A typical multi-unit agreement provides to the developer the right (and obligation) to open a certain number of units according to a specified timetable within a defined territory. In exchange, the developer pays a fee that usually is based on the number of units to be opened. The number of units, opening timetable, territory, and fee are all agreed upon between the franchisor and developer before the multi-unit agreement is signed. Then, as each unit opens, a franchise agreement is signed for the operation of that unit.
Strategically, multi-unit agreements are an ideal way for most franchisors to develop their network and should be considered for inclusion along with single-unit franchises in any expansion plan. Multi-unit agreements provide an attractive opportunity for investors looking to build a larger business, while enabling the franchisor to better forecast growth, project revenues and resource needs, and reduce their overall cost of franchise sales and support.
Among the risks, however, are that the development schedule is not met and/or growth is not what either side had anticipated. For the developer this can result in the termination of their multi-unit agreement and the loss of their right to open additional units. In addition, since area fees typically are non-refundable, the termination of the multi-unit agreement may result in forfeiture of their fee as well. For the franchisor, brand awareness and market penetration are not achieved, revenues are lost, and there is added cost and relationship management time in working through a resolution with the developer.
To lay a foundation for the success of a multi-unit developer and enable both sides to achieve their goals, there are several things a franchisor can do. Franchisors looking for organic growth through existing franchisees should also ask themselves if they have the proper structure in place to enable the single-unit franchisee to make a successful transition to a multi-unit franchisee.
The first is to provide training and education in operating a multi-unit business. The role of the developer is different than that of an owner-operator. While learning to operate a unit of the business is fundamental to both groups, the developer must also be trained in managing multiple units. Many of the subjects are the same, but the content and depth may be different, such as planning and forecasting, supply chain management, building an organization, and leveraging marketing programs and budgets, to name a few. For franchisees who begin as the owner-operator of a single unit, the transition to multi-unit ownership can be difficult. Having the proper training provides the confidence necessary to make the change.
The second issue may seem at first to be counter-intuitive: the development schedule provides for too much time between openings, especially at the beginning of the agreement. Too often we’ve witnessed someone open one unit and continue to manage that first unit while opening the second. Once the second unit is open they divide their time between the two and struggle to open unit three. If they open number three they find it overwhelming to divide their time between all three units so numbers four, five, six, and more are never even started. Compressing the opening schedule eliminates the option for the developer to become settled in an owner-operator role, and in some respects forces delegation of unit management to managers. While this approach helps ensure the development schedule is met, it also requires that the multi-unit developer have the necessary financial resources available before signing the agreement to execute a more aggressive opening schedule.
Franchisors with multi-unit franchisees should also examine the way they provide field support. Multi-unit franchisees may face different issues and have different concerns than their single-unit brethren. In many cases, support programs can be provided to the developer, and they will bear the responsibility for implementing the program in each of their units. Franchisors can consider having a field consultant dedicated to multi-unit franchisees who is trained in delivering the advice and support necessary to add value to the developer’s business.
Another option for maximizing the value of a multi-unit agreement is to offer the developer an incentive for meeting or exceeding their development schedule. There are several ways to provide incentives. For example: if the developer has the total number of required units open and operating before the expiration of the development agreement; and if both the developer and the franchisor agree that the territory can hold an additional unit (or units); and if the developer begins the construction of the additional unit (or units) before the expiration date… then the franchisor waives the initial fee for that unit (or units).
Developing a multi-unit program is more than simply setting the fees and preparing the documents. The proper types and levels of support must be provided for both franchisor and franchisee to realize the benefits.
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