How Many Franchises Are Better Than One?
Printed in USA Today
by Nancy Rathbun Scott
"Ownership of multiple franchise units frequently adds up to a win-win-win deal for the franchise company, the franchisee and employees," says Russell Frith, chairman and CEO of Lawn Doctor. "It makes sense to expand a good business relationship once it's established."
Like many franchise company owners, Frith expresses confidence in the growing trend toward multi-unit ownership by franchisees. The experience of the big lawn service, founded in 1968, is not unusual. Twenty-five to thirty percent of Lawn Doctor franchisees own more than one unit. Likewise, Paul Bernstein, vice-president of communications for Precision Tune, reports that 185 franchisees own close to 600 Precision Tune auto centers.
Many newer franchise enterprises support multi-unit ownership, too.Philip Schumacher, general manager of The Goddard Schools, says that 25 percent of its current franchisees have signed for second units. Goddard, which became a child-care franchise division of MAACO Enterprises, Inc. in 1989, now has forty-one operating units.
Profits spur multiple ownership
"Prospective multi-unit owners look to increase income by duplicating a proven process," says Schumacher. That's because, as a business managed according to an economic model, multi-unit ownership lends itself to certain economies of scale. "Once a franchisee has successfully duplicated the model, say with the school well-enrolled, staff in place, and a director who runs the education program, they have some time to devote to a new location. The second unit can be more than twice as profitable because of economies of scale; but more importantly, both units can be equally profitable-and that's the goal."
Bernstein agrees that more than one means more profits. "A multi-unit franchisee generally experiences a geometric increase in profitability. If someone is a good operator, he should be successful no matter how many centers he owns." But, he cautions, no matter how good a manager is, there is no substitute for the owner's enthusiasm.
Many prospects think multiple upfront
Prospective franchise owners frequently consider ownership of multiple units at the time of their first purchase. Fortunately, financial disclosures by franchise companies enable prospects to size up their chances of owning more than one unit. "When they talk with us, they recognize that to have the kind of financial independence they are seeking, they probably need to own multiple centers," says Bernstein. "They can make a living with one, but to secure their future, they may need more than one unit."
Schumacher says that, with Goddard, most prospective franchisees talk about owning multiple schools. "But they don't always know what they are talking about. Roughly half will actually do that."
On the other hand, personal preferences play a part in making the decision to own more than one unit. Some just don't want the headache.
Who likes multiple?
Franchise executives are reluctant to characterize people who tend to be multiple owners. But they do agree that people who follow the system closely are the ones who get to their second unit the quickest. Says Schumacher, "Goddard has no specific background requirement, but if someone is willing to work within our system, work hard and follow our policies, then we can train them."
What franchisors gain
Franchisors benefit from multiple-unit ownership because it translates into sound and quick expansion of their franchise system. When a proven owner takes on a second or third unit, the franchise company is growing with confidence in the quality and profitability of the enterprise.
"When the time comes for a franchisee to purchase a second unit, the business relationship between franchisor and franchisee usually has arrived at a certain level of comfort," says Bernstein. "We know we have a winner if they are able to do well with their first school," Schumacher agrees.
Some franchises like Lawn Doctor want repeat ownership enough to offer unique programs encouraging multi-unit ownership. "We offer discounts on the purchase of additional units because it is in our best interest as well as theirs," says Frith. "It takes us less time to get over the initial bumps and fears and should result in accelerated growth in the new territory with less involvement from our staff."
The likelihood of failure is less with a proven commodity, too, so Lawn Doctor converts its savings from the arrangement into a substantial discount that benefits the franchisee who purchases additional units.
Franchisors additionally gain from multi-unit ownership because the arrangement provides a ready training ground for employees looking to move up into management and eventual ownership of their own units. Recognizing the advantage of having experienced employees become owners, Lawn Doctor also created a discounted franchise purchase program for employees.
Where multi-unit ownership peaks
"A typical multi-unit owner comfortably stops with the second or third unit, although a lot of shrewd operators own four, five and six centers," says Bernstein. "The most successful owner is the owner/operator-the one with his personal investment on the line. He can extend to maybe three centers, but after that it becomes difficult to oversee everything."
While many franchisors agree that three is a natural place to stop for many owners, the number of units one franchisee can successfully own rides on the nature of the business. "In MAACO's business, where profits turn on the owner's personal attention to customers, his second center may not do as well because he can't be there all the time," says Al Hornstein, MAACO-Goddard's director of public relations. "But at the Goddard Learning Centers, where the school director runs the center, the franchise owner is more free to manage the business-end of multiple units."
Still, one individual can only stretch so far, probably to only two schools, and Goddard prefers to have an active owner on each site. Sometimes that is a spouse or other partner.
Controlling timing and location of additional unit purchases
Franchise companies tend to control a franchisee's purchase of additional units. "They must present a business plan for multiple ownership that demonstrates that the second operation will not impair them financially," says Frith.
Both timing and location warrant careful control. "We don't seriously consider any candidate before they have been operating at least twelve months, usually longer," Frith says. Prospects commonly approach a second purchase after three years in the business.
"We don't like them to jump in too early; it can be a mistake," says Goddard's Schumacher. "Then, too, we make sure that the locations are within a half hour of each other."
Precision Tune requires the centers of multi-unit owners to be in contiguous areas. "Distance impairs the owner's ability to be on top of things," Bernstein says.
In the main and given the right combination, multi-unit ownership substantially benefits both the franchisor and franchisee. As Frith says, "It's a win-win-win deal in which employees share."
Success Times Three
"I wanted to own multiple units from the start," says Ed Woltz, a franchise owner of five Precision Tune centers based in Augusta, Georgia. "It's easier to make a reasonable profit from each of several centers, than to make a lot of money from one unit."
The franchise company encouraged his expansion, knowing it would help grow their franchise system. "Getting active in the company certainly helped me," says Woltz, who chaired the franchise owners association for three years. "I felt comfortable with Precision Tune's system and management and had made enough money to purchase a second unit without having to take on a big debt load." The ability to expand without being finally strapped was important to Woltz, who says he's confident in the automotive care industry's future.
Still, Woltz experienced some trepidation in the leap to owning a second unit. "If you have one going well, you wonder whether the second will steal from your customer base."
His doubts about locating two units in a small Augusta suburb were offset by the second unit's proximity to a McDonalds, where a waiting customer could get a cup of coffee. Also, by transferring employees from his first center to the second, he launched the new shop with experienced help.
How did it turn out? "Excellent, just fantastic-it took off right away."
Woltz credits success of the additional units to economies of management. "It was an easy package to put together and maintain," he says, especially since his first three centers are all within ten miles of each other. Woltz opened his second center and bought the third two years after launching his first. He recalls that his workload doubled, forcing him to hire office help for the first time.
On the other hand, Woltz says that owning multiple units spreads out the risk. "Each center has its own business dynamic and you never get them all up at the same time."
There are other advantages. He controls the service standards for an entire area, ensuring a clean reputation. Cash flow flexibility translates into quicker responses to new ideas and updating. Further, his employees take more interest in the business as their opportunities to move up in the chain of management increase.
"It takes a special personality to own more than one unit," Woltz says. "If you are buying a job, you are a one-unit operator and will probably run a better shop than a multiple owner will because you will look at every detail. If you've got multiple units, you have to look at the big picture."
How many Precision Tune's would be ideal for Ed Woltz? "Twelve," he says.

® copyright 1999 Nancy Rathbun Scott
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