The benefits of diversification as a franchisee
One of the keys to successful investing is diversification. Spreading capital across a variety of assets and sectors protects investors from catastrophic losses should one investment tank. The same strategy is proving to be true for franchisees who are looking to open multiple units.
While some franchisees have found success in opening multiple locations of the same business, others are finding it advantageous to explore other franchising opportunities. This month, BOSS looks at the benefits of diversification in franchise ownership.
Conventional wisdom has suggested that successful franchisees expand their businesses by opening the same concept in new markets. However, this ignores an important aspect of being a successful franchisee: knowledge of the local market.
The UPS Store, Dunkin’ Donuts, and Planet Fitness are among the most popular franchises in 2019, but popularity does not ensure success in every location. Local knowledge allows franchisees to succeed by knowing the customer base and tailoring marketing to its tastes and needs. Successful franchisees looking to open a new business can draw on their experience in a specific town and use that when launching an entirely new venture.
Some franchises naturally complement one another. For example, an owner of an Orangetheory Fitness franchise has an existing client base of people concerned with wellness and physical fitness. If the same franchisee then diversifies by opening a Vitamin Shoppe franchise nearby, he or she can advertise each business at both locations and even offer discounts to encourage customers to support the new business.
Speaking to Franchising.com, Sally Brewer offered a first-hand success story of using cross-promotion while diversifying her and her husband’s franchise businesses. The couple own a Merry Maids and a Furniture Medic franchise in South Carolina. Brewer explained, “We sent letters to our Merry Maids customers letting them know that we had added a Furniture Medic franchise and could service those needs as well.” She says Merry Maids employees also keep an eye out for furniture that has fallen into disrepair and mention the Furniture Medic business to homeowners when it’s appropriate.
Sometimes, franchises that seem rather disparate at first glance can, in fact, be run in very similar manners. For example, LSGF Management operates more than 160 T-Mobile, Great Clips, and Smoothie King franchises. Although the three franchises operate in very different sectors, LSGF has found tremendous success by noticing one key similarity. Writing in a Smoothie King blog post, LSGF Management president Greg Thomas notes, “… you’ll notice that almost all our businesses, which include Smoothie King, Great Clips, and T-Mobile, are with brands that have simple operations and require a small store format of about 1,200 square feet. That is no coincidence.”
As seen in the case of LSGF Management, operating methods that are successful in one franchise can be used in vastly different businesses, provided they are of a similar size or culture.
Protecting Your Investment
The success of a business can depend upon the changing tastes of a fickle public, and occasionally franchisees misread trends when opening a new business. Fortunately, those who have diversified their businesses can protect their invested capital if other franchises are successful. Not only does diversification keep overall investments, it provides a cushion for the franchisee to see if the new business will eventually catch on before closing shop.
Franchisees who operate businesses that could be a passing fad would be well advised to have other more stable businesses that protect their overall investment. As such, it can be a good idea to diversify franchise ownership by adding long-standing franchises such as McDonald’s, Culver’s, or Jiffy Lube.
Taking the Next Step
Franchisees who have one successful business often feel the entrepreneurial pull to open another business. Fortunately, a successful track record makes it easier to secure funding and be approved by other franchises. Diversification is an enticing option that can lead to success for franchisees that are ready to grow. Those looking to diversify need to make sure they have their other businesses well-established and should seek out expansion advice before committing to anything.