Selling franchises has become not only very popular but restaurant franchises are arguably the most popular of all. Nearly half of all franchises are food and beverage establishments.
Many of us dream of owning our own restaurant. The feeling of being the boss, schmoozing with customers, standing outside and looking with admiration at the sign above the doors.
What a dream for many!
But unless you’ve already owned or managed a restaurant, the desire to own one is often mitigated by uncertainty. You’re stepping off into a new experience.
But then you realize you can be part of a franchise.
You can take advantage of their expertise, their experience and those with an established brand such as Taco Bell or McDonald’s want you to succeed just as much as you do.
7 Things You Need to Know Before Becoming a Franchise Owner
At the high-end franchises such as KFC, Taco Bell and McDonald’s are very costly.
A franchise fee of around $45,000.00 is only the tip of the iceberg.
In total, the startup expense for one of these operations may cost something over $2 million. Legitimate franchisors have just as much interest in seeing you succeed as you do. After all, it’s their name over the door.
Anyway, let’s see also other things you need to know before becoming a franchise owner.
1. You are bound by the company rules
Some franchise operators even go so far as to demand at least something like a perfect attendance record for training classes and they must “graduate” with perhaps an 80% grade on tests.
Obviously, they’re not just after that initial franchise fee. If you succeed and make money, they make money as well.
Of course, you may own a restaurant but you still are bound by the company rules and some companies even require as a part of the franchise purchase that the owner open more than one location within a given time.
Usually, the franchisee has to pay a percentage of profits to the franchisor as well.
Looked at one way, one might say you’ve just laid out a lot of time and money to work for someone else. However, most operators who can raise the funding for one or more of these hot franchises don’t work in them.
They have trained managers.
They may have an office and even a secretary to manage the behind-the-scenes operations but they don’t emulate the late Colonel Sanders who is said, used to show up at franchises, and dressed in his white suit and cussing like a drunken sailor on leave, marched into the kitchen, rolled up his sleeves and showed his workers how it should be done.
2. Franchises with successful companies don’t come cheap
Another part of start-up cost is a lease on your new shop, equipment, signage (Often these can be leased as well). At first, you’ll probably have to interview and hire employees, etc.
However, with the training they receive and the brand name over your doors, you’re ready to go.
Everything is in place now and all you have to do is rake in the profits. These are also called “turnkey” businesses since you, the proud owner now have only to “turn the key” and open the doors.
As we said, franchises with successful companies don’t come cheap.
They’re primarily for those with enough money to make a sizeable investment.
Many professionals can afford to invest in a franchise.
They have the backup money and they have more than they need to live on from their other business(s).
Usually, the owner of a franchise restaurant has to purchase all supplies through the franchise operator, so there is no possibility of shopping for prices, although most claim that with their clout they can buy cheaper than you can.
Many franchisors also require royalties on profits.
While you’re the “owner”, don’t forget, you still have franchise rules to live by. Breaking those rules can be a valid reason to revoke the franchise and that can, of course, lead to serious financial problems.
All the above may sound pretty rosy for those with adequate financial reserves. And some of these (around 16%, top $200,000. a year.) Not bad.
But many try to get into franchises on what we might call a shoestring.
No matter how much experience they have or how much work they’re willing and able to put into the business, researches show that nearly half of all restaurant franchise owners earn profits of less than $50,000 a year.
Now many competent workers can make that much or more without all the attendant responsibilities.
3. The turnover rate is so high in the restaurant industry
The owner of a franchise operation who opts for management to save the cost of a manager, not only has to interview prospective employees but oversee them, the food, the customers, the service, and in short, everything connected to the restaurant.
In other words, owning a franchise can be little more than a migraine headache for many owners — and long hours at the helm.
Although the typical owner doesn’t work at an establishment, the headache involved in worrying about a business (or sometimes several locations) can be a nightmare.
The turnover of employees in restaurants is something approaching 100% a year! In Europe, restaurant service is considered a profession and most people involved tend to remain in that profession for their lifetime.
For many reasons, restaurant and bar employees in the United States tend to consider their jobs as temporary employment and they always have an eye out for something better.
Others are going to schools and universities and the restaurant job is only a stopgap.
For you, that alone involves a great deal of paperwork.
And if you think you can sit comfortably at home watching football on the television while the money rolls in you’d better think again.
If you do that, you’re going to wake up someday to the bitter realization that in the meantime, your employees are being rude, wasting food, giving away food to friends and taking food home.
