casual dining

The rise of the super-sized franchisee

June 17, 2013: 12:24 PM ET

Companies like Moe's Southwest Grill are increasingly looking to operators with experience franchising and a desire to run multiple restaurants.

By Beth Kowitt, writer

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FORTUNE --  When Moe's Southwest Grill president Paul Damico decided to bring his brand to Missouri, he could have signed one-restaurant deals with 30 different operators and had all of them open within a year.

Instead, Moe's signed the largest franchise agreement in its history, a single 30-unit deal giving one operator the rights to build out the brand in the state.

Damico's chosen strategy means the restaurants will open over a longer period of time -- one the first year followed by four to five annually -- but it moves the company closer to its goal of increasing the ratio of restaurants to franchisees to 5-to-1, up from the company's near 1-to-1 ratio when it was bought in 2007 by Focus Brands. The 500-unit Mexican-Southwest fast casual chain's restaurant to franchisee ratio is now at 2.6-to-1.

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The push at Moe's to sign on multi-unit franchisees has become a common theme in the restaurant industry. Companies like Moe's are increasingly looking to operators with experience franchising and a desire to run multiple restaurants for the brand. Franchisees that fit that profile have access to financing, knowledge of the market, and economies of scale -- a desirable combination for a brand looking to grow.

"Mini-franchise empires are getting hotter and hotter," says H.G. Parsa, a professor at the University of Denver's Daniels College of Business. "A restaurant is no longer about cooking and serving -- it's a million-dollar business."

According to FRANdata, the number of units held by the top 50 multi-unit owner (MUO) increased 18% between 2011 and 2013. The average MUO has five units, with 66% of all locations owned by MUOs, says FRANdata. There are about 80 franchisees that each own more than 100 units. Damico notes that one of his newest operators is also Wendy's largest franchisee with more than 300 locations.

Matthew Haller, vice president of public affairs for the International Franchise Association, says that aspiring and smaller franchisees got squeezed out in recent years as the credit crunch made it harder to get financing. "During the last decade it became increasingly challenging for people not already in franchising to get in, and the balance of power shifted toward existing multi-unit operators," he says.

Haller added that it's recently become easier to get into franchising as banks have started lending again. But Parsa notes that new entrants often can only sign deals with young, regional concepts.

For Damico, the ease of building consensus with a smaller group is a big advantage of upping his restaurant to franchisee ratio. "It would be awesome if we had a thousand restaurants and 200 people to talk to," he says. "Those people are more business people than individual mom and pop operators."

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Moe's was often considered an investment from its founding until about 2007, Damico explains. You could be a lawyer or doctor, buy a Moe's, and have your nephew run it. Now, if you want to own a Moe's, Damico requires that you have franchise restaurant experience.

"So could I be a Moe's franchisee?" I asked Damico. "You can't," he told me. He'll only do single-restaurant deals with existing partners to fill out a market.

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