To Franchise or Not To Franchise—That is the Question

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on Oct 8, 2018 8:00:00 AM
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I remember when investors first began coming to my parent’s restaurants with both praise and promises. They were dangling the franchise carrot—the one my parents ultimately said no to. Did they look back with regret? Maybe. It was an age when parents rarely discussed finances with their children. While I may not know what weight their final decision carried, here’s what I do know.

Like most businesses, franchising can lead to great success or dismal failure. The most successful restaurant franchises usually fall into the fast food or quick service segments. Chick-fil-A, as an example, averages $3.2 million in sales per store—the highest per store sales of just about any franchised brand—even McDonald’s which comes in at $2.6 million.

The notion that franchises have a success rate of close to 95 percent is, well, to put it mildly, absurd. Who started this widely touted statistic that floats through the internet on a cloud of almost guaranteed success? My best, and obvious, guess would be a backstreet franchise broker.  

The truth is that franchising, as with any business dealings, is risky.

An Example of What Not to Do

Let’s start our franchise story with an example of what not to do. Quiznos, a sub shop that at one time had about 5,000 units in America was, by 2017, down to less than 400. Just where did Quiznos go wrong? For one, instead of supporting their franchisees by negotiating with vendors for lower prices, Quiznos bought product from vendors and then sold it to their “partners” at a markup. Bad, bad business and one that led to an almost 40 percent food cost for their franchisees. When you compare this to Subway’s typical 30 percent food costs, you understand why many became disgruntled and filed lawsuits.

The other area it lost in was differentiating itself from the masses. I don’t know about you, but I permanently have “$5-foot-long” etched into the inner recesses of my brain. What is Quiznos known for? I can’t remember.

An Example of What to Do

What, exactly, happens when you franchise a restaurant? You become the parent company that licenses other operators to use your concept and business strategies in exchange for a fee. These fees can be hefty with many in the sit-down dining arena topping out at $1 million plus.

On the one end are franchises such as Halal Guys. Franchisees must prove they have $2 million in net worth and $1 million in capital and they have to open up five locations. Wow.

On the other end, franchising a Chick-fil-A can cost as little as $10,000 with no start up fees. Land, construction, and equipment are all paid upfront by the company. Profits to the business are made by the 15 percent of gross sales and the 50 percent of pretax profit that goes into the parent company’s coiffures.

Obviously, starting a franchise can be very profitable.

Halal Guys started out as a hot dog cart which soon turned into their famous platter of chicken and gyro over rice. They now have over 200 restaurants worldwide.

How Do You Know When It’s Time to Franchise?

Do you have a unique concept that can be duplicated? Would you like to own multiple locations but are strapped for cash or time? Does a lower level of risk appeal to you?

One of the best measures as to your franchise readiness is if you have received inquiries before the fact. Keep in mind that your units will need to make enough profit for both you and your franchisee, otherwise, you may go the way of the sub chain we referred to earlier. No need to beat a dead horse. According to a report in Entrepreneur, if your franchise can generate an adjusted 15 percent return on investment on a mature franchise, your restaurant may be a good candidate.

Once you know you’re ready, you may want to obtain the services of a franchising company that can help you with the many requirements some of which include a Franchise Disclosure Document and the Franchise Agreement. Help can be found in the form of franchise attorneys or consultants. The International Franchise Association also offers resources to those seeking information on getting into the franchise arena.

Let’s end on a successful note. Have you heard of The Lost Cajun? It’s a Louisiana-based restaurant that caters to families who enjoy authentic Cajun food, a relaxed atmosphere, and southern hospitality. The first franchise opportunity came along in 2013. They currently have 18 locations in four states and are looking to add at least 11 more for the remainder of 2018. Total investments required of their franchisees are anywhere from $300,000 to $500,000.

 Download Now: Run Your Restaurant for Explosive Growth!

Topics: Capital, Real Estate

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