The Growth and Development of Multi-Unit Franchising

April 24, 2017

Multi-unit operators are becoming a larger part of the mix. As long as the fundamentals are in place, the changing mix should be an asset to the brand.

By Robert McDevitt, CFE

In an article in Restaurant Finance Monitor in June 2016, editor John Hamburger observed that 200 franchisee entities operate over 25,000 restaurants in the United States, and the number is growing. The restaurant space is not alone — fewer and fewer franchisee entities are operating more and more franchised businesses. Multi-unit operators, some quite large, are changing the dynamics of the franchise industry.

Golden Corral operates 80 company restaurants and franchises 415. Nearly 300 of the franchised restaurants are operated by single and double-unit operators and the rest are operated by multi-unit franchisees with three or more stores. The largest franchisee operates 31 restaurants in three states.

Until recently Golden Corral resisted selling multi-unit development opportunities. The reasons were related to the cost of developing a restaurant and the experience necessary to successfully operate one. With the world changing and the increasing number of franchisee entities with the financial wherewithal and infrastructure to develop restaurants and attract and hire the talent necessary to operate them, the company is now looking to sell multi-unit development opportunities to larger entities.

With many concepts, a system’s largest franchisees got that way by acquiring other franchisees. That in itself is not a bad thing; after all, having a market for single unit and smaller multi-unit franchisees to sell their restaurants (an exit strategy) is a plus. However, to the franchisor the only real advantage is if the acquiring franchisee operates the restaurant better and has more financial prowess to invest in remodels, new equipment, required programs, etc. Ideally, every franchisor wants to see new unit growth, not just musical chairs. So what are the advantages of multi-unit franchisee entities in a franchisors portfolio?

Growth

New entities buying multi-unit development agreements usually have some infrastructure in place to find sites and open restaurants faster. As for existing entities, even if larger franchisees got that way buying smaller ones, many of the multi-unit franchisees have new unit development agreements. The larger franchisees all have more experience in development and access to financing so new growth is part of the process. With multiple units already in operation, training management for new stores is a natural progression done from within their own organization.

Operational and Financial Stability

As multi-unit franchisees grow, they get better at almost every aspect of the business, from selecting and retaining management to meeting operational standards to better site selection for new units. One element of stability is financial. Larger franchisees are better able to finance remodels and equipment necessary for remaining relevant in the market.

FAC Size Diversity

Having both small and large franchisees on the Franchise Advisory Council allows for both tactical and strategic input. Larger, multi-unit franchise entities tend to be more strategic and more receptive to longer-term investments in the business. By the same token, smaller franchisees are generally closer to the business and can more readily see operational opportunities and shortcomings of programs. This diversity of point-of-view makes for well-rounded input.

Leadership

Large multi-unit franchisees generally have the respect of the smaller franchisees and can make the job of selling in programs easier if the franchisor can get their support up front. The multi-unit franchisees are for the most part the leaders, not just in FAC meetings but they act as a benchmark for sales, costs, and standards.

As mentioned, Golden Corral is just now encouraging multi-unit development deals for new entities. Many of them are interested in buying a few restaurants first, company or franchise, then adding a development agreement on top of that. As part of this program, the bar was reset on the financial and experience standards necessary to qualify.

One challenge inherent in the strategy of multi-unit growth is attracting franchise entities that meet the new criteria. Frankly, reaching them is not that difficult. The challenge is getting them interested; everybody wants them!

There is no secret to marketing to this group, just consistency of message and communications through multiple channels. It doesn’t take a rocket scientist to determine the media that this demographic consumes. After all, these are typically high net worth individuals who subscribe to traditional trade journals and national business journals. Social media isn’t hard either; LinkedIn is a pretty smart way to reach out to this type of consumer. So, the media itself is not difficult.

The hard part is the content. Golden Corral has embarked on a platform of providing information to potential candidates about what is happening with the brand from an innovation and growth perspective. Prospective multi-unit operators won’t be sold anything, besides a good story in the Franchise Disclosure Document. They just want to know if the brand is relevant and what is being done to keep it that way.

The growth of multi-unit operators is something taking place across the entire franchise system. To some extent, it is also recognizes the demand created by interest in the segment and a lot of investment capital accumulating in the hands of large multi-unit franchisees and private equity players.

From an operations perspective, as long as the fundamentals of good franchise relationships and business practices remain in place, the changing mix of smaller and larger franchisees should be an asset to the brand.

Robert McDevitt, CFE, is the Senior Vice President of Franchise Development for Golden Corral and a member of the IFA Board of Directors.