blog

date

October 30, 2024

blog

reading time

6 min

How Do you Open a Franchise Restaurant in 6 Simple Steps - 2024 Guide

What Is a Franchise Restaurant?

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Franchising is a strategy for business expansion and industry market penetration and for restaurant franchises particularly, it is a business model that can continuously earn the business money without the large upfront investments and personal management by restaurant owners. Food franchises are the most common type of franchise, and with a long record of success especially with fast food restaurant businesses, it is an proven mutual beneficial for both the Franchisor and Franchisee.

A food franchise is essentially where the owners of a restaurant grant third party operators the rights to utilize the restaurant's name, branding, and business model in exchange for a percentage of their revenue.

For restaurants, that can look like selling the same menu (occasionally with regional differences), market with same advertisements, and using the same branding so that consumers cannot differentiate between a restaurant owned by the business and a franchised branch of the same restaurant.

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Franchisor vs Franchisee

Franchisor: Owner of the whole restaurant business, trademarks, and products. The franchisor gives franchise opportunities by providing franchisee a license to operate their own branch of the business.

Franchisee: A business owner who opens up one or multiple locations of an already established restaurant business. A predetermined initial investment and standard set of rules apply.

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Illustration of a businessperson standing at the center of a network of five connected stores labeled "Store," representing franchise management.

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Pros and Cons of a Franchise?

To a Franchisor:

Pros to restaurant franchising:

1. Rapid expansion with little capital - Allows a franchising company to grow exponentially because franchisees invest in their locations

2. Local market knowledge - Franchisees often do thorough market research before deciding on restaurant locations to boost success rate.

3. Increased brand awareness - Potential to increase customer base and build a stronger brand and reputation

4. Franchise Fees and Royalties - Franchisors can earn significant revenue through initial franchise startup fees and ongoing royalties, and sometimes through supply chain agreements

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Cons to restaurant franchising:

1. Loss of control over operations - Although franchisors provide franchisees a rulebook, they have limited control over day to day operations at each location which might lead to inconsistant guest experiences

2. Brand reputation risk - Poor management at one franchise location can harm the entire brand as a whole, affecting the entire restaurant corporate entity

3. Quality assurance challenges - Ensuring the quality is consistant across all restaurants is challenging. Standardization is key.

4. Initial training and support costs - Franchisors often will provide staff training and support to franchisees which might be time consuming and costly.

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To a Franchisee:

Pros to restaurant franchising:

1. Building on an established brand and business model - starting from an already built business can significantly reduce startup risks and already have a large customer base

2. Training and support provided - Franchisors usually provide comprehensive training and support to help franchisees succeed

3. Reduced risk of failure - Franchises statistically have higher success rates than independent restaurants due to their established business model, brand recognition, and ongoing support systems

4. Easier financing options - Financial institutions often are more willing to finance franchises due to their proven track records set by other successful franchise restaurants or the brand itself

5. Bulk purchasing power - Restaurant franchisees often have access to bulk purchasing prices and deals for ingredients, supplies, and equipment which can save a significant sum of money in the long run

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Cons to restaurant franchising:

1. High initial start up costs and fees - Franchisees must pay an initial upfront fee plus ongoing royalties which might be a high barrier to entry for prospective franchisees

2. Limited operational control - Franchisees must follow the franchisor's guidelines and cannot make significant changes which limits their control and creativity

3. Ongoing royalty fees - With a constant percentage of monthly sales going back to the franchisor, it will prove to be a burden during slower periods

4. Brand dependent - The franchisee's success is largely tied to the entire brand's success so if it encounters an issue, it can directly affect the franchisee's business

5. Risk of Market Saturation - Potential franchisees might open new franchises nearby which can potentially lead to market saturation

6. Limited growth potential - Franchisees have limited flexibility to grow outside the franchise model which can be restrictive especially if their goal is to innovate or expand

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How Much Does It Cost to Open a Franchise?

The cost to open a franchise will differ with each type of restaurant, and can range from $200,000 to over $2 million and initial franchising fees from $2000 to $50,000+.

