Can a Franchise Get Too Big?

When it comes to franchising, bigger is better, right? Just look at McDonald’s, KFC, Burger King and Domino’s, some of the largest and most successful franchises in the country.

And then there’s Boston Market. After a successful IPO in the early ‘90s, the company rolled over the cash it raised to rapidly scale up its number of locations.

But the fast-casual rotisserie chicken chain — which is owned by McDonald’s — had trouble managing the operations of its main stores. On top of it, Boston Market suddenly found itself competing with grocery stores as they increasingly began to expand their prepared food offerings. As a result, in 2019, Boston Market was forced to shrink by nearly 60% since its gravy days, when the franchise chain had more than 1,100 locations across the country.

It’s Not the Size. It’s the Timing

“It’s not necessarily a bad thing to get too big,” said Lauren Coulter, director of franchise development for emerging brand Biscuit Belly. “But it can be a bad thing to get too big too quickly, especially if you don’t have the bandwidth to manage it. It’s easy to want to take a check from every franchisee who will give it to you, but it’s important to grow strategically.”

According to Matthew Weiss, director of franchise development at Level 5 Capital Partners and director of operations for a multi-location Massage Envy franchise, franchisors have a responsibility to make sure their sales match the infrastructure they have in place.

“The amount of infrastructure and staffing it takes to grow a brand internally is significant,” Weiss said. “A brand like MidiCi [a Neapolitan pizza franchise] is a cautionary tale of a chain that got really big really fast, and then they just kind of went away. A lot of licenses were awarded, but not a single franchised store ended up opening.”

Part of the problem is that MidiCi never opened a corporate store or sold a single slice of pizza before selling franchises. With no proven operating system in place, no recipe testing and no data, MidiCi focused on sales over execution. In 2018, three years after it started selling pizza franchises that never opened, MidiCi filed for bankruptcy.

Cash is King

According to Corey Elias, director of franchise development at Franchise Captain, one of the biggest pitfalls when it comes to growing a franchise quickly is not having enough capital to support the growth. 

“You need to be very well-funded to cover the increased staffing you’ll need to handle franchisee support,” Elias said. “The cost of running that kind of model is huge.”

Funding for training, site selection assistance and opening support is yet another consideration. Most franchisors spend their franchisees’ fees on those fundamentals, but if they’ve spent most of it paying franchise brokers to grow the brand instead, they might find themselves in a situation where they have too many franchisees and insufficient capital to manage them.

“A lot of franchises crumble because they don’t have the dollars to support franchisees until the royalties come in, which can sometimes be a few years out,” Elias said. “Unfortunately, there are a lot of horror stories in the franchising world.”