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As a business owner with a successful franchise, you may be considering different ways to expand your business. For instance, you may find you are comfortable opening more franchise units within a particular area. You will need to use a multi-unit franchising model, which is a great way to grow your business. This article will explain some key points about owning multiple franchise units and offer some guidance on how to go about this expansion process.
What is Multi-Unit Franchising?
A multi-unit franchise is much like a single unit franchise. However, the franchisee will run several franchise business units within a defined geographical area.
Ordinarily, the franchisee usually oversees the network of franchises in one area. Furthermore, they may decide to delegate duties for each franchise unit to unit managers. Doing this can be critical to the business’s success. This is because franchisees might find it difficult to have a good level of involvement when managing multiple stores.
As a franchisor, you may enter into an area development agreement when starting a multi-unit franchise. An area development agreement is where the franchisor asks a franchisee to establish units within the area within a set period.
Alternatively, you may choose to enter into a sequential agreement. This agreement means the franchisee may control how many units they open within the area. Moreover, this agreement is usually determined by how much money is at the disposal of the franchisee. As a franchisor, you might further consider drafting a timetable to suggest specific dates that you expect new units to open.
Finally, you may also come across a ‘cross-default clause’. This clause is where you, as the franchisor, state that if one of the franchisee’s units fails, then the franchisee is in breach of the agreed obligations. Therefore, you will be able to buy back the franchisee’s business at a cheaper value than what you initially gave to the franchisee.
Would a Multi-Unit Franchising Model Be Beneficial for My Business?
A multi-unit franchising system can be beneficial to your business for several reasons.
Firstly, this business model can help you expand your franchise brand. Opening more units will help expand your customer base, exposing your brand to a wider variety of people. This can be a good idea if your business strategy involves growing your brand image.
Secondly, using a multi-unit model will allow you to share resources between each franchise unit. As each unit is part of the same franchise business, you can do things such as send employees from one location to another to meet an increase in demand.
Additionally, the more successful units will carry the less successful ones when you have multiple units. This means you have a greater chance of growing your business without as much fear for a struggling unit. Furthermore, it is much easier to run multiple franchise units when your business model is already running successfully.
Finally, having lots of locations will allow you to benefit from the economics of scale. The term ‘economies of scale’ refers to the idea that the more you purchase something, the less each unit will cost. For instance, you will likely need to purchase products in bulk when maintaining multiple locations. Doing this is typically cheaper than buying smaller amounts of a product for individual prices. As a result, your profit margins on each good you sell will increase. Although this may not apply if your franchise business is offering a service, it is still a critical point to keep in mind.
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Why Might a Multi-Unit Model Be Bad for My Business?
Despite the many benefits, it is essential to consider the disadvantages that multi-unit franchising can have. For example, opening multiple units might mean that you will have to wait for your business to be profitable. On the other hand, if you are not operating a multi-unit franchise model, you will likely have quicker profits as it will not require as much start-up capital. This means it will take less time for your business to break even.
Additionally, multi-unit franchising is a more considerable commitment that requires more risk-taking. Therefore, it is important to properly consider potential risks when deciding whether to start a multi-unit franchise model. For instance, one risk you take when opening multiple units is the initial unpredictability of cash flow.
Key Takeaways
Opening a multi-unit franchise business can be a great way to expand your already successful franchise business. It can help to:
- grow your brand;
- increase your customer base; and
- help you increase profits in the long term.
Furthermore, having multiple businesses in various locations might mean you will become more comfortable if one of your units does not perform well. This is typically due to other units performing more successfully. However, it would help if you also considered that opening a multi-unit franchise business is a complex and costly business venture. In addition, it comes with more significant risks, as you can lose a lot of money if your business brand or customer base does not develop as you hope.
If you need help with your multi-unit franchising model, our experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
The franchise disclosure document will come with the franchise agreement, and it discloses everything that there is to know about the franchise business to a prospective franchisee.
A multi-unit franchise model is where your franchise business has several units within a defined geographical area.
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