Costs can include:

1. Initial franchise fee that grants you the legal right to operate a separate restaurant under the franchise's brand and use their business model ($10,000 - $50,000+)

2. Startup costs including lease payments, construction, equipment, inventory, marketing, and legal fees ($100,000+)

3. Liquid capital requirements to cover initial opening costs and any potential risks (depending on the franchisor)

4. Ongoing costs and royalties based on sales and marketing contributions (Royalty Fees: Usually 4-8% of gross sales, Marketing Fees: Typically 2-4% of gross sales)

Factors that contribute to the price of opening a franchise restaurant include the location, restaurant size, and the franchise brand reputation.

High costs can be because your franchise restaurant is a well known brand, located in a busy high traffic area, occupying a large floor space which results in a higher staff count, more equipment needs, and a more expensive lease.

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A Step-by-Step Guide to Open a Franchise Restaurant as a Franchisee

To open a franchise restaurant, you can consider the following steps:

1. Choose a franchise business

Selecting the right restaurant to franchise is of the utmost importance because a profitable business relies on a successful business with a solid foundation and launch plan.

With popular franchise restaurants like McDonalds, Tim Hortons, and Taco Bell, you can expect high success rates in terms of revenue and customer base, but also a high startup costs and royalty percentages as a franchise owner. The franchising process is reliable and standardized and the future success of your franchised restaurant is practically guaranteed.

On the other hand, with smaller popular restaurants that are looking to start their franchise model with their current restaurant business, the entry fee and minimum requirements might be lower but the standard operating procedures might still be solidifying with continued experience and franchise growth.

2. Create a business plan

Creating a business plan should always happen before opening a restaurant, but in the case of a franchise, there are already many aspects that are set in place from the current business model. Particularly, financial planning and marketing strategies should still be proposed, but must be in line with the franchise operations manual.

3. Write a franchise disclosure document (FDD)

The franchisor will provide you with an FDD that details their rules, fees, and your responsibilities as a franchisee. This will include al financial commitments such as initial fees, ongoing royalties, and potential extra costs

4. Secure financing

Franchisors often offer financial aid to franchisees. Franchisees can consider SBA loans, which are a common financing option for franchises and small businesses.

Having liquid assets is crucial and a requirement for most franchise restaurant businesses to help with startup costs and any sudden instabilities.

MenuSifu's EZCapital is a smart solution for small business financing. They provide a safe, fast, and flexible loans for small businesses, especially restaurants. 4 main solutions that EZ Capital provides are SPA loans, term loans, business line of credit, and merchant cash advance.

SPA Loans are lower interest, lower monthly payment loans for small businesses.

Term Loans are longer terms loans with fast funding.

Business Line of Credit are loans where you draw funds as needed and only pay for funds used.

Merchant Cash Advance are loans for people with bad credit and no collateral required.

Apply Here for these easy financing plans.

5. Sign a franchise agreement

Signing a legal contract protects both parties and describes the scope of the franchise. There are many franchise laws that franchisees might not fully understand or are even aware of, so having a franchise broker to explain all the requirements is valuable.

6. Set up your new franchise restaurant

Finding a suitable location for your future restaurant is important, and a remaining within the franchise regulations is necessary. For example, some franchisors require your restaurant to be in proximity to certain businesses or customer demographics.

Attending training and pre opening tasks is for your own informational purposes and it is a essential step to opening and successfully managing your restaurant.

With the simple All in One Solution by MenuSifu, including POS systems, online order and delivery app partnerships, marketing and loyalty programs, etc. setting up your restaurant franchise and getting your staff equipped to run it will be made straightforward and manageable.

Focusing on strict standardization and consistency for the menu, marketing, and branding for customer loyalty and satisfaction is vital to be in line with the franchisor's regulations and to build a franchise restaurant indistinguishable from the ones opened by the franchisor.

Finally, seek franchisor support whenever needed because they will always provide necessary guidance to help improve overall performance and brand perception.

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