Leveraging people and assets across multiple operating businesses is what enables most companies to make money, including franchisees. The leveraging action turns what would otherwise be an individual, high-overhead and high-risk investment into a portfolio of lower-overhead and risk-managed investments.
In a previous job I worked for a commercial real estate investment and management company. The company made money because they were able to use the same employees to manage dozens of leased properties, and leveraging one employee across dozens of properties increased the profit margins.
In franchising, a multi-unit operator can leverage skilled managers across multiple units. And, the $25,000 saved across 50 restaurants adds up quickly to a nice income.
A great example of leverage in franchising is Frank Heath and David Paradise of Mississippi-based Mid River Restaurants. Between them they own:
- 12 Applebee’s in Louisiana,
- 26 Hardee’s in West Virginia, North Carolina and Kentucky,
- 10 Taco Bell restaurants in Louisiana and Mississippi, and
- 12 IHOP restaurants in Ohio, Indiana, and Kentucky.
And, they are in the process of acquiring 33 St. Louis area Applebee’s for the rock-bottom price of $25 million ($757k each, below build out cost). The seller is DineEquity Inc., the parent company of Applebee’s Neighborhood Bar & Grill and IHOP restaurants.
Mid River Restaurants has several advantages over other small and individual franchisees:
- profit per restaurant is higher than most because of their controllable costs are lower with centralized management, accounting and service teams
- cash flow is large enough to finance large, well priced acquisitions
- the greater cash flow also enables them to hire and retain smarter employees who are likely to further enhance the profitability
- the whole enterprise learns from four very well developed franchise systems, exposing employees to “best of breed” methods
Individual franchisees as a group tend to be lower skilled, lower financed, micro-managers, unleveraged and over worked, which is why franchisors prefer experience multi-unit operators.