The Pros and Cons of Multi-Unit Franchising

For many entrepreneurs, expansion is the name of the game. Everyone wants a franchise brand to grow its footprint, whether it be the franchisee, the franchisor or the broker. That is why multi-unit development is increasingly booming in popularity within the franchising industry.

“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.” 

Multi-unit franchising can be a very attractive endeavor to new business owners, but that doesn’t mean the strategy is immune to pitfalls. It's imperative franchisees understand whether or not it’s the right fit for their entrepreneurial ventures before they bite off more than they can chew. Here are a few of the pros and cons associated with multi-unit franchising.

Pro: Higher earning potential. 

Con: ROI takes longer to establish. 

With multiple units ultimately comes a larger payout. But the rate of investment after a second and even third opening takes time to build back the down payment toward initial costs. For many multi-unit franchisees, concern about the time it takes to earn the money back mounts and results in hasty decision-making. Franchisees must understand that the money will come, but not as quickly as with the first location.

“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.” 

Pro: A larger footprint and customer base. 

Con: Not understanding the market potential and oversaturating.

Many franchisees agree to sign two or more unit deals within their first year of development without researching the market. Before opening the business, franchisees need to identify the potential for sustainable business expansion in their area. It’s one thing to break into a market with a new concept, but opening multiple locations in an unsustainable area is dangerous. Though the goal of most franchising businesses is expansion, it is important to ensure each location can be successful. 

“You don’t want to have a bunch of multi-unit deals that never went anywhere or fizzled out after the first location,” said Fisher. “The right multi-unit deal within the right target markets can be a good strategy, but it is really something franchisors and franchisees need to think through before agreeing to it, as the wrong deal could slow down growth in the long run.”

Pro: Working with an established brand image.

Con: Taking the backseat while others run the business. 

After the first unit opens, franchisees will already have a relationship with their most loyal customers. This network is often used as momentum when opening a second location. Trust and word-of-mouth are extremely valuable.

Depending on the number of units owned, general managers become an integral part of the business as the franchisee’s role changes. The new hired staff now becomes the face of the location, with the brand image backed by the franchise name. As a multi-unit owner, franchisees will likely no longer have their hand in all of the daily activities, which can be difficult for most hands-on entrepreneurs. That is why franchisees need to be confident in their team and ability to properly staff each location before investing in multiple units.