Many restaurant would-be owners believe that operating a franchise is a more stable restaurant business and a shorter path to restaurant success compared to an independent restaurant.
Owning a restaurant franchise gets you started with the tools, equipment, and support you need from the beginning. As a brand, a franchise is also more well-established, with access to a solid customer base.
Opening an independent restaurant does comes with more risks, compared to a franchise. You’re entering the industry as an unknown brand, which you need to build from the ground up. You have to master daily operations, and resolve other kinds of issues that a franchise may have already figured out.
So if you’re in doubt about starting your own restaurant from scratch, we’d like to help you decide if getting into a franchise is right for you.
Restaurant Franchise Facts
1. Franchising Has Different Models and Ownership Types
There are two primary franchise business models in the United States: the Product Distribution Model and the Business Format Franchise Model.
In the Product Distribution Model, your franchisor manufactures the product and you sell it. Restaurants don’t normally offer this franchise model, but other food businesses, like Coca-Cola, may do.
The Business Format Franchise Model is the most common franchise business model in the United States. Chances are it’s the model your potential franchisor offers. In this model, you can use your franchisor’s brand and trade name (e.g., Dunkin Donuts), and sell their products under that name.
Aside from a franchise business model, you may also be subject to a specific type of franchise ownership, such as:
- Single Unit Franchise – as a first-time franchisee, your ownership type will most likely be a single unit franchise, which means that you own only one unit of the franchise restaurant.
- Multi-Unit Franchise – being a multi-unit franchise owner means you own more than one unit of the franchise restaurant. Franchisees who have successfully run one unit often become multi-unit owners in time, but some franchisors require even first-time franchisees to be multi-unit owners right away.
- Multi-Unit Area Developers – they are similar to multi-unit franchise owners, except multi-unit area developers agree to open multiple restaurants within a specified time and area. If you want market exclusivity, a franchisor may agree to make you a multi-unit area developer.
- Master Franchisee – being a master franchisee may subject you to the same requirements as a multi-unit area developer. You may also be allowed to sell a sub-franchise to sub-franchisees. Your franchisee can then act as a middleman between you and your potential sub-franchisees.
2. Not Every Popular Restaurant Chain is a Franchise
Popular restaurants that don’t sell franchises have decided they have a lot to risk, including brand values and mastery of their product.
So if you wanted to open your own individual Starbucks branch, for instance, you’ll discover that you can’t, because the popular coffee shop chain isn’t actually a franchise.
Starbucks inks brand licensing deals with strategic partners in the US and overseas, who, in turn, can’t accept franchisees, either.
That said, you need to adopt and embody a restaurant’s values, mission, and culture to be a good franchisee.
If you’d love to explore a franchise opportunity, look at QSR chains like Burger King, McDonald’s, Tropical Cafe Smoothies, and Fajita Pete’s. They are more open to letting other experienced business owners run their brand, as evidenced by their successful franchising operations in many locations.
3. Buying a Franchise Can Be Costly
Initial franchise fees are usually lower than the upfront costs of opening an independent restaurant. However, franchising can come with scheduled fees that may be significantly higher than the average costs of running an independent restaurant.
For example, if you want to buy a franchise of Chick-fil-A, you may only need to pay an initial franchise fee of $6,250 to $37,500. But your contract will likely obligate you to pay a fixed percentage—as high as 15%—of your sales to Chick-fil-A’s parent company. In addition, you may have to pay the company 50% of your remaining pretax profit every month.
Franchisors may also impose stringent requirements from their potential franchisees. For example, if you want to buy a franchise of The Halal Guys, you should have a net worth of at least $2 million, and a capital of no less than $1 million.
Wendy’s requires a relatively smaller net worth and liquid assets: $1 million and $500,000, respectively. Still, those can be substantial amounts if you’re looking to start with limited capital.
You can get a business loan to finance your restaurant franchise to keep your investment in check. Some franchisors even offer financing assistance to their franchisees. They can help you gather the requirements that will allow you to easily apply for a loan.
4. Some Franchisors May Require You to Open Multiple Restaurants
Franchisors who require their franchisees to have a high net worth may also require them to be multi-unit owners or multi-unit area developers. For example, Pizza Hut and Taco Bell both require franchisees to open three outlets within three years. The Halal Guys requires their US franchisees to open at least five outlets.
Consider that owning just one franchise can already demand a significant amount of your time and money. If you want to be a multi-unit owner or area developer, make sure that you can meet your franchisor’s standards and expectations, and that you have the time and energy to be constantly present in your business.
5. Buying a Franchise May Require Entrepreneurial Experience
Since you will be entrusted with a well-established business, an experience in business ownership—preferably a restaurant—can make you a better franchise candidate.
