Buying a franchise restaurant eliminates the headaches of developing a restaurant concept from the ground up. And although you get to take quite the shortcut, it can still be daunting and probably even confusing. So, we’re here to guide you on how to franchise a restaurant properly to get you where you want to go.
1: Determine the right type of restaurant to franchise
Crucial to how to franchise a restaurant with great success is finding the right franchisor for you. If you don’t have a particular franchise in mind, Franchise Direct and QSR Magazine have an updated list of available franchises that show the opportunities you can tap into in your state. An essential step in making your choice is to evaluate your personality and ability.
What type of restaurant franchise do you see yourself owning?
Quick-service or fast food
- The most common type of restaurant franchise
- Quick-to-prepare and less expensive menu
- Casual or fine dining
- Casual establishments such as family-style cafeterias are less expensive and laid back with shorter eating duration
- Upscale dining restaurants have a formal setting with multiple courses and elegant atmosphere.
- High-quality food and atmosphere with a faster turnaround time
- Organic ingredients and healthier food selections
Can this type of restaurant be sustained in your area?
An important but criminally overlooked part of learning the process of how to franchise a restaurant is making sure there’s an actual marketing opportunity. Does it make sense for the local market and the economic situation? Common franchise agreement lengths range from five to 10 years so you need to evaluate the viability of the franchise during this period.
How much are you willing to spend?
We can’t discuss the subject of how to franchise a restaurant without going over financing. Before you even start your search for a franchise, you should set your budget and make it a point to stick to it. This narrows down your choices so you can spend more time researching franchises that you can afford.
There are franchisors that can offer financial support. These are the ones from The Franchise Registry, a catalog of businesses that the Small Business Administration (SBA) has reviewed for eligibility for SBA financial assistance This will make your loan applications faster and easier.
What type of ownership are you interested in?
For a new business owner, single-unit ownership is recommended for the lower startup costs and risks. Purchasing an existing restaurant franchise from another franchisee is also possible with the benefit of built-in exposure and patronage.
At some point, you can switch to multi-unit ownership to open and run multiple locations in a specific area over a specified period of time (area developer ownership) or sell a number of units in a specific geographic location to other franchisees (master franchise ownership).
2: Learn everything about franchising
A franchise’s website is your first destination to find basic financial requirements and available territories. You’ll have to dig a little deeper for more specific and objective information beyond the sales pitches and potentially seeded reviews. The best way to do this is to purchase or preview the Franchise Disclosure Document of franchises you are interested in. Below are some more resources to help you how to franchise a restaurant that works for you:
- Chamber of commerce can provide information on existing and upcoming businesses in your chosen area and connect you to other local business owners who can offer insight.
- Research firms such as Franchise Business Review and Franchise Research Institute collect feedback from franchisees to measure franchisee satisfaction on franchisor relations. FRANdata analyzes franchise performance and maintains a large database of franchise industry information including the franchisees, industry and company profile reports, and financial performance assessments to give you an idea of how a particular franchisor is doing and if it will be profitable in the long run.
- Associations such as International Franchise Association, Coalition of Franchisee Associations, American Association of Franchisees & Dealers, and American Franchisee Association who are dedicated to protecting and promoting your interests as a franchisee as well as educating you on the process and your rights while helping you identify specific needs and the kind of support the franchisor will provide.
- Franchise-centric publications and trade magazines
- Franchise consultants
- Former franchisees that can provide a better understanding of the pitfalls they encountered or why they ultimately left the business.
3: Dissect the Franchise Disclosure Document or FDD
A franchise disclosure document (FDD) contains all the information about the franchisor, its system, and the terms of the relationship. Generally, this document is given to you 14 days prior to signing any contract with the franchisor. Take your time to study every single page preferably with a lawyer who can provide helpful input and analysis of the document.
By law, the FDD should have specific information regarding the franchisor’s history, background, success rate, profitability, and other information that will impact your decision. Look for the following:
- Initial franchise fee, ongoing royalties, and marketing fees
- A set of proven-as-effective rules and regulations that you must follow to maintain uniformity across the entire brand and replicate the success and operational efficiency of their profitable franchise locations
- Franchisor and its executive board’s background and business history that showcase their level of experience and expertise. (Tip! Check for a history of bankruptcy.)
- Litigation history that shows how the franchisor values brand image. Of course, a shorter litigation history if none at all is preferred. (Tip! Determine the percentage of franchises with litigation by dividing the number of court cases in the most recent year to the total number of franchisees.)
- Average revenue and profitability (Tip: Some franchisors might play it safe to avoid false claims. If your franchisor is one of those, it should at least provide details such as average unit volume as well as overhead and operating costs so you can compute the net operating income.)
- The kind and level of support provided for training, marketing, advertising, equipment, point of sale system, and more.
- Names and contact information of current franchisees (Tip! These people have already walked or are walking the journey you want to be on and will probably have a lot of insight to share from their first-hand experience that you otherwise won’t get anywhere else. Connect with them and ask questions about hidden fees, typical day-to-day operations, how long it took them to be profitable, spending challenges, discoveries after signing with the franchisor.)
- Details about termination, resale, and renewal that set expectations on extending the agreement, how it can get prematurely terminated, or what you can and cannot do when you decide to end the contract upon expiration.
4: Get to know your franchisor better
Next step on how to franchise a restaurant is attending “discovery day” at the franchisor’s corporate office along with other potential franchisees. The franchisor will prepare presentations and will conduct Q&A sessions and one-on-one discussions to tell you what the business endeavor will entail. Sometimes, they also organize tours of different departments.
Listen to what they say and pay attention to what they don’t say. This will reveal the kind of treatment and support you will get as a franchisee and what matters most to the franchisor. Here are some questions that can help you learn more:
- Why do some of your locations fail? What steps have been taken to avoid this?
- Is there a part of the system that franchisees find difficult to follow and could lead to failure?
- How do you resolve conflicts with franchisees? Have you had one recently?
- What is your priority? What do you value most in the relationship?
5: Form a corporation
Form a corporation to ensure limited personal liability and protect yourself and your personal assets. An S-corporation is advised for franchisees because they can elect to have profits, losses, deductions, and credits to “pass through” the entity level so that they can only be taxed at the shareholder level and also significantly reduce FICA payroll taxes.
After that, secure the necessary licenses and permits needed to operate your restaurant legally. More often than not, your franchisor can assist you with this task.
6: Build the kitchen
At this point, it becomes all about making your restaurant fully functional with the commercial restaurant equipment that will allow you to produce consistently high-quality food and service. A franchisor might require you to purchase specific brands and models from recommended suppliers.
Having the proper equipment at your restaurant is vital. Recognize the positive impact and profitability of having the best and most trusted commercial ice machine brands for your ice supply such as a Manitowoc ice machine or excellent refrigeration including a walk in refrigerator for keeping bulk ingredients fresh for longer.
If they haven’t already, franchisors will provide you additional training you may need to prepare you for the opening. This will involve hiring and training the right employees, properly marketing the restaurant, and negotiating with suppliers.