all your equipment and, as a result, offer you a more economical rate.
•  Co-branding. Locating two or more brands in a single location also allows behind-the-scenes efficiencies that can boost profits. Be careful to maintain compliance with each franchise agreement, as some concepts may not be combined legally or functionally. If it does work, co-branding and co-marketing can make more efficient use of your advertising dollar.
• Synergy. Each franchise brand has its own proprietary operating system perfected over many years and many thousands of customer transactions. While the operating systems differ and must remain separate, sometimes elements of one can be applied to another, or to internal operations at the franchisee's home office. The same holds true for marketing programs, recruiting methods, training, HR, and every other ingredient of franchising success. Keep them separate to maintain compliance, but look for areas to adapt good ideas across your organization.

Multi-brand franchising is a complex business. Done right, it offers great potential to the multi-unit franchisee seeking to diversify their investment, increase their profitability, and build a larger, stronger organization. One caveat: New brands should not (and in many franchise agreements, cannot) be in competition with your existing brands. Check with your franchisor, franchise agreement, and franchise attorney before you start shopping for a new brand.