Franchise restaurants are now a common fixture of the American dining scene, offering entrepreneurs a formal gateway to the food service industry.
What Is a Franchise restaurant?
A franchise restaurant is in place under a license agreement between two parties: the franchisor and the franchisee. The master brand, trademarks, and business model are managed by the franchisor, and the franchisee purchases the right to operate a restaurant under the franchisor’s established system and brand. It allows franchisees to leverage the franchisor’s brand image and experience operating and reduce some of the risk associated with opening a stand-alone restaurant.
Franchisor and Franchisee
It is required to understand the various roles of the franchisee and the franchisor:
- Franchisor: The firm which owns the brand, business model, and trademarks. They provide franchisees with the right to operate under their established system, along with training, marketing, and product development support.
- Franchisee: Any individual or group of individuals who invest in the franchise restaurant right to operate. They perform day-to-day operations, obey the directives of the franchisor, and remit periodic payments for brand use and support services.
Pros and cons of investing in a franchise restaurant
Advantages:
- Tried brand name: The franchisor already has a name and customer base, which can lead to quicker profitability.
- Established business model: Operations on a predetermined framework reduce the period of trial-and-error characteristic with new businesses.
- Support and guidance: Training provided by franchisors and ongoing guidance ensure franchisees are running businesses profitably.
Disadvantages:
- Initial high investment: Franchisees require a large initial investment to start operating, and franchise fees, property, and equipment costs are involved.
- Regular charges: Marketing fees and royalties are usually paid by franchisees, which decreases profit margins.
- Limited autonomy: Strict adherence to the procedure that has been designated by the franchisor can prevent the franchisee from implementing his/her own innovations or business concepts.
Financial commitments in franchise restaurants
- Initial franchise fee
One-time franchise initial fee is paid by the franchisor to the franchise in the form of a license fee to use their brand name. The one-time fee is tremendous based on brand equity, base of the market, and avenues to sustain it. For example, Papa John’s charges a restaurant an initial franchise fee of $25,000.
- Estimated initial investment
What it costs: Total franchise restaurant startup costs range anywhere from $50,000 to $6,000,000. While you can find franchises on the lower end of the spectrum, most chains start in the $200,000 to $300,000 range.
- Real estate costs
Securing the appropriate location is fundamental to restaurant success. Real estate charges consist of leasing or purchasing land, land improvement, and adherence to regional zoning regulations. These charges can be determined by the size, location, and regional economic factors of the restaurant’s real estate. Wendy’s expansion into the new Australian market, for example, wrestled with tough real estate and economic issues like steep planning expenses and labor expenses.
Ongoing fees for franchise restaurants
Royalties
How much it pays: Franchise restaurants typically run between 4% and 8% of your total income per month.
Marketing fees
How much it pays: The franchisor will also charge a marketing fee of between 2% and 5%.
How to franchise a restaurant
- Determine the feasibility of franchising your business
Prior to franchising, determine if your restaurant idea is replicable and there is a track record of profitability. Evaluate market demand, product uniqueness, and scalability of operations.
- Prepare your franchise disclosure document (FDD)
The FDD is an American regulatory requirement that provides prospective franchisees with considerable information about the franchisor, the business of the franchise, and terms of the franchise agreement. It includes information on fees, obligations, and litigation, encouraging disclosure and informed decision-making.
- Create a franchise entity
Creating a properly defined legal form for your franchise business can serve to protect your underlying business as well as assist in managing your franchises. Seek the counsel of attorneys to determine the most optimal form, an LLC, corporation, or partnership.
- Register your franchise
State registration requirements differ. In some states, registration of the FDD with state regulators is required prior to franchises being sold, whereas others have statutory provisions for franchise selling. Compliance is needed with both state and federal laws to prevent legal traps.
- Create a franchise operations manual
This guidebook is a complete handbook for franchisees, detailing each step of running the restaurant, from day-to-day operations to marketing plans. A well-crafted guidebook ensures consistency and maintains brand integrity throughout.
- Hire and screen potential franchisees
Recruiting like-minded franchisees with the necessary skills is essential. Conduct a serious screening process, such as interviews, background checks, and financial analysis, to build a winning partnership.
- Ongoing support to franchisees
Ongoing support by training programs, advertising assistance, and operational advice is vital for the long-term success of your franchise business. Establish open communication channels and an open culture to address problems in a timely fashion.
