How Investing in a Multi-Unit Franchise Can Positively Diversify Your Portfolio

Opinions expressed by Entrepreneur contributors are their own.

Most investors know the wisdom of diversifying their portfolios to hedge against market fluctuations and choosing a franchise business with several units can be a shrewd way to put that strategy to work. It offers various revenue streams with the reliability of a proven brand, so you can invest in a single entity without taking an “all in one basket” approach. It has been a solid plan for one of our Ford’s Garage franchisees, who has even diversified into other restaurant brands.

While prior franchise ownership or business experience is highly beneficial, it is not always a strict requirement for investment. What’s crucial is having strong management skills, a solid understanding of business operations and the ability to learn quickly. If you lack direct franchise experience, partnering with experienced managers or investing in training can bridge the gap.

Managing multiple units requires more management skills and well-planned systems to handle operations, staff, inventory and guest service effectively. Here are some considerations to think about before committing to this strategy.

Related: 4 Strategies to Diversify Your Franchise Portfolio

1. Financial stability and growth

Benefit: Having more units means more revenue streams, which can enhance your financial stability and growth potential. You can spread costs such as marketing, supply chain management and staff training across several locations, so per-unit costs are lower and overall profitability is higher. Successful units can offset underperforming ones, providing a balanced portfolio. The increased volume and potential for long-term partnerships also give you greater negotiating power with suppliers, landlords and service providers.

Keep in Mind: The financial commitment is significantly higher with multiple units. If the group is not properly overseen, the financial strain can be considerable – especially during economic downturns or if some units underperform. Financial struggles often develop when franchisees take on more units than they can handle. The ideal number of units varies based on market conditions, financial capacity and operational capabilities. But a typical starting point is three to five units, which allows for achieving economies of scale without overwhelming the management structure.

Related: Diversify your Portfolio by Investing in Qualified Opportunity Zones

2. Operational efficiencies

Benefit: Having standardized processes and best practices across all locations can improve performance and consistency. In a restaurant franchise like Ford’s Garage, menu offerings are common to all locations and service standards are consistent. Our guests know what to expect at Location B because they have experienced it at Location A. Having service and performance standards that are known and uniformly enforced enables you to hire and retain a higher level of team members.

Keep in Mind: Your unit locations will affect the level of support they give each other. Too close — and they are in competition. Too far apart — and they can’t support each other. Most important will be your franchisor’s policies; they may have a development agreement defining the radius within which new units can be opened to avoid cannibalization and ensure adequate market coverage. Be sure of your prospective franchisor’s policies before you commit.

3. Greater brand visibility

Benefit: Owning multiple units in a region can enhance your brand’s visibility and market dominance, increasing guest loyalty and competitive advantage. If a guest has had a satisfactory experience at one of your locations, they are more likely to patronize other locations because of your trust with them. It can also discourage competitors from entering one of your markets.

Keep in Mind: Bad experiences at one location can keep guests away from the others. Ensure your team is aware of this risk; they are reflecting on their location and the entire group. And most people know you can lose trust much faster than it is built.

Related: 5 Levels of Brand Visibility and How to Make It to the Top in 2024

Research tips

To be as informed as possible before taking the leap, prospective investors should do the following:

  • Analyze the financial performance and growth trends of the franchise, past and future. How much demand is there for its products or services in the intended markets? Is it likely to continue? Understand the competitive landscape and how the franchise differentiates itself.
  • Evaluate the level of support provided by the franchisor, including training, marketing and operational assistance. To me, this is a critical piece in the decision-making process.
  • Speak with current franchisees to get insights into their experiences and challenges. Conferences like the Multi-Unit Franchising Conference offer opportunities for networking, learning about new trends, meeting potential franchisors and gaining insights from industry experts. They are an excellent way to educate yourself and make informed investment decisions.
  • Examine your personal goals and objectives to see if your prospective investment aligns with them. Investing in the same industry can provide operational synergies and easier management due to familiarity with the business model. However, diversifying into different industries can reduce risk and create new opportunities.

Smart start

Investing in a multi-unit franchise can diversify your portfolio and build a substantial business, but it is critical to understand your financial and operational capabilities clearly. Leveraging franchisor support and industry resources will further enhance your chances of success. That’s why franchising is an excellent opportunity for investors. Most brands have the standards, systems and procedures dialed in, so you would be joining an established organization that has the operational basics worked out.

Source link

About The Author

Scroll to Top