Franchising is a business arrangement in which a company, the franchisor, allows a person, the franchisee, to buy the rights to sell the company’s products or services and use its logos for advertising purposes. The restaurant industry is one of the most widely known industries for franchising.
Many individuals who want to start a new restaurant, but who do not have a lot of experience, often buy into franchises because the chain will have an established training and marketing network. The characteristics of typical franchisees are: they can be team players, they have little or no experience in the restaurant industry, and they have cash on hand for the initial franchise fees.
Benefits of Buying into a Franchise
The following are some of the main benefits to buying into an established restaurant franchise:
- Success rate. A new restaurant in an established chain is less likely to fail than an independent restaurant.
- Name recognition. Most chain restaurants are already established and successful. When you open up a new store in your area, chances are people already know the brand and its reputation, so you can expect nearly instantaneous business.
- Tested and successful strategy. The training, marketing and service methods of the franchise have already withstood the test of time, so you do not have to build a marketing strategy through trial and error.
- Support network. Franchisors have an established network of trainers, managers and brand representatives available to help you get your business up and running.
- Buying power. A national restaurant chain has a lot of different stores that need equipment, food and supplies. The brand is able to negotiate better deals with vendors because it can bring a large volume of orders to that dealer. This means you will get better prices on your purchases.
Drawbacks of Buying Into a Franchise
Every business arrangement comes with certain drawbacks. Here are some of the negatives to owning a franchise restaurant:
- Royalty payments. The franchisor will take a percentage of your pre-tax profits as a fee for using their brand and to keep the support network functioning. However, this will cut into your personal take-home income, especially if your store is barely turning a profit.
- Advertising fee. Depending on the chain, you may have to pay additional advertising fees to advertise the brand in your trading area.
- Costly updates. When the franchisor decides it is time to update every store with eco-friendly equipment or a new décor, you will be required to front the cash for those upgrades, and you will have little say in the matter.
- Same-brand competition. Competition is the nature of business, but with franchising, sometimes you can be competing against the same brand, which does not always benefit your operation. For example, if there is a Starbucks on every street corner, any money those outlets make will strengthen the brand, but it hurts your individual profits when someone goes across the street for their latte.
- Strict rules. No matter what restaurant franchise you buy into, the business will already have an established policy for advertising, quality control and operations. This can limit your creativity, and if you decide to operate outside the rules, your contract can be terminated.
Things to Look at in a Possible Franchise
Before diving head first into a franchise, you will want to look into the following aspects of the business and make sure the company you have selected is really as good as it seems:
- Initial investment. Most franchisors will require a cash payment upfront. Generally speaking, these funds must come from personal assets, not bank loans. So you will want to make sure you can produce these funds before sending in your application.
- Royalty payments. Franchisors will require you to pay a certain percentage of gross sales. Sometimes you will be required to pay a base amount whether or not your business is making a profit. You will want to know upfront how much you will have to pay to be sure you can still earn a living.
- Franchise agreement longevity. A franchise agreement (your contract with the franchisor) can last as long as 20 years. Along with this information you will also want to know if there are any provisions for selling your store before the contract is up or if you can pass it along to your children.
- Services offered by the franchisor. One of the benefits of buying into a franchise is that there is a support network of marketers and trainers in place to help you get established. Make sure the support services offered by the franchisor will suit your individual needs.
- Background information. Do an extensive background check on the franchisor. Talk with other franchisees to see if the chain is actually as good as the company website says it is. You will also want to know if the franchisor has any stores that are failing or if the franchise owners have ever filed for bankruptcy. These can indicate a weak business.
Franchise Lawyer: A franchise lawyer is someone who is knowledgeable in buying and selling franchises. Before you invest your personal income into starting a chain restaurant, contact a franchise lawyer to make sure you have all of your bases covered.
Funding Your Franchise
Aside from the initial cash payment that must come from personal assets, funding a franchise is a lot like funding any startup restaurant. You will be responsible for rent payments, equipment and supplies purchases, hiring and paying employees, taxes and insurance. Most likely, you will need to secure loans from the bank, family and friends or through the franchise to cover the initial startup costs of your business. >> More on Funding Your New Restaurant
Locate a Franchise Opportunity
Most major chain restaurants have information available on their website. If you know what restaurant franchise you want to open, start with the company’s website. However, if you want to start a restaurant but are not set on the brand or type, there are dedicated websites like Franchise Gator that provide basic information about various chains and opportunities.
 Federal Trade Commission, “Buying a Franchise: A Consumer’s Guide,” http://www.ftc.gov/bcp/edu/pubs/consumer/invest/inv05.pdf (accessed February 16, 2009).