What is a Franchise?
A franchise is when a business is technically owned by a person (the franchisee) but is overseen by a larger entity (the franchisor). From McDonald’s to Waffle House and everything in between, many major restaurant chains offer people the opportunity to jumpstart their entrepreneurial goals by opening up a restaurant under the name of a major franchisor.
In fact, about 82% of McDonald’s restaurants are owned by a franchisee, not by McDonald’s itself. The graph below goes into more detail regarding the different types of ownership for McDonald’s restaurants.
Restaurants that allow people to Franchise
- Firehouse Subs
- Dunkin Donuts
- Jimmy John’s
- Little Caesars
- Taco Bell
- Dairy Queen
- Five Guys
These are a just a handful of the total amount of restaurants that offer franchise opportunities.
Why would you buy a franchise when you could open your restaurant?
Many people may be wondering about the benefits that come with opening a franchise instead of starting your own business. Well, there is a number of benefits that explain why people would go through so many hurdles and spend so much money opening their own franchise:
- The franchisor lays the groundwork for making the business successful. This is what makes franchising so attractive to people who don’t have much experience in the restaurant industry. By opening a restaurant that is already well-known and has a strong customer base, the franchisee has the opportunity to be exposed to a business model that has proved to be successful for a number of different locations. Thus making the overall investment into opening the restaurant much safer for the franchisee.
- The franchisor provides owners with a marketing plan for promoting their new business in their area, as well as having them benefit from whatever national marketing campaigns they may be promoting at that time. For example, if you are a McDonald’s franchisee while they’re running a national ad campaign to promote a new burger that includes commercials during the SuperBowl, billboards, subway ads, etc. then you’ll be directly benefiting from all of this extra exposure.
- The franchisee is given all the supplies and equipment they need to successfully run the location. This is because the franchisor wants to ensure their product’s quality is consistent throughout all of their locations, which leads them to supply ovens, decor, POS equipment, etc. They may even have a system in place to help you with creating and enforcing employee schedules, but if they don’t, consider the benefits and features that come with using Deputy. Feel free to click on the button below to start your free trial.
- Financing is also easier to obtain when you’re a franchisee rather than a sole business owner. That’s because opening a franchise is typically seen as a much safer investment in the eyes of a bank because it is a well-known brand that has a better chance of being successful than a typical mom & pop restaurant.
- Last but not least, a franchise typically has a higher rate of success than an independently owned restaurant. Which makes it a safer investment for everyone involved. Think of it like this, say you want to open a Korean-Mexican fusion restaurant. While the idea of this restaurant may sound like a great idea to you and your close friends, the general public in the area that you’re opening up in may not like it at all and think that it’s a terrible idea to combine those two types of restaurants. On the other hand, if you want to open up a Wendy’s, you and your investors can feel much more comfortable opening this up because it is a well-recognized brand that has proved to be successful at numerous locations all over the world.
Disadvantages of opening a restaurant franchise?
With all of that said, it should be stated that opening a franchise isn’t always good news. There are a number of disadvantages that you should be aware of before you make the investment into owning one. Here are a couple that you should keep in mind:
- The biggest disadvantage is that it isn’t a democracy, it’s a dictatorship. What I mean by that is the franchisor controls many of your business decisions that aren’t up for negotiation and that many franchisees would consider dissatisfying. Some examples of decisions that can be controlled by the franchisor are your hours of operation, business location, pricing for certain products, layout & design of the store, uniforms for employees, use of certain supplied products, etc.
- The recurring costs associated with opening a franchise is also something that you should keep in mind. Although you may be aware of the franchise fee, you should also be aware that a percentage of your sales will be going back to the franchisor, you have to pay for royalties because you’re paying to use their likeness, you may also have to pay for costs associated with marketing & advertising.
- Lastly, you have to keep costs in mind when considering making the investment in certain brands. That’s because opening one restaurant brand can be considerably more expensive than opening another. For example, opening a McDonald’s would be much more expensive than opening a Subway, but you also have to account that the average McDonald’s would garner much more sales than a Subway. To get a better sense of the costs associated with different brands and how those costs correlate with sales, take a look at the graph below.
What do major restaurant companies get out of letting people finance?
Now that you’re better aware of the advantages & disadvantages associated with opening a restaurant franchise, let’s take a look at why a multi-billion dollar global corporation would want you to own one of their locations.
- The first and most blatant benefit for these businesses is that they don’t have to spend all of their own money when opening a new location, they can simply use a good portion of someone else’s money. While the franchisor still has to pay a certain amount to create & keep-up the franchise system, they save a substantial amount of money whenever they open a new location.
- The franchisors also benefit from having multiple revenue streams that are built from having multiple locations as well as receiving royalties that are paid on a monthly basis and are a percentage of your gross sales.
- Another benefit that often goes unnoticed is that the franchise is run by an owner that has a large vested interest in the growth of the business versus a management employee.
To give you a better idea of just how much franchising works to strengthen the revenue of these corporations, take a look at the graph below that better details McDonald’s profit margins from their franchised stores.
