Transitioning from an operator of a single franchise to managing multiple units isn’t as straightforward as it may seem. There are unique challenges to running multiple units that require new skills and abilities to be successful. Below are the three main struggles operators are confronted with:
- Lack of oversight
While a single unit operator can be on-site, multi-unit owners must be skilled at delegating tasks and monitoring the combined operations. The attraction of owning multiple franchise units is the benefit of not only increased cash flow and economies of scale, but geographic diversity. Over a given period, you can expect some units will perform better than others. Owners should be monitoring and managing the combined results, identifying growth opportunities, and leveraging shared resources to promote employee training and development, marketing, and purchasing.
Large, multi-unit organizations can afford to have full-time back-office support staff, including accounting and CFO functions. Smaller, leaner enterprises may outsource these tasks to an accounting firm or CFO service. These services can consolidate your various entities to produce your combined EBITDA, cash flow, and various other financial and operating metrics.
- Consolidated reporting and forecasting
Growing your franchise operation requires investment in employees, equipment, and new locations – either start-up locations or through acquisition. It’s relatively easy to view a P&L and assess historical performance. The challenge is planning for future events and forecasting your cash flow. Cash flow forecasting is essential in the decision-making process. Moreover, forecasting allows you to evaluate strategic growth opportunities such as acquiring new units. Developing an accurate forecast enables ownership to determine if the sales and margins of the target units, along with the new debt required to acquire the units, generates a sufficient return to meet your combined cash flow and covenant requirements for your lender, partners, or investors.
- Accessing growth capital
Lending to a franchise is different than lending to a traditional business. Banks almost always lend on assets they can convert to cash if necessary, such as receivables, inventory, equipment, or real estate. The tangible assets of a franchise typically don’t amount to much value; however, there may be significant intangible value to your franchise. Quick service restaurants such as McDonalds, Taco Bell, and Wendy’s carry strong intangible value and there is a liquid market for buying and selling these franchises. The sale of a franchise unit indicates an EBITDA multiple the market is willing to pay, and this multiple can be used as a benchmark to value other units.
Traditional commercial banks are not comfortable lending on intangible value but may issue some credit based on strong cash flow and owner net worth. Some banks (and many non-bank lenders) have a franchise finance arm with extensive expertise in this domain. These lenders understand franchise brands exceptionally well and will provide the capital needed for an acquisition of other units or real estate. Franchise lenders will have greater reporting requirements than your local bank or credit union. Given that these lenders are issuing credit on the faith that you are a strong operator, you should expect covenant monitoring of your consolidated results on a quarterly basis. Those franchisees that are unable to provide sufficient consolidated reporting or quarterly reporting risk losing access to growth capital through these franchise lenders.
About the author
Mark Ahern is founder and CEO of Amp Business Consulting, LLC in Arvada, CO. Mark earned his MBA from DePaul University in Chicago and has over a decade of commercial lending experience, including several years at firms such as GE Capital and Wells Fargo. Mark is also an affiliate finance professor at Regis University.
Amp Business Consulting, LLC
Amp provides outsourced CFO services to small and medium sized business. Amp specializes in multi-unit franchise reporting, analysis, and forecasting to provide owners and ownership groups an efficient solution to their financial reporting and performance management needs.