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When you run a successful restaurant, it’s not uncommon to receive franchising requests. The prospect can be attractive — allowing other people to open restaurants under your brand brings in more profit without the work and risk of running other locations yourself. Before you make the decision to franchise a restaurant, be sure to understand the process, the advantages and the disadvantages.
What is a franchise?
A franchise is a type of business where a company owner, or franchisor, licenses their company name and brand to other people. These franchisees open their own locations with support from the parent company. In return, they usually pay the franchisor start-up fees and a percentage of the monthly profits.
McDonald’s is an example of a successful restaurant franchise — 95% of the company’s U.S. locations are franchised. Each location has the same decor, branding, menu, and design as other McDonald’s locations, but they’re owned by different franchisees.
Many popular restaurants use a similar model, particularly in the fast-food industry. Auntie Anne’s, Taco Bell, Arby’s, Chick-fil-A and Subway are all franchise businesses.
It’s important to note that a franchise is different from a chain restaurant, such as Starbucks or Chipotle. In a chain, new locations are owned and operated by the parent company. Some businesses use a hybrid model that embraces both franchising and corporate-run branches.
Pros and cons of franchising your restaurant
Like any other type of business, restaurant franchising has both pros and cons. As you decide whether to run a franchise restaurant or an independent restaurant, it’s important to consider both sides.
Pros of franchising restaurants
All restaurants come with a certain amount of risk, but franchises have significant advantages that can help parent companies and individual owners reduce uncertainty.
- Faster start-up. New restaurant franchise owners typically receive support from the franchisor to streamline the start-up process. Depending on the business, this might include guidance on finding property, choosing or constructing a building, buying equipment, designing the interior, hiring staff and creating a menu. These established practices save a great deal of time and money, which means the location can open and start turning a profit in less time.
- Included branding. As the parent company, you provide all the marketing materials and branding elements to franchisees. This process lets you maintain control over the brand.
- Name recognition. Franchisees don’t need to worry about building an audience from scratch. Because they’re licensing your existing brand name, they gain access to an existing customer base. This can reduce purchasing barriers and make it easier to secure sales.
- Easier operation. You can provide franchise owners with access to your existing advertising, suppliers and support network. With these resources, they can run the business without expensive trial and error. The built-in support is especially helpful if you want to attract owners who are new to the restaurant industry.
- Streamlined expansion. Franchising lets you build your brand without the level of investment that’s required to open company-run branches. While other people run individual locations, you still make a profit.
Cons of franchising restaurants
Franchises don’t operate like traditional restaurants, so make sure to understand the disadvantages before you license your restaurant’s brand.
- Ample oversight. To maintain the integrity of the brand, you’ll need to spend a great deal of time and money monitoring individual restaurant franchise locations. If issues arise, you must manage disputes and pursue legal recourse, if necessary.
- Strict requirements. Before you can franchise your restaurant, you’ll need to establish strict requirements. Some companies look for franchisees with experience in restaurants or commercial real estate development. Others require new owners to have a minimum net worth and the ability to pay start-up fees without borrowing money. These qualifications reduce risk, but they also make it more challenging to find qualified entrepreneurs.
- Fees and royalties. Franchises come with a variety of fees, but even so, it takes time for the parent company to realize a profit on a new franchise restaurant.
How to franchise a restaurant
If you own a successful business, franchising is one way to expand your brand. You won’t own each location, but you’ll still receive a percentage of the profits. Learning how to franchise a restaurant takes time; the process varies but usually includes a few common steps:
- Standardize operations. A successful franchise restaurant is one that can be recreated easily by another owner in another location. Standard operating procedures are key — by standardizing and documenting each process in the business, you can help franchisees maintain the same quality and customer experience. You should have solid, repeatable processes for all common tasks, including ordering, inventory management, food service, food prep, staff training, and reporting.
- Claim your brand. Protect yourself and your brand from legal issues by trademarking the company name, logo, tagline, and any other prominent identifiers.
- Build a franchise plan. Work with an attorney, a business analyst, and a financial planner to create a basic franchise plan. These professionals can help you analyze property costs, sales data, and financial forecasts. With that information, you can determine the franchise fee, start-up costs, and required capital. It’s also important to establish requirements for the owner, property, and equipment.
- File a franchise disclosure document (FDD). Use your franchise plan to create this overview document, which is required by the Federal Trade Commission (FTC). The FTC’s format is designed to provide potential franchisors with all the information they need to make a decision. You’ll need this document whether you’re franchising a fast-food or fine-dining brand; in some states, you must file or register the FDD.
- Write a franchise agreement. Have your attorney draw up a legal contract between you and your franchisees. It should spell out the responsibilities of each party in detail so everyone is clear about what to expect. The document should also explain the consequences if you or the franchisee fails to meet one or more obligations.
- Create franchisee resources. Build a resource library to help guide franchisees through the process of opening and operating a business. You might include information about finding property, choosing equipment, working with preferred suppliers, getting required permits, training employees, handling conflicts and managing revenue. If possible, create a forum or communication system that enables franchisees to support each other.
- Establish brand guidelines. Make sure each franchisee represents your brand accurately with clear, specific brand guidelines. This might include rules for social media, logo files, menu templates and interior design requirements. Be sure to explain exactly when and if franchisees have room for creativity in marketing and advertising and when they must follow established standards.
The cost of franchising your restaurant depends on attorney rates, state filing fees, and the complexity of your operations. Costs could range from $15,000 to more than $125,000.
Is franchising right for you?
Learning how to franchise a restaurant is just one way to grow a food-industry business. You can also expand your current location or open additional restaurants in other areas.
Franchising might be right for you if:
- Your business runs on standard operating procedures.
- Your menu is easy to replicate.
- You have a reliable and established network of suppliers.
- You’ve received numerous inquiries from potential franchise owners.
- You have the resources to manage and communicate with each franchisee.
- You want to diversify your income stream.
- Franchisees can open a restaurant for a reasonable price.
Grow your restaurant with a trusted partner by your side
If you’re hoping to franchise your restaurant, either now or in the future, it’s important to build a solid foundation. Adding delivery or using a ghost kitchen can help you develop recipes, bring in new customers and increase brand awareness — all of which make the business more attractive to prospective franchisees. Grubhub can help; to learn more, sign up for a free trial.