You’ve done a lot of research, reviewed the pros and cons, and weighed your options carefully. You would like to buy into a franchise restaurant, but you have no idea how to get started. What do you have to do?
Here’s how to buy into a restaurant franchise:
- Choose the type of restaurant carefully
- Be aware of the fees before you invest
- Ask for a franchise disclosure document
- Participate in a discovery day
- Create a business plan
- Get the necessary financing
- Open the franchise
In this guide to becoming a restaurant franchisee, we’ll go over the above 7 steps in much more detail so you can plan every aspect of owning a franchise restaurant. There’s lots of great information to come, so keep reading!
Follow These 7 Steps to Own a Franchise Restaurant
Choose the Type of Restaurant Carefully
First comes your hardest decision, and that’s determining which restaurant you’ll franchise. Although you might want to pick an establishment that you eat at all the time, you can’t let favoritism blind you.
Instead, you must consider a multitude of factors. For one, what’s popular in your area? If people mostly like sit-down restaurants, then investing in a fast-food restaurant isn’t the wisest idea.
Besides popularity, which restaurants have longevity? If a franchised restaurant has only been in your city for two years, that’s a risky proposition. The restaurant could succeed as they have for the past two years, or they could shutter their doors anytime.
As you should know if you’ve read this blog, the restaurant failure rate within the first five years is quite high!
That’s not to say that well-established restaurants couldn’t face the same fate and have to close down, but it’s somewhat unlikelier the longer they’ve been around.
How many franchisees does the restaurant have? The more, the merrier in this case. A huge roster of franchisees shows that the restaurant is a good one to own. If you can, you might want to reach out to some franchisees and ask them about their experiences. This can majorly influence your decision.
The last factor to keep in mind is the cost of franchising. Fast-food restaurants are among the least expensive to open, costing about $10,000 but often more.
According to Business Insider, here are the 2020 costs to franchise your favorite fast food establishments:
- Arby’s – $314,550 to $1.8 million
- Dunkin’ Donuts – $109,700 to $1.6 million
- Papa John’s – $300,000
- Sonic – $977,300 to $3.53 million
- Dairy Queen – $1.1 million to $1.8 million
- KFC – $1.4 million to $2.8 million
- Wendy’s – $2 million to $3.7 million
- Taco Bell – $1.2 million to $2.9 million
- Burger King – $1.9 million to $3.3 million
- Subway – $116,000 to $263,000
- Chick-Fil-A – $10,000
- McDonald’s – $1.2 million to $2.2 million
Be Aware of the Fees Before You Invest
Why is it so expensive to open a McDonald’s or a Wendy’s in a town near you? Franchising a restaurant requires you to pay a variety of fees, some of which are rolled into the above costs and others of which are not.
Let’s discuss these fees now.
The initial franchising fees are what you’ll pay to use that franchise’s trademark. This is where the bulk of the money you’re spending comes from. Since the initial fees are usually non-refundable, you must be ultra-confident in your franchising decision before you sign a contract and any money changes hands.
The startup fees are another huge chunk of change, as these cover the costs to open and manage the restaurant. Everything from your building rent or mortgage to permits, licenses, equipment, food costs, other logistics, and hiring and paying employees is part of the startup fees.
As you can probably guess, it’s not uncommon to spend several hundred thousand dollars on startup fees.
The franchise will typically recommend several locations for opening the restaurant in your city. You’d select from that shortlist rather than scope out your own locations.
Most of the purchases you’ll need to make to keep your restaurant running are recurrent. Every year, you’ll renew your POS software, and vendor contracts will also come up for renewal at various times of the year as well.
For the first year that you’re a franchisee, these fees can sneak up on you. By the time you reach your second or third year, you’ll be able to better predict and thus budget for these recurring fees.
You thought you were done paying for your franchised restaurant? Not quite. There are also royalty fees to contend with.
Remember, the restaurant you run is not your own creation, so you have to devote a portion of your revenue to remain associated with the franchise. Per month, this will require you to lose four to six percent of your earnings to royalty fees.
Ask for a Franchise Disclosure Document
Once you select a franchise that fits your budget and has a history of performing well in your town, it’s time to talk to a franchisor. From them, you’ll obtain a franchise disclosure document.
What is a franchise disclosure document? Once called the Uniform Franchise Offering Circular, a franchise disclosure document goes out to every potential franchisee. In the document, the franchisor’s roles and responsibilities will be covered in detail, as will the franchisee’s, which is you.
Franchise disclosure documents include 23 separate sections. Here are some topics covered in the various sections:
- The history of the franchisor’s operation
- The franchisor’s business operations and experience
- Any litigation pending or current against the franchisor
- If the franchise has gone bankrupt, including if bankruptcy has occurred to any affiliates or predecessors
- What the franchisee’s initial fees are and what their initial investment will be
- Any service or product restrictions
- The obligations of the franchisee
- Financing options
- The training, computer system, advertising, and assistance the franchisee will receive
- The restrictions on location for the franchisee’s restaurant
- Any franchise copyrights or patents
- The names of public figures linked to the franchise
- Financial performance projections and financial statements
The Federal Trade Commission or FTC mandates that franchisees get 14 days to fully review the contract. Then they must sign it if the terms are agreeable and make the first of many payments to the franchisor. Since you have ample time, if you’d rather a lawyer look through the franchise disclosure document before you sign it, that’s certainly an option.
