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3 Criteria for Choosing the Right Number of Franchise Units

Once you have decided to move forward with a franchise opportunity the next decision is whether to open a single unit or multiple units (often called an area development agreement.) The question is, how do you decide how many franchise units you should open? There are 3 main criteria that are important to consider when you are making this decision.

First and foremost, do you have enough money to open multiple units? You should never go into business undercapitalized. Don’t use all of your money on initial franchise fees. You don’t want to put yourself in a position where you can’t support your franchise because your capital is tied up in franchise fees.  

Second, what are your goals for the business? Are you opening this business for additional income and equity or are you looking at the business to eventually replace your current salary?  Let’s say you investigate a franchise and come to the conclusion that, on average, each location should make around $75,000 – $100,000. If you are currently making $220,000 per year at your job and the goal is to use the franchise to leave your job then one franchise is not going to cut it.

It doesn’t make sense to put in the hard work required to build a franchise business without giving yourself a chance to reach your goals.  However, if the franchise business is being used as an additional income stream then maybe one franchise would suffice (with the opportunity to expand later on.)

Third, decide what causes you more pain: loss of money in franchisee fees or loss of opportunity for further growth? Let’s play this out, assume the market you are in has 5 franchise territories available. For one unit the franchise the fee is $50,000, for 3 the fee is $125,000, and for 5 the fee is $175,000.

Would you be more upset if you paid for 1 location, got it up and running, and it was doing great but someone else bought each of the remaining 4 territories or if you signed up for 3 units, paid $125,000 but decided you were only going to open 1 store?  Is it worth the additional $75,000 to give yourself the opportunity to scale and control 3 areas? 

When you reach the point where either your finances don’t work or the pain of losing the money is greater than the pain of losing additional growth opportunities, you should stop adding units.

In conclusion, the number of locations or territories is a personal decision and is different for each individual. You should take into account your financial situation, the goals you are trying to achieve, and the pain tolerance between the fear of losing future opportunities and the fear of losing initial franchise fees.

Franchise Guidance can help you navigate this decision along with the many others that come along with finding the right franchise business for your lifestyle.