The most discerning franchisors will likely pick a candidate with the skill to run and maintain their brand, so years’ worth of business experience will enhance your franchise application
If you’re relatively new to the restaurant business, many franchisors will be more than happy to offer guidance to you. You won’t be alone in running the business. Nonetheless, if you lack experience, you may want to start with a smaller-sized franchise before venturing into bigger brands that have more extensive requirements.
6. You Should Follow Your Franchisor’s Rules
Complying with your franchisor’s rulebook is essential in operating your restaurant franchise successfully. The rules may cover a large range of requirements, from vendor supplies to customer service style, interior design, and food and drink preparation and presentation.
This may leave little room for creativity, but that doesn’t mean operating a restaurant franchise will not challenge you in that area. If your vision is aligned with your franchisor, your creativity will find a place in helping your restaurant franchise become successful.
7. You Need a Business Plan
Even though a restaurant franchise is a plug-and-play business, applying for a franchise is a lengthy process, starting with a business plan that will you will need to show the restaurant’s franchise committee.
If you’re going to take out a loan, your potential financier may also ask for the franchise business plan to verify that your restaurant franchise can generate enough profit enough to pay back the loan.
Financial Qualifications for Ideal Franchisees
Buying a restaurant franchise is a step-by-step process. It generally starts with meeting the qualification requirements, such as:
- Credit Score
A credit score is a 3-digit number between 300 and 850 that determines your creditworthiness. In the United States, the three main credit reference agencies—Experian, Equifax, and Callcredit—calculate personal credit scores.
Not all countries have a credit scoring system. If that’s the case in your country, your creditworthiness will be measured based on your financial records—income, bills, and debts. Your creditworthiness increases the higher your income and the more punctual you are with your payments. Make sure your income is stable and that you pay your bills and debts on time to boost your credit.
- Net Worth
Your net worth is your total wealth or the total value of your assets minus your liabilities. As mentioned, franchisors may require potential franchisees to have a minimum net worth. It can go from $250,000 to $1 million.
- Cash on Hand
Cash on hand is also known as liquid assets or cash reserves. Simply put, it is readily available cash, which is used to cover the initial franchise fee or a loan down payment.
It’s best to consider more than three franchisors whose requirements you can meet. Once you’ve narrowed down your options, you may start filling out their preliminary questionnaires or application forms. Fill out the forms completely and accurately to allow your potential franchisor to assess your qualifications properly.
If you meet the franchisors’ initial requirements, a representative from their company may arrange a meeting with you.
Franchise Disclosure Document (FDD)
Before your franchise gets finalized, you will receive a franchise disclosure document (FDD) from your franchisor. It is a lengthy document outlining the franchisor’s rules and regulations, the fees you must pay, and your responsibilities as a franchisee.
The FDD also includes key information about the franchisor’s company, such as its legal and financial history.
Make sure to read all pages of the FDD carefully. It will help you determine if owning a restaurant franchise is right for you. You may have up to 14 days to decide whether to finalize agreements, sign contracts, and pay fees.
Banks, money lenders, or external investors may also ask to see the FDD. Since the FDD will influence many factors in your business plan, studying it is crucial in your potential financier’s decision-making process on whether to fund your franchise or not.
Strengthening Your Ability to Manage a Franchise
Owning a restaurant franchise gives your business instant brand recognition and therefore easier access to customers. Your franchise fee will also cover in-depth training, operation manuals, equipment, POS systems, quality control standards, and more.
Everything you’ll receive from your franchisor is designed to minimize the risks in your business. But you may also have the opportunity to implement any new process or system that will work best for your restaurant franchise.
For instance, if you’re facing challenges like high operating costs, you may consider automating your ordering system to decrease your turnaround time.
Perhaps you can propose swapping out your franchisor’s traditional POS system for a cloud-based POS system. With your database stored securely in the cloud, you can reduce paper waste, data processing and recording errors, and cybersecurity risks.
What’s more, you can process orders and payments, manage your inventory, set up your online ordering system, and monitor your performance all on one device.
If you want to have full control over your enterprise, you might want to reconsider buying a restaurant franchise. Once you sign the franchise agreement, you will be obligated to follow the franchisor’s rules, such as their operating procedures and brand methods.
That’s why it’s important for your vision and principles to be aligned with your franchisor—without that mutual understanding, your restaurant franchise may face challenges, and you may feel limited in your power as its owner.
Thriving With a Restaurant Franchise
Weigh the benefits, rewards, and potential pitfalls of owning a restaurant franchise before committing. Evaluate your own skills and identify what you can contribute to the brand. You may still find opening an independent restaurant suits you better, which is also a brilliant choice. Diners are always down for new restaurant concepts and dining options.
Costs and challenges aside, owning a restaurant franchise gives you the fuel to kickstart your business. With your franchisor’s guidance and resources at hand, your business may grow faster, you may expand your professional network, thanks to your franchisor’s connections, and you may sooner than later find the restaurant success you are actively pursuing.
