Restaurant Franchising: How to get Started
When you think of franchising a restaurant, you likely think of any number of chain locations that exist throughout the country. In fact, according to Entrepreneur of the top 20 ranking franchises, 9 are restaurant chains. But how did a restaurant like McDonald’s make the step up from a single location restaurant to an international chain that has served billions? How can a single-site restaurant owner make the move to the next level? Is your restaurant primed for franchising?
Restaurant Franchises versus Chains
You may hear the phrase “franchise” used interchangeably with “chain,” and while there is plenty of overlap that is not the case. To franchise a restaurant is to sell permission for a third-party investor or franchisee to make the use of your name, branding, etc. in exchange for fees or royalties. Franchisees are responsible for the upkeep and management of their restaurant and are typically beholden to specific contractual agreements that may include requirements to use specific technology and more.
By contrast, a chain is a series of restaurants all owned by a singular entity. In the middle is a multi-unit restaurant, an increasingly popular option that describes an operation that is relatively small, but owned by one party. Where it becomes tricky is in the overlap between each: a single entity can own a franchise and then have several locations of that franchise. So a chain is always one entity owning a string of sites, whereas a franchise is a singular entity owning paying to franchise a name, who may then expand to more than one operation.
A Brief History of Restaurant Franchising
As a concept, franchising started as a way for landowners and rulers to permit to tax property in their name. That set the tone for modern business franchising, which took off as we would recognize to mirror the industrial revolution with companies like Coca Cola and Ford serving as early adopters. The first fast-food franchise was A&W Root Beer, who began franchising in 1924, followed by table service restaurants from Howard Johnson in 1935.
The telecommunications boom has allowed for long distance communication between restaurants, as well as modern conveniences like the drive-thru. Now operators who run multi-unit franchises can view real-time business metrics or analyze previous through business intelligence, both of which give franchisees opportunities to work remotely without missing out on anything happening “in the moment.”
The Benefits of Franchising
The main reason that you would even consider any expansion is to increase your bottom line, but there are several benefits to franchising your location. For example, if you’re a multi-unit restaurateur, you’re singularly responsible for the operations management, financial obligations, and oversight for each of your businesses. In that scenario, you net all the gain, but you also carry all the burden. Franchising allows you the opportunity to grow, but with a minimized risk to yourself, as outside investors will serve as your partners.
Additionally, franchising allows you the opportunity to increase your talent pool. The management of your second location isn’t someone you hire or pay, but who earns their reward through the hard work they put into their franchised location. Those operators have paid you for the opportunity to use your name so that in turn gives you expanded capital.
Should You Franchise Your Restaurant?
Franchising is a powerful way to expand your brand if it’s the right fit. What is it about your restaurant that you think others will want to invest in? Will it potentially detract from the charm of a smaller operation? While the end goal in the expansion is to develop a more substantial presence, be mindful of whether or not that growth could potentially hamstring your current business.
There are a variety of factors involved in franchising your restaurant. First, are you prepared to cede any control over your business? While you can include standard operating procedures (SOP) into your franchising contract, you are allowing outside operators the keys to the store. While there may be contractual agreements that they are obligated to satisfy, there is plenty of room for them to do things in a way that you may disagree with otherwise.
The Costs of Franchising
What you charge to begin franchising should reflect the size of your business and the estimated return on investment (ROI) that you can show potential investors. Doing so is a legal requirement from the Federal Trade Commission (FTC), that allows franchisees access to the pertinent information that they need to make their decision.
There are a host of available franchise options out there for investors. Companies like Walk-On’s Bixtreaux & Bar set clear franchising objectives for potential investors, taking interested parties step by step through their process and making it clear what they will need to do to become part of the team and what they gain from doing so.
In general, amounts vary on up-front franchise costs from approximately $10,000 to open a new Chick-Fil-A restaurant, to around $500,000 to own a McDonald’s franchise. Keep in mind that investors know the ROI and expectations inherent to these franchises at the start, and you should do the same. Make sure you have some way of calculating that estimation up front, as a way to illustrate your value. Below are some costs to consider before you get started.
Test the Waters
Franchise owners yield on average around 90K, a healthy ROI, but one that comes at a high cost to your time. Restaurant operators are statistically likely to work more than 40 hours per week, sometimes upward of 50 plus per week. Those hours are often in the evening and late at night, which eats into your time to spend with loved ones.
Before you commit to more time spent overseeing multiple operations, consider starting small. Is it affordable or feasible to open up a food cart/truck or to host a dark/virtual kitchen after hours? This is a cost-effective way to not only test your brand expansion but to get a feel for how this may impact your time. Although you are not
If this is your first time franchising, another approach is just to talk to someone else who has. Getting mentorship is a valuable way to gain insight into the business, from what to expect in bringing in new partners through franchising, to the value that doing so adds to your brand. Since you’ll effectively have to write a bible for how you want the business to operate, including a laundry list of expectations, getting a second opinion from a professional can help you spot the holes that you may not have realized were there.
Part of the process is making sure that potential investors are doing things your way. While it may not be your dollars on the line, it is your reputation, which you can’t put a price tag on. That includes making sure you spell out, in explicit detail, the expectations of each franchise owner, including your SOP, your franchise fees, royalties, and anticipated marketing costs. Beyond that, a lawyer can help you navigate what the FTC needs from you, as well as any local or corporate laws that may be affiliated with the franchising process.
Franchisees have a lot of work ahead of them. As a possible franchisor, it’s imperative to ask if you have the time and resources to aid them in finding success. Do you have training or employee retainment programs in place? Do you have a marketing team that can help promote the brand as a whole? You probably already take stock of your total budget and costs, so make sure that you remain transparent and honest, not only with yourself but with potential investors.
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About the Author
Syd is a content marketing specialist, which are fancy words for writing pretty to tell a good story. He likes writing things about food, drinks, and music. He’s a musician himself, a father of two, and loves his wife a whole lot.