Finding the Best Type of Franchise for you
Now that you’re better acquainted with the numerous advantages & disadvantages that are associated with being a franchisee, along with why franchisors choose to franchise in the first place, let’s take a look at the choices that are available to those that are considering opening up their own franchise.
The three most common choices that are available to those looking to open a franchise is the conventional franchise, developmental license agreement, and the affiliate franchise option. Keep on reading as we run through each so you can better determine which would be the best fit for you and your goals.
The conventional franchise is the most well-known of the three and account for the majority of all franchised locations. Under this method, the franchisor either owns the land and building or secures a lease for the business, while the franchisee pays for things like equipment, decoration, tables, chairs, etc. If you want to get a conventional franchise, then you’ll have to submit an application as well as funding in hopes of getting them approved. If it goes through, then the franchisor will walk you through how to set up your business as well as how it should look & feel.
It’s important to note that you won’t have much control over what goes on with your business like the food you serve, types of uniforms your employees use, etc. If you’re looking for a straightforward restaurant business plan where you don’t have to worry about many nuisances or technicalities, then a conventional franchise would be a perfect fit for you and your needs.
Developmental License Agreement
Under a developmental license agreement, those that own the restaurant (licensees) pay for the entire business project which includes all the money used in the real estate. In this situation, the franchisor doesn’t invest any of their own money during the development of the business and makes a profit through royalties based on the percent of sales, as well as initial fees such as the grant needed to open the restaurant.
The affiliate franchising option is the least popular of the three and consists of the franchisor receiving a royalty that’s based on the percentage of sales and records its portion of net results in equity of earnings of unconsolidated affiliates. This method is most popular on the internet where sites promote goods and services for other companies through the use of affiliate marketing programs. It is very common for these third-party affiliate programs to serve as middlemen between the companies and the sellers in exchange for a fee.
Fees associated with Opening a Franchise
Don’t think that going the franchise route means that the franchisor will be handling the majority of your costs, you’re still responsible for covering a number of costs with the opening of your franchise as well as costs associated with opening a franchise specifically. Here are a couple of these costs:
- Franchise Fee: Most franchisors charge their franchisees an upfront fee before they own their franchise, this fee can be paid either up-front or in installments. Although it varies a lot by company, it can go up to a hundred thousand dollars and is not refundable after the franchisee is accepted.
- Royalty and advertising fees: A number of franchisors also charge their franchisees a recurring royalty fee as well as marketing & advertising fees. This also varies widely and should be considered when making the decision to franchise or not.
Financing Options for your Franchise
Now that you’re sold on the idea of running your own franchise, let’s go over some strategies you should consider when figuring out how you’re going to pay for all of the fees that come with it. Most people don’t have $2 million sitting around, so there’s nothing wrong with looking for some help.
1. Franchisor Financing
The first avenue you should always consider is to see if you franchisor has any financing solutions that can help you get what you need. Certain franchisors like Marco’s Pizza, offer plans that can help you pay for your location, equipment, supplies, etc. These financing options are typically offered in conjunction with specific lenders or by offering the capital directly to the individual.
This avenue benefits the franchisee because they’ll be working with a group that thoroughly understands your business and has a strong idea of when you’ll start bringing in profits along with the road bumps you’ll encounter on the way.
2. Small Business Loans
Don’t forget that although your business may be part of a larger corporation, it is still a small business and you should scour the resources that are provided to those in your situation. One of which are small business loans that are offered in conjunction with the small business association and are specifically designed for businesses just like yours. Some of the benefits that come with getting a small business loan are that lenders offer more loans with lower interest rates and longer repayment terms, this is because the lenders are incentivized by the small business administration because they guarantee a portion of the loan amount. With all of that said, keep in mind it can be difficult qualifying for one and the applications can take a long time before you figure out if you’re approved or not.
3. Commercial Bank Loan
This route is more traditional and involves going to a bank to receive a typical term loan. This is what most people first think of when they consider getting a loan and is very similar to popular loans like home mortgages, student loans, etc. Under this method, the bank or other alternative lender offers you a lump sum of cash upfront for you to use however you need. You then repay the full loan amount, plus interest, in monthly installments over a certain period of time. If you choose to pursue a commercial bank loan, you should make sure to build a thorough business plan that details exactly how you’re planning on building a successful franchise so that you have a better chance of being approved.
Just keep in mind that commercial bank loans rely heavily on your credit score and financial history so it may not be a good decision if you don’t have the best record.
Becoming a franchisee is an exciting opportunity to become part of the history of a storied franchise that can be very financially beneficial on your part as long as you understand what you’re doing and play your cards right. Starting a business, particularly a restaurant, can be an intimidating journey for many people. That’s why you should go over all of your options and conduct your own research so that you have the utmost confidence in whichever path you choose.
Now that you’re all filled in on how to begin your own franchise, you’ll need a way to easily build and send your employee schedules as well as keeping track of their time & attendance. Click on the button below to book a demo and get filled in on how Deputy can better your business.
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