What's Better, More Franchisees or Multi-Unit Franchisees?

In franchising, there are two general types of franchisees: single-unit and multi-unit. While single-unit franchising — individual entrepreneurs leaving a corporate lifestyle to start their own business backed by a proven brand — has traditionally been the backbone of the industry, multi-unit franchising is becoming more popular. This is because, over the past decade, franchising has become a more common option for established investment groups, private equity companies and well-capitalized individuals who are trying to protect and scale their portfolios, which has led to growth in the multi-unit category. 

Still, for the franchisor looking to grow, the question remains: Is it better to have 20 single-unit franchisees or two 10-unit franchisees? It’s imperative to understand the difference between single-unit and multi-unit franchising to ensure a brand is able to reach its goals without biting off more than it can chew.

The Advantage of Multi-Unit Franchising

Multi-unit franchising is an attractive option for franchisors because it offers a way to grow the system faster and more efficiently. Several franchisors also look for multi-unit operators as they recognize it may be significantly easier to work with a select few experienced multi-unit franchisees rather than several inexperienced single-unit owners. 

“There is giant growth in the multi-unit franchise category — prospects are very attracted to semi-absentee businesses where they can have multiple units in a single geography, and franchisors are attracted to the opportunity to grow quickly,” said Lane Fisher, partner at Fisher Zucker law firm. “In addition, brokers are usually big advocates of multi-unit deals because it is more profitable for all involved.” 

Still, multi-unit franchising only works if it is done right, with the right prospect and the right systems in place. “If you have a good franchisee who believes in the brand, believes in the corporate team and has the operational and financial capacity to grow into multiple units, it can be super advantageous compared to having to find three single-unit franchise owners who can do what one multi-unit franchisee can do,” said Blair Nicol, FranNet vice chairman and principal. 

The Advantage of Single-Unit Franchising

Single-unit franchise growth will allow both the franchisor and the franchisee to take things slowly and ensure each owner is the right fit for the brand. While multi-unit signings are attractive, franchisors shouldn’t oversell a prospect — if they are someone coming from corporate America who simply wants to be their own boss, they may be better suited to be a single-unit operator. 

“Whether single- or multi-unit franchising is ideal will be based on the brand and the individual,” said Nicol. “If you are going to sign a multi-unit franchisee, you need to make sure they have the stamina and financial capacity to open up multiple locations. The last thing you want is for somebody to tie up a market without performing well or being financially unable to open multiple units. For those prospects who need to build capital, single-unit franchising may actually result in stronger growth.” 

In addition, new and emerging franchisors will often begin their expansion through single-unit development because most multi-unit franchisees want to wait to see the profitability of the concept, the training and the support systems in place before investing. Single-unit franchising gives franchisors the time and capital to develop those best practices.

“Franchisors need to have the best practices in place to keep all franchisees — single-unit or multi-unit — profitable and successful,” said Fisher. “When it comes to multi-unit operators, with size comes leverage, and franchisors don’t want to put themselves in a position where they are underdelivering on promises made during the signing.”

Encouraging Single-Unit Franchisees To Grow Into Multi-Unit Franchisees

If franchisors are eager to grow through multi-unit development but aren’t quite ready, they can also offer single-unit agreements that have the option for further development.  

“This is a smart strategy because a multi-unit franchisee should never plan on bankrolling units number two and three on number one — most franchise development schedules make it difficult to sign up for multiple units without having the capital for all units upfront,” said Fisher. “More franchisees open their first unit than the ones who make it to their third.” 

Multi-unit franchising can also be a good strategy for emerging franchisors looking to encourage structured, regional growth around where they are based. Multi-unit franchisees often sign an area developer agreement, which specifies the number of units that the franchisee will open, in what time period and in what specific territory. 

“You can’t rush into multi-unit signings — you need to have a well-established development offering first,” said Fisher. “Early multi-unit growth isn’t necessarily a bad thing, but franchisors need to offer a standard, proven multi-unit development agreement instead of an unachievable, undefined giant development deal. You don’t want to have a bunch of multi-unit deals that never went anywhere or fizzled out after the first location. The right multi-unit deal within the right target markets can be a good strategy, but it is really something franchisors need to think through before agreeing to it, as the wrong deal could slow down growth in the long run.”

Neither single-unit nor multi-unit franchising is inherently better than the other, but franchisors need to have an in-depth understanding of which option is right for them if they hope to grow the right way.