Like most franchising companies, Las Vegas-based Capriotti's Sandwich Shop had difficulty selling franchises during the recession — in no small part due to lack of access to capital. But like most, the company is hoping that the worst of the recession is behind us and is looking to expand. In a recent article in the Las Vegas Review Journal, Ashley Morris, CEO of Capriotti's parent company, notes that territorial contracts have been signed covering about 200 units — including a 50-store agreement covering Dallas.
While the company has had to revise its expansion schedule as a result of the recession, its ability to change and re-focus sales strategies has played a significant part in its ability to continue to grow even through the down economy. Learning through experience that a focus on single-unit franchises would not help meet the company's expansion goals, Capriotti's instead changed its strategy to look for expansion deals that would commit well-funded buyers to open a number of stores in defined territories. This strategy can work very well for a franchise company, so long as it understands at the outset how using development agreements for expansion is fundamentally different from growth through adding single-unit operators.
The benefit to doing multi-unit deals (sometimes structured as area development agreements or sub/master franchise arrangements) is that such agreements will usually lead to faster brand expansion. As the brand grows more quickly, the increased name recognition that comes from a larger pool of units has system-wide benefits. In doing large territory development contracts, you (the franchisor) must realize that you are not dealing with an individual or small group of individuals that you know will be present and in the store on a daily basis; instead, the individuals you are dealing with will have management responsibility over a number of stores in their territory. This means that you have to look for a different type of franchisee: what makes someone an ideal single or two-unit operator will not necessarily translate well to a 20-store development deal.
Also, you as the franchisor should realize from the outset that sometimes (or, during the recession, many times), development schedules under multi-unit deals are not followed strictly or fulfilled. In those instances, it is important for you in your franchise contract to retain the right and ability (but not the obligation) to take action due to a franchisee's failure to follow the development schedule. If you were counting on the developer's build-out to adequately serve a market, you need to be able to step in and retake all or part of the development territory, depending on the circumstances. Your agreement also needs to be flexible enough to allow you to use less drastic measures to encourage the fulfillment of the store build-out obligation when you have an otherwise capable and strong franchisee as your developer; if your developer is the right person for the job, you don't necessarily want to abandon him or her if the expansion plans are not going exactly the way you thought they would.