Thinking of becoming a new brand multi-unit franchise operator? Here's what you need to know first.

The opinions expressed by Entrepreneurs contributors are their own.

Multi-Unit Operators (MUOs) in the United States own more than 50% of franchised units. According to FRANdata, the number of MUO franchisees with more than 50 units has increased by 112.3% since 2019. Some sectors are on the rise. MUOs control 82% of all Quick Service Restaurants (QSRs), 71.5% of beauty-related restaurants, and 72% of sit-down restaurants in the United States.

This is partly due to the natural consolidation of existing units due to retirements, and partly due to new multi-unit deals. Many articles have been written about creating wealth in timeshare franchising. Should this be taken into account?

Related: 4 Reasons to Own a Multi-Unit Franchise

Let's break this down into two discussions: Resales (which I'll cover in my next post) and New Development Multi-Packs. The sale of new multi-pack licenses is becoming more and more common in franchises. The reasons are simple:

Multi-packs generate more cash for the parent company.

They demonstrate "demand", which franchisors hope will attract private capital.

Fewer franchisees cost less to run.

Only high net worth buyers are eligible

Buyers themselves are demanding multi-pack purchasing opportunities because it is easier to increase operational scale and profitability.

Multi-packs can be as small as two to three units and as large as 50 to 100 units or more to sell entire territories or states. Note that selling "multi-packs" is separate from selling zone development contracts or master licenses, which have different performance requirements.

Competition for franchise talent is fierce and costly. High commission outsourced sales channels, marketing and expensive lead generation eat up franchise fees. Young, undercapitalized brands are clearly at a disadvantage. Royalty self-sufficiency (when a brand can fund corporate activities through royalties) is pushed back as franchisee recruitment costs rise.

Traditionally, franchisors limited the number of licenses a new franchisee could sign until they proved themselves as an operator (or had existing MUO experience). Once inside, limits were also placed on expansion licenses to ensure that only proven operators in good standing with the franchisor were allowed to add territories. But more and more emerging brands are now skipping the initial stage and jumping straight into selling multi-packs.

Besides trying to get a place on the private equity radar, this is how some young brands get around the problem of “high commission starvation” in a high-cost retail environment. It seems absurd to me that anyone agrees to buy a pack of more than 10 licenses from a brand with only 10 total units open. But buyers do just that. Some brands even sell with messages that they only accept "executive" buyers who don't need financing. This is meant to partially flatter buyers, but may also signal that there isn't enough slack in the business to...