Why Franchisees Should Consider Multi-Brand Ownership [0:00]
Multi-brand franchise ownership is a strategic business approach that involves a franchisee or franchisee group owning and operating multiple franchise units in different brands. This is different than multi-unit franchising, where the franchisee or franchisee group operates several franchise businesses in the same franchise system.
Multi-brand franchise ownership enables franchisees to maximize their growth potential by diversifying their portfolio, reducing risk, and gaining operational efficiencies. By expanding across various brands, franchisees can better adapt to changing market conditions, access larger consumer markets, and increase their overall profitability.
There are a variety of reasons why franchise operators are interested in diversifying their portfolio with multi-brand ownership. For one thing, they may be looking to mitigate risk by entering different markets or industries. Diversifying with multiple brands can enhance revenue streams and reduce dependency on a single market. Alternatively, they may be seeking to increase market share of an industry. And sometimes it’s by default. They want to expand their business operations, but there is no territory available for further development in their existing franchise system.
While many multi-brand franchisees have traditionally focused on expanding within the same industry, for example, in the restaurant industry. So in that case, a franchisee might own both a fast casual burger restaurant and a pizza franchise in the same region, which would allow them to serve a broader customer base and capitalize on different dining preferences.Or in the fitness industry, franchisees might operate multiple fitness concepts such as a yoga studio and a boutique cycling studio, which would offer customers a range of fitness operations while benefiting from a shared customer base.
But there is a growing trend of diversifying into entirely different sectors. For example, that franchisee who owns fast food restaurants might consider expanding into fitness. Or a franchisee with a brick and mortar franchise may want to acquire a service-based franchise, such as an operator of a coffee shop franchise who also operates home inspection franchises.This would allow the franchisee to take advantage of different types of consumer spending patterns and reduce risk by owning businesses that are less susceptible to the same economic or consumer behavior trends.
I remember a story from years ago that I saw in Franchise Times, which was I thought, brilliant actually. The franchisee group had decided to essentially own the rights to an exit off the New York State Thruway. And in that case, every restaurant, every convenience store, every gas station was owned and operated by the same franchisee group. And no matter what business the traveler visited, the same owners were benefiting from that visit.
Benefits for Franchise Selling to a Multi-Brand Operator [3:06]
Franchisors may have mixed feelings about multi-brand operators, and whether they prefer them will depend on various factors. So let’s look at the benefits to the franchisor of selling to a multi-brand operator. For one thing, multi-brand operators tend to be experienced, which creates lower risk for the franchisor.
They often have significant business experience having operated multiple units across different brands, and this can make them more capable and efficient at managing the franchises and ensuring that they can handle multiple units and achieve better performance. They also tend to be more financially stable and less risky from a franchisor’s perspective.
Multi-brand operators typically have the capital and operational knowledge needed to run successful franchises, which is a big plus compared to first-time franchisees. These operators may also afford the franchisor much faster expansion and market penetration. Because multi-brand franchisees, particularly those with experience in managing large portfolios, may be more likely to take on large territory development obligations. And commit to opening multiple units in a given region, which can help the franchisor rapidly scale in a new or existing market.
Franchisees who are already operating one or more units within the system are often seen as more likely to expand further. And franchisors can push these operators to open additional locations because they know they’re more likely to follow through with their multi-unit commitments. So where the franchisor might have multiple brands under its ownership umbrella, they may want to encourage these franchisees to expand into complementary brands within the same family. Sometimes even offering cross-brand promotions or multi-brand discounts. And this creates financial incentives and operational synergies, making it easier for the multi-brand operator to scale their portfolio with fewer barriers.
Multi-brand operators also tend to have greater stability and financial backing and have more financial resources at their disposal, which is certainly going to make them more attractive to franchisors. They’re less likely to struggle with the initial fees and investment costs to open their units.
Multi-brand operators bring professionalism and expertise that new operators may not have. If they’ve operated in different sectors, they can leverage industry knowledge systems and best practices across all the brands in their portfolio, which is going to help them streamline franchise operations, which overall benefits the franchisor in system.