Some of the more clever employees can and do think up ways to steal money. All these considerations and more may be gnawing away at what are supposed to be your profits.
4. Franchises are nothing new
One of the founding fathers of the United States of America, Benjamin Franklin, among his many creations, sold a franchise for a printing business back in 1731.
Like legitimate franchisors today, Mr. Franklin’s franchises came with training to give his franchisors every opportunity to succeed.
Ray Kroc is often considered the father of the modern franchise with his McDonald’s concept. This has led to the countless franchises being offered today.
Almost every café that stays open for six months or more is likely to begin offering franchises to investors. There are hundreds of franchises. Some of these are or can be hugely successful.
Others just hang on and still, others simply die.
The franchise fee can be the least costly part of opening a restaurant.
But while owning any franchise restaurant is no guarantee of high profits, there is an even darker side to this business.
5. Innocent and Inexperienced Franchisor is almost certain to fail
As we stated, once a restaurant owner, be it a fairly large restaurant or a small café or specialty house for tacos, etc. the owner may well begin thinking of offering franchises to investors.
Showing off a business model, combined with a low franchise fee, many hopeful operators jump in.
They’ve been excited at seeing the success of so many famous restaurants but the cost of starting up a legitimate restaurant for example not only involves a high franchise fee, but the potential franchisee has to show a hefty net worth and liquid cash that’s more than many hopeful operators have ever seen.
Suddenly, some dinner cook with limited funds sees a golden opportunity. A fully-equipped restaurant, a low franchise fee and voilà, he or she is a restaurateur.
However, this can be a pit that many don’t see until it’s too late.
I can’t mention names here, but before you dive into any franchise, look out for rocks just beneath the waves.
These restaurateurs have found a new profession, that of being con men with a profitable niche. This along with the relative inexpensive franchise fee and few if any requirements for liquidity to get the franchisor off to a good future, he or she is almost bound to fail
The franchisor may have a restaurant as a model, often out of state.
All you have to go on is cooked books, colorful brochures, and an attractive website. Next, the franchisor sets up a small restaurant, often in a poor location, and then offers the franchise for perhaps $15,000 payable in advance, for the opportunity to take over this fully-equipped restaurant.
The only other thing the franchisor must do is sign a lease agreement with the property owner.
If the operator should manage to succeed, that’s great.
But with little or no training, a poor location, and layout, the innocent and inexperienced franchisor is almost certain to fail.
6. Do not allow yourself to be blinded to reality
Many in this category, hoping for immediate success, lack the liquidity to carry them over the first months and some have to lock the doors after only as little as a month or two.
With this cloud hanging over their heads, some are even forced into declaring bankruptcy.
Sure, he was thought he was being careful!
He read the glowing brochures, he studied the falsified spreadsheets showing the immense profits to be made and listened to a silver-tongued seller.
In his desire to have this, he’s blinded to reality.
He doesn’t consult a contract attorney. He doesn’t spend a lot of time checking up on the company’s history. He knows he can’t go wrong.
When this occurs, the lessor is likely to sue you, the restaurateur for breaking your lease agreement and the franchisor may well have hidden in the contract a little clause stating that if the franchisee fails to honor the contract, the seller of the franchise too may sue the restaurant owner and in addition turn around and sell the very same franchise to the next hopeful restaurateur.
Even a legitimate but inexperienced franchisor may set you up to fail by not being able to offer adequate training or oversight to ensure that you follow the recipes, menus, and rules, etc.
In many cases, the franchisor is simply not in a position to do that.
The new franchisee may have a few ideas of his own. A little change here, a little change there, and pretty soon, this location is not at all like the original.
7. The Bottom Line
The bottom line for any potential franchisee is to do some serious research on the company. It isn’t enough just to listen to their great story of success and look over their “statistics”.
You should dig deeper than that.
Getting any restaurant up and running costs considerable money. You have to husband that money very carefully or it can all go up in smoke.
If there are other locations close enough to visit, talk to the managers and/or owners. There are review sites such as Yelp and the BBB. And lastly, if offered a contract, make sure to have a contract attorney explain exactly everything you need to know in language you can understand.
Remember, contracts often have a great deal of “fine print” that a layman is unlikely to understand — there’s a reason for that: usually, it’s written that way in the hope that you won’t bother to read it.
So the old saying, caveat emptor has never had more importance perhaps than in the purchase of a franchise. — franchises that have little chance of success — except for the sellers of these franchises
This growing problem has even reached the United States Senate.
So beware and never step into anything that requires investment before checking it out thoroughly.