Should I Buy More Than One Franchise Up Front
I get this question a lot and always give the same answer regardless of how experienced the client is in business. Here is the pragmatic opinion:
Franchisors almost always “offer” a multi-unit deal because they clearly want to sell more franchises faster, and what quicker way than to someone who already wants to buy one. Ask yourself, did you decide you wanted more than one franchise BEFORE approaching the Franchisor? I would guess that is a resounding NO in 99% of the situations. Then why would you make such a hasty decision to part with a large additional chunk of money, sign up for double or triple the obligations, without even wanting to in the first place. –Because you got talked into it from the Franchisor sales person on the guide of having a larger protected territory and/or at a discounted franchise fee for the 2nd and 3rd unit. Would you EVER buy a car or a house that way? Franchises for stores or restaurants are many hundreds of thousands of dollars, yet with a 15 minute conversation with a sales person you have decided you want to buy 2 or 3?
I am going to be brutally honest here. This is creative a method for Franchisors to extract more initial fees from you up front. But if things aren’t working according to plan in one location, you won’t want to invest more capital into another long term lease, and large equipment purchases, advertising dollars, employees, etc in the other locations. If you abandon your plans for the 2nd or 3rd location, you will get no refund of this extra money you paid upfront, And lose the large protected area.
Giving up more of your capital up front, takes the operating income out of your pocket when you need it the most-in your first year. If you are barely breaking even when it is time to commit to another location or even if you are doing well, I have seen the 2nd location drag down the first successful one over and over, due to the influx of needed capital investment all at once, plus the time drain on the owner trying to teach the new managers and employees. It is critical to know if you can make a go of 1 franchise, before you pay for more, even at a discount. And frankly many FDDs I reviewed there was not even a discounted fee and it actually cost MORE-you pay something called a developer fee just for the right to purchase multiple franchises!
Another convincing incentive, is getting a larger protected territory your chosen area. However, getting the territory (off the market) is not any benefit to you if you never open the 2nd store. Again, once you pass the deadlines you lose both your deposit and the protected territory.
In addition, the deadlines for finding a 2nd location are rarely realistic-most require a 2nd opening within 12 months of opening your first location, some within 12 months of signing your first lease. If you understand how difficult it is to work through some lease negotiations, you understand you need the extra time so you don’t have to take a substandard location just because time is up. (or unacceptable lease terms).
The warning here should be obvious -but I will state the obvious— unless you have virtually unlimited resources and personnel and a team of folks working searching locations simultaneously and working on construction of the 2nd while dealing with opening operations issues the first, And searching locations for the 3rd-all simultaneously, etc., etc. it is just not realistic to achieve and you will be in default easier. This is not the time to give the franchisor all your excess capital to find out if you are good at this kind of multitasking. You need to be very cautious with your money. Better to build a great business in one location, get the logistics of everything down then move to a second, even if not in the closest area.
It is the rare case it works out-Best advice–Just don’t.