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BFS Capital Blog

12 Things to Consider Before Franchising Your Restaurant

October 12, 2015

As the saying goes, “imitation is the sincerest form of flattery”. If you’re a restaurant franchisor with an idea that is good enough to be imitated, then franchisees will line up to pay for the right to use your franchise’s good name.

This is one of the reasons why the world of franchising has become so popular. If you have a great business idea for a restaurant franchise but you lack the time and capital to expand it, then you can become a franchisor and get people to pay you to make your name even bigger. And in return, franchisees get to start their own small business.

Did you know that 10 percent of the US private sector economy and 14 percent of private sector employment comes from franchises? A new franchise opens up every seven minutes in this country, and franchises account for over $1 trillion in sales every year.

This all sounds ideal, right? Easy there, Ray Kroc. There are a lot of things to think about before you start a restaurant franchise. Here are 12 tips on restaurant franchising for potential franchisors to consider.

You Won’t Be Running a Restaurant Like You Used To

So you liked going in every day and making new recipes? You enjoyed touching tables and getting to know your customers? Those days are over. You are now a business person running a restaurant franchise operation. While you may still roll into your kitchen or circulate the dining room, the bulk of your time now is going to be spent recruiting, starting and managing your new locations. And if you’re not a business person, this might not be for you.

Management Needs to be Top-Notch

Consequently, this means the people you leave to man the fort need to be as good at it – if not better – than you. That means having a general manager who is committed to the restaurant, an innovative chef, and anybody else who will do the restaurant-related functions that you used to. Because you have a new job now. See the first tip.

You’ll Need Capital to Get Started

Ironically, a venture you may be going into to avoid startup costs may have a high startup cost. You may need at least $100,000 to get your restaurant franchise started. The bulk of these costs will be for your registration and application process as these will require legal advice, which rarely comes cheap. A federal filing can run up to $20,000, state fees are another few thousand, and accountants fees (franchised businesses get audited every year) are up to $15,000. That’s your bare minimum, and as a small business owner you know nothing ever costs less that you think.

You’ll Probably Need to Hire New Employees

Much as you’d love to get double-platinum frequent flier status going around the country to set up franchises, you’re needed at home too. Which means at the very least, you’ll probably have to hire at least one trainer to do that job for you. After enough franchises open up, you’ll likely need a franchise liaison, who can handle their concerns and issues as they arise. If these aren’t things you can afford, franchising your restaurant may not be for you.

You’ll Need to Fill Out an FDD, and It Better Be Perfect

Somehow, the declaration of independence was only 1458 words, but everything the federal government put together after that is at least 40 pages. The Franchise Disclosure Document (FDD) is no different. This is the form the feds require you to submit where you tell them every single thing about your business: from the fees you’ll charge franchisees to your operating manual, to the experience of your management team, to your favorite episode of Family Ties. And if it’s not all perfect, guess what? They’ll send it back and make you do it again.

There Are a Ton of Rules You’ll Need to Lay Out

Before you sit down to that beast of a document that is the FDD, you’re going to need to have everything mapped out. Not just the areas where you plan to expand into, but how big each territory will be. Other things to include, but by no means are limited to: how long will your training be, and who will be performing it; whether franchisees will need to buy equipment from your company; how the business will be marketed; the terms of your franchise agreement; royalties; how you will protect proprietary information; and a new organizational structure that allows for someone for franchisees to report to.

Regulations Change More Than You Think

Even from town to town in your home state, things like building codes, permitting agencies, and employee taxes can change drastically – not to mention from state to state. California and Illinois are the two most notorious states for franchise regulation. But even if you’re not planning to expand there, do more homework than you think you need to on the regulations where you are expanding. Better be safe than sorry.

You’ll Probably Need to Hire a Franchise Consultant

Yes. That’s an actual job, and a pretty lucrative one too. Great restaurant owners aren’t always great business people or franchisors, and with so much to consider you might be best served to get some outside help. These consultants are paid to help you put together your FDD, research regulations in other states. Screen out applicants, and generally do all the stuff that’s been giving you insomnia since you thought up this crazy idea.

Your Idea Might Not Work Everywhere

Just because people in your town think the concept of deep-fried butter is the greatest thing in history and line up around the block to get it, doesn’t mean people everywhere will do so. Some cities may already be saturated with deep-fried butter vendors. Others might find the idea revolting and a serious challenge to their collective beach bodies. Popularity is never universal, so just like you research regulations, be sure to research the culture and competitors wherever you’re planning to set up shop.

Everything About Your Business Needs to be Duplicable

Everything. From the layout to the food to the people who work there. If you run a “chef-driven” restaurant, it’s going to be hard to drive that chef to six other locations. Or if your menu is all “locally sourced” and seasonal, that means it will be physically impossible to duplicate your menu in other regions. The goal of a franchise is to give customers an identical experience in each one, and if your business has some underlying concepts that just can’t be duplicated, then restaurant franchising may not be for you.

You Need to Make Your Franchisees Help with Marketing

You might be the one running national (or regional) ad campaigns. But in your franchise agreement, you should consider laying out a set percentage of revenues that the franchisee must spend on marketing. Ultimately, it is their business too. Ten to fifteen percent is not uncommon as a marketing spend in franchise agreements.

Not Everyone Who Wants a Franchise Should Get One

Nothing strokes your ego faster than someone coming into your restaurant and saying “OMG! You make the best food in history. I’m here every day and I love your whole menu and I want to be just like you. Can I be a franchisee?” Be very careful in these situations. Business is business, and it takes a lot more than passionate devotion to make a franchise work. Screen your applicants very carefully, and make sure their main objective is to make money while following the franchise’s guidelines. Sure, you want them to be as excited about your business as you are. But, if a franchisee fails, then it hurts your restaurant franchise’s brand name and may end up doing more harm than good.

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