Australia might be a long way off the US situation where groups of franchisees band together to form publicly listed companies. But there are new trends emerging in the franchise industry including multi-store and, more recently, multi-brand franchises that demonstrate a maturing sector which can now provide more scope and opportunity than just the traditional single site operation we’ve come to consider as standard for the sector.
A small number of pioneering franchisees are starting to build businesses of multi-brand franchise groups. Under this business model a single franchisee might own multiple, complementary franchise brands clustered together in a single location.
For example, the one owner might run a Baker’s Delight franchise, a Subway franchise, a Gloria Jean’s franchise and an Oporto franchise all located in the one shopping strip or food court.
Not only that, the franchisee might vertically integrate so that they own the freehold in the shopping centre, a construction business and a fit-out business to maximise their overall investment and leverage economies of scale. The business might also sub-franchise some of the stores to other operators, also generating a return.
Benefits for franchisees
The advent of the multi-brand franchise is an intriguing innovation that has multiple benefits for franchisees. Not least of which is increased negotiating power with suppliers and landlords, as well as reduced set-up costs when one owner establishes a number of different franchise outlets at the one time, at a single location.
Another major benefit is the amplification of the marketing investment. For example, rather than having individual stores sponsor the local football team or the local carols by candlelight to raise the profile of a single brand, in a multi-brand franchise situation the entire shopping strip can make a range of sponsorship investments, thus delivering benefits to the individual brands located in the centre as well as the centre as a whole.
Sound financial controls
Executing this strategy, however, takes considerable skill and discipline and it must be stressed this requires a move from an operationally brilliant to a strategically brilliant mindset and hence may not suit all franchisees. The franchisee must have excellent financial reporting systems for each of the franchise brands and sites, capable of delivering accurate, up-to-date financial information to the central management structure. Building a multi-brand franchise business also requires strong business controls over processes, staff and cash management to enable each brand to be successful.
Taking this approach is also something that doesn’t happen overnight. Building a multi-brand franchise is a tactic that is generally employed by franchisees with considerable business acumen, who have built up their experience starting with one franchise, then two, then three, and building on this over time to reach a situation where the management of multiple brands is possible. It’s not something that can happen overnight if converting from a single unit operation.
Of course, such a strategy is not without its challenges. The primary purpose of this strategy is to build wealth through cash flow. The challenge, however, of taking this approach is devising an exit strategy once you own multiple franchise brands in the one or various locations and determining the timeframe for the exit.
When the franchisee wants to realise the wealth created in the business, will it possible to sell, say, 15 stores at the one time to another operator? If the stores cannot be sold in the one line, how will the franchisee be able to realise the gains made across the different businesses? This is one issue that, given how new the multi-brand phenomenon is, will be sorted out over time.
Building a multi-brand franchise is also a strategy that has to be carefully negotiated with franchisors, who are likely to have a natural reticence to work with a franchisee that runs multiple brands. The franchisor will generally have concerns that an operator with multiple brands won’t devote enough time to their brand or be able to run multiple systems at the one time, and rightly so.
But if the franchisee can demonstrate proven experience running multiple stores, this is likely to help convince the franchisor the franchisee is capable of running multiple business brands. Because before a franchisee can take on multiple brands it’s likely he or she will have demonstrable experience running multiple stores for a single brand. It’s during this stage the franchisee will develop the skill to run multiple businesses concurrently, experience that can be parlayed into building a business with multiple franchise brands.
The multi-store strategy
Franchisees that make the leap from running a single store to running many stores under the same franchise system will learn to develop a different mindset and business culture to the traditional mindset franchisees have when they own a single store.
Often, single store franchise owners will work in the business 24/7 and have total operational control. A proportion of successful single store franchisees will, however, want to open another franchise for the same brand, perhaps located in the same area as the first franchise.
This approach can work well if the franchisee has developed trusted staff he or she knows will be able to run the first franchise while the second franchise is developed.
But when it comes to opening a third store, this is the point at which the franchisee must take a more strategic rather than operational approach to running the business. Deeper business and financial disciplines will need to be put in place, especially when it comes to staff rostering and marketing. It’s also at this stage the franchisee will develop the expertise to collect and process a lot of financial information in a short amount of time.
When a franchisee moves to a multi-store situation thought also needs to be given to how senior staff will be motivated and incentivised to stay with the business, because often the success of individual stores depends on experienced, long-term, loyal staff. A good idea is to put in place profit sharing arrangements with senior staff, linked to clear financial targets. For example, a store manager who reaches a target of taking weekly revenue from $15,000 to $18,000 might be entitled to a share of the profits from the additional revenue.
It’s also at this point consideration needs to be given to how the growth of the business and the network of franchises will be funded. Sometimes, the original franchisee will identify a capital-rich business partner with which to work. Alternatively, the franchisee might be able to borrow funds from a bank to fund the expansion of the business.
An ideal situation for a franchise owner to be in when approaching a bank for capital to fund a new store is to be able to demonstrate revenue growth for the initial store. The franchisee might have purchased an initial store for $350,000 and lifted weekly revenue from $15,000 to $20,000, increasing the value of the business to $600,000. This might mean a bank is prepared to lend the franchisee $325,000 to fund the purchase of an additional store, whereas a loan of only $175,000 might have been approved had revenues remained at $15,000 per week.
Having access to additional funds will mean the franchisee can invest in a quality business, which will increase the business’s chance of success.
Working with franchisors
Times are changing and many franchisors who previously resisted multi-unit franchising now encourage their best franchisees to open multiple stores because it demonstrates a clear career path to new franchisees coming into the system. And it can also reduce the risk to the franchisor because the franchisee has demonstrated success in running one business, which can be extrapolated to other sites. Initially there will be franchisor concerns about multi-brand investment similar to concerns about operators running multi-unit investment several years ago. But franchisors will discover there are some people suited to multi branding and will in time open their arms to people with the ability to run multiple brands simultaneously.
Although multi-brand and multi-site franchise businesses are likely to become more popular, an exciting prospect for ambitious franchisees, it’s important to recognise single unit business franchisees will continue to operate and prosper.
But the existence of multi-unit franchise businesses does point to a maturing in the Australian industry, which is a positive development for all franchise owners as it provides broader scope of investment in the sector.
Rod Nuttall is the National Head of Franchising at Commonwealth Bank. He leads a specialist team of business bankers dedicated to providing tailored financial solutions to both franchisees and franchisors around the country
Important information: This general advice has been prepared without taking into account your particular financial needs, circumstances or objectives. While every effort has been made to ensure the accuracy of this information it is not guaranteed. You should obtain professional advice before acting on the information contained in this publication