Disadvantages for Franchisors Selling to a Multi-Brand Operator [5:48]
Not all franchisors are going to favor multi-brand operators, and there may be some disadvantages for the franchisor who does sell to a multi-brand operator. There could certainly be concerns about divided attention and overextension. A multi-brand operator may struggle to give enough attention to each of the franchises they own, especially if they own franchises in very different industries.
A franchisee managing a fast food business and a fitness center might find it difficult to give equal focus to both businesses, which could lead to operational inefficiencies. Some franchisers also worry that multi-brand operators might overextend themselves, fail to meet performance standards. And if one brand under-performs, it could impact the franchisee’s overall reputation, which might in turn affect the franchisor’s brand integrity.
There’s the potential for conflicts of interest. If a franchisee who owns multiple brands within the same industry, two different restaurants that both serve burgers, the franchisor may worry about internal competition between the brands and the franchisee prioritizing one over the other. In some cases, I suppose a multi-brand operator could be seen to push customers toward one brand over another, which would create conflicts about brand positioning or customer loyalty. And this is particularly true when the franchise businesses are geographically close and provide similar products and services.
Another concern for franchisors is that it may be harder to impose control over their franchisees and brand standards because franchisors are concerned about operators conforming to their standards. And in fact, they’re invested in making sure that there’s consistency across all locations in the franchise system. But a franchisee who owns multiple brands may struggle where they have industry experience in operating a similar business. They may think their approach is going to be more effective and it’s going to be hard for them to then want to follow the franchisor’s requirements.
Another concern for franchisors, particularly emerging franchisors and newer brands, is the operational influence a large multi-brand operator might have. And they may have leverage or influence over the franchisor’s decisions such as requests for discounts or special treatment, or vendor relationships that they think are going to be more cost-effective for them to work with. And it’s going to be very hard for the franchisor to say no to a large multi-brand operator.
Business Issues to Consider for Multi-Brand Development [8:20]
If you’re considering multi-brand franchise development, there are certain operational and staffing issues to think about. Running multiple brands can create significant operational complexity that is different from multi-unit operations. You’re going to want to ensure that you have the right systems and processes in place to manage the day-to-day operations of multiple locations.
And this is particularly concerning as different franchise brands are going to require to use different supply chains, different marketing strategies, training programs, customer service protocols, and the like. You’re also going to want to consider your management and staffing structure. Do you have the capacity to oversee multiple brands? Because running multiple brands means juggling these different operational standards. So you’re going to want to assess whether your current management structure can handle the increased complexity. It’s different than just adding another unit where the management is already aware of brand standards and so forth. But in addition, each brand is going to likely require an independent manager who’s charged with the day-to-day oversight of each unit. So you’re going to need to hire additional managers or district supervisors to ensure that each brand is effectively managed.
As your portfolio grows, effective delegation and leadership are going to be crucial for success. Employee training and retention are also critical. Multi-brand operators often face challenges with this, and you should consider how you are going to develop your training systems that can apply across multiple brands, while maintaining consistency and quality and confidentiality requirements that franchisors impose.
New franchise development may impact your existing brands. There may be brand overlap and cannibalization. And consider whether the new brand will be perceived as a direct competitor to your existing brands. You want to avoid a situation where both brands are competing for the same customer base and sales in the same location.
Consider also the potential for dilution of your focus. Managing multiple brands is going to divert your attention from your core operations. You want to assess whether expanding your portfolio will stretch your resources in a way that may compromise the performance of your existing brand.
Legal Issues That Arise in Multi-Brand Franchising [10:36]
The legal landscape becomes much more complex in multi-brand franchising, as you will need to navigate multiple forms of franchise agreements, each with its own set of terms, restrictions, and obligations. Legal considerations such as territorial rights, non-compete clauses, and franchisee obligations must be carefully evaluated to ensure that operations of the new brand doesn’t cause conflicts with your existing brand.
