How To Buy A Restaurant Franchise
What You Need To Know About Franchising
For many would be restaurateurs, a franchise presents the perfect opportunity to open their own restaurant. There are a lot of benefits of restaurant franchises, such as instant name recognition and built-in marketing. However, buying a restaurant franchise is not always as easy (or as cheap) as one might think. Here is a step-by-step guide to finding and buying a restaurant franchise.
Understand What Defines a Restaurant as a Franchise
Not all restaurant chains are franchises.
For example, Starbucks is one of the most recognized chains in the world. But it is not a franchise. It is corporate owned and operated. Applebee’s is a restaurant franchise. Owners, called franchisees, purchase the rights to open and operate an Applebee’s.
As part of the deal, the franchisee pays royalties to the head office, called a Franchisor. In return, the franchisor (in this case IHOP is the owner of Applebee’s) takes care of marketing, menu design and problem-solving for all its franchisees.
Consider Which Type of Restaurant Franchise is Best for Your Local Market
Restaurant franchises include fast food (think McDonald's, Taco Bell and KFC) and fast casual (think Applebees, Panera Bread, Chilis Grill & Bar) as well as smaller chains, like Cold Stone Creamery. Before pursuing any restaurant franchise, first, find out if it will fill a market niche.
This means doing a study of the local competition as well as a profile of the local economy.
For example, if the area already has several Mexican restaurants, investing in a franchise of On The Border Mexican Grill & Cantina may not be the best idea. It could also be deemed too expensive compared to the average household income. On the other hand, a market analysis may show that it will be welcomed with open arms by the locals.
Examine Your Budget and Restaurant Qualifications
Restaurant franchises are expensive ventures. Cost more than anything else will limit your choices when it comes to buying a restaurant franchise. Experience is another important factor in opening a restaurant franchise. Parent companies (franchisors) don’t hand out the keys to a franchise unit to just anyone. Consider the following:
- Applebee’s requires a minimum of $1.5 million in net worth and $500,000 in liquid assets.
- Brinker International, the parent company of On the Border Mexican Grill & Cantina, Chilis, and Romano’s Macaroni Grill requires a net worth $500,000 and a minimum of five years experience in casual dining.
- Panera Bread requires a net worth of $7.5 million and liquid assets of $3 million. Plus experience in real estate and managing multi-unit restaurants.
Many restaurant chains list franchise requirements right on their website. www.foodfranchise.com is an online company that also lists current franchise opportunities for sale.
Create a Restaurant Business Plan
A restaurant business plan, which you need for bank or investor financing, will help fill in any gaps in your restaurant franchise concept. It will force you to examine things like the population base of an area, profiles of the local economy and choices of location.
As part of writing a restaurant business plan for a franchise, you will need to investigate the franchise’s history and current financial status. This is especially important if you are investing in a new restaurant franchise.
Go over a Restaurant Franchise Contract With a Lawyer
Once you get through the initial process of being approved for a restaurant franchise and secure your financing, you will sign a lengthy contract with the franchisor. Review the contract with a fine tooth comb before signing on the dotted line. Most importantly, know what can happen if the franchise fails.
Are you locked into paying the franchisor a set amount of money each month or year, regardless of success? Who owns the equipment? Will you get any of your investment money back? Don’t assume that because it is a chain it will be an instant success.
It still takes hard work and patience.
Buying a restaurant franchise offers many benefits. However, it does require significant capital and comes with many legal strings. For those looking for a less costly investment and more creative freedom, opening up an independent restaurant, starting a food truck or even trying out self-catering are also avenues into the food industry.