Participate in a Discovery Day
Upon the receival of the franchise disclosure document but before it’s due, the franchisor might request that you join in on a discovery day for the franchise. This is an invite common of franchisees, so other franchisees might join you.
During the discovery day, you can visit the franchise’s closest location to you and sometimes tour the corporate headquarters as well. You’ll be able to glean a behind-the-scenes view of the franchise so you can get a feel for the corporate culture and everyday operations.
You’re allowed to ask questions, so if anything springs to mind during the discovery day or after, don’t hold back. You’re putting in a major amount of capital into the franchise after all, so you must be confident in your decision.
Create a Business Plan
As a franchisee, you’re now a business owner, so you must have a business plan. We recommend a traditional business plan over a lean startup plan, as the latter is shorter and lacks the detailed information you get out of a traditional business plan.
Prepare to set aside ideally an afternoon to write your traditional business plan, as it will be time-consuming. Here are the elements you must include.
The executive summary is the first part of your business plan and arguably the most important. In the executive summary, you want to include information about the franchise, including its location, its team of employees, and your leadership. Provide financial details and talk about your product as well.
You also want to write a mission statement, which explains why your franchise is important, what you hope to achieve, and how you’re going to get there.
In the franchise description, start by describing the franchise as a whole. When was the original restaurant founded? Who is the founder or founders? How has the restaurant grown over the years or generations? How many locations does it have and how many of them are franchised?
Then talk about your specific franchise. What problems exist in your neighborhood that your franchise can solve? What expertise are you bringing to the table, either from you personally or other members of the team? Any strengths and advantages should be covered thoroughly in this section.
This section is for your market research. You might be asked to do this yourself or the franchisor might provide market research to you. In your market analysis, you want to include a review of the competition, what they’re doing right, and how you can do it better.
Management and Organization
This part of your business plan is all about your franchise’s organizational structure and who will fill the various management roles. Talk about what your restaurant’s legal structure is, such as a limited liability company or LLC or an S corp.
The best way to showcase the breadth of your staff is with an organizational chart. Talk a bit about the strengths of your individual team members and how they will work in unison to further the goals of your franchised restaurant.
Product or Service
What does your restaurant sell? Go over the multitude of menu items and why customers flock to them.
Sales and Marketing
Even though your restaurant already has a rooted history of success thanks to its franchised name, that doesn’t mean you can forego marketing. Whatever your marketing tactics will entail must be detailed in this part of your business plan.
You also need a section devoted to the sales process. How do you obtain new customers? How do those leads become customers? How do you keep your customers coming back for more, thus increasing their loyalty? Think thoughtfully on each question.
Some franchisees have the capital to pour into a restaurant and others do not. If you’re in the latter camp, then putting together a business plan is as much for you as it is for investors to feel comfortable funding your venture.
You must be clear about exactly how much money you need for your franchised restaurant. Perhaps it doesn’t all come from one investor, but don’t beat around the bush even if you need a significant sum.
Talk about in this section exactly where the money will go. For example, if an investor gives you $100,000, you can tell them that $50,000 would be used for restaurant equipment and another $50k would go towards décor or building rent.
The last section of the business plan is also for investors, as it includes financial projections. Since you received this data from the franchisor in the franchise disclosure document, you shouldn’t have to crunch any numbers yourself.
Get the Necessary Financing
Franchisors don’t accept just anyone who wants to franchise a restaurant. They expect franchisees to have a certain amount of personal finances to use for the establishment. Your net worth is one such area the franchisor will assess, and your liquid assets are another.
Pizza Hut prefers its franchisees have $300,000 worth of liquid assets and a net worth of $700,000 while Panera Bread requires $3 million of liquid assets and a $7.5 million net worth.
If you could use a financial boost to make your franchising dreams come true, you have a multitude of financing options. You can take out a small business loan, which has low interest rates. Due to those low rates, the competition to be offered one of these loans is especially fierce.
Having a business line of credit is another option. You’re granted a certain amount of money that you can use as needed. When you take money out, you’re expected to pay it back before you can take out more.
Term loans are longer-term loans that you pay back over a series of years. The longer a term loan is in play, the higher the interest rates become, which is something to keep in mind.
Open the Franchise for Business
Now it’s time for the moment you’ve been waiting for when you finally open your franchise restaurant!
Before you reach this point, you will have agreed on a location, selected the décor and menu for the franchise restaurant (to an extent), hired employees, been trained on restaurant ownership by the franchisor, and paid your rent or mortgage on the building at least once.
Marketing your restaurant is a great way to help it succeed, but customer service goes even further. By prioritizing your customers, giving them quality service, and quickly assisting if something goes wrong, you’ll retain loyal customers, hopefully for years to come!
Owning a franchise restaurant is a big decision, and for many franchisees, it’s a life-changing one that makes their dreams come true. We hope this article helped you decide whether owning a franchised restaurant is the right choice for you!