So you’re going to want to review your existing agreements. When purchasing a franchise in any system, of course, it’s wise to review the franchise documents with knowledgeable counsel to fully understand your rights and obligations under the agreement. But with multi-brand development, in addition to reviewing the franchise documents for the new brand, you’re going to want to review your existing agreement to ensure that you do not inadvertently breach any of your obligations under your current franchise agreements.
For example, you’re going to want to look at provisions in both the existing franchise agreements and the new franchise agreement that relate to non-compete obligations, non-disclosure obligations, customer information, supply chain limitations, and management requirements.
So first, let’s look at non-competition and non-disclosure obligations. It’s not uncommon for multi-brand operators to want to leverage their experience in certain industries and seek to acquire similar businesses in different brands. However, all franchise agreements contain non-competition covenants that are going to impact your ability to operate similar brands.
For example, if you already own a quick service restaurant franchise, you may be restricted from owning any other QSR franchise that directly competes in the same area. How a franchisor defines a competitive business varies from one franchise system to another, but all franchisors share a common goal, which is to protect their proprietary methods and confidential information from being used by a developer in this case to compete with the franchisor.
That being said, except for certain circumstances where two franchise systems are directly competing, with the right safeguards in place, the franchisor and developer can often reach a mutually acceptable solution that allows the franchisee to operate outlets under another franchise system while still addressing the franchisor’s concerns about protecting its proprietary method.
Another issue is customer information ownership. Franchise agreements often provide that the customer information belongs to the franchisor. The nature of the industry and method in which the customer information is gathered usually will demonstrate the importance of customer information to the franchisor and whether the franchisor desires to control the information.
For example, a restaurant franchisee may not be as interested in customer information as service industry franchisors. But if the restaurant franchisor means a loyalty program or cross markets among a family of brands, that customer information could become pretty important to the system.
Franchise operators who operate outlets under multiple brands will want to determine what their rights and obligations are with respect to the customer information. They’re going to want to know the extent to which they can use that information from each brand to across market to customers of all their franchises.
Another issue to consider in the agreements is supply chain. Franchise agreements require franchisees to purchase inventory, equipment, and other supplies from the franchisor or the franchisor’s designated supplier. This enables the franchisor to ensure brand consistency and allows the franchisor to create an additional revenue stream if, for example, it’s the sole supplier.
However, experienced multi-brand operators may have sufficient expertise to better source equipment and supplies similar to those required by the franchisor. And they already have relationships with vendors that will permit them to obtain the equipment and products at better prices or on better terms than can be obtained from the franchisor’s suppliers. So if you’re seeking to acquire franchises in another brand, you’re going to want to address these issues at the beginning of the relationship.
Another issue that comes up under the franchise agreements are the management requirements. Because the agreements franchisors often require the franchisee or its principals, or a manager who’s been previously trained by the franchisor to devote full-time attention, skill, and best efforts to the management and operation of the franchise businesses.
Some franchisors even go so far as to require that each location be operated by a separate manager. And that franchisor may even require that the manager have an ownership interest in the franchise. For a multi-brand operator, the principals are simply not going to be able to devote full-time attention to each of the outlets, and they may not want to give managers equity ownership. This is something else to look at when looking at your franchise agreements.
Another legal consideration for multi-brand operators is their relationship with their current franchisors. They’re going to want to maintain a positive relationship, and some franchisors have clauses that restrict ownership of competing brands. Others may be more flexible. Determining when to tell your existing franchisor about your plans to acquire an additional brand is a strategic decision that should be carefully considered.
So these are just some of the legal issues that should be considered and addressed prior to committing to development in an additional franchise brand. For multi-brand operators, the key to a successful partnership with the franchisor lies in managing the multiple brands effectively, maintaining brand integrity, and avoiding conflicts of interest between the brands. And if you can do so while demonstrating solid performance and operational excellence, you will likely be seen as an attractive partner for franchisors.
