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Restaurant

The Beginner's Guide to Franchise Restaurants

The Beginner's Guide to Franchise Restaurants

Running a restaurant can be incredibly fulfilling. You can make a living while pursuing your passion and work with people who end up feeling like family. Starting a restaurant from scratch, however, can be quite challenging. In order to be within the  20% of restaurants that make it past their fifth year in business, you need to be well versed in cooking, managing people and inventory, marketing and much more. Running a franchise restaurant reduces many of these hurdles because it involves buying a pre-made concept with brand name recognition and support from a corporate office. All that’s left to do is deliver a quality product consistently and manage employees.

If you want to know how to buy a restaurant from a franchisor, this guide is for you. You’ll learn:

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What is a franchise restaurant?

A franchise restaurant is a turnkey restaurant concept that you can purchase from a franchisor. In exchange for an initial investment and ongoing royalty payments, franchisees have access to the franchisor’s proprietary processes, software and hardware – like a restaurant POS, training, recipes, supplier relationships, equipment, real estate expertise, marketing and more to set them up for success.

Whether you’re looking for a large or small restaurant for sale, there are plenty of franchises to choose from. Many popular quick service chain restaurants, like McDonald’s, Subway, and Tim Hortons, operate as franchises. Full service restaurants, like Pizza Hut and Denny’s, are also available for franchise. 

 

Pros and cons of investing in a franchise restaurant

Not sure if running a franchise restaurant is right for you? Take these pros and cons into consideration before making a decision. 

Pros of investing in a franchise restaurant

There are many great reasons to purchase a franchise restaurant.

  • Buying a franchise is easier than starting from scratch. You don’t have to come up with the concept, recipes or branding, so you can just focus on operations.
  • Franchises come with resources. As a franchisee you’ll have access to software, systems, recipes, suppliers, marketing and much more from corporate.
  • Franchise restaurants come with a built-in customer base thanks to brand recognition. Customers are already familiar with the concept and dishes that most chains serve. For example, the food at a Subway near you will be the same as, or very similar to, the food at a Subway in a city across the country or across the globe. 
  • As a franchise owner, you’ll have access to a support network. You’ll have help from the corporate office and other franchisees who you can network with.
  • Franchisees have access to marketing resources. Franchisors provide advertising and promotional help in exchange for royalties and/or marketing fees.
  • Quality control is built into the franchise model. You’ll have access to processes, recipes, suppliers and equipment that ensures consistent quality from franchise to franchise.
  • Because you’re buying a turnkey concept, you’ll likely break even faster with a franchise than if you had opened up your own restaurant.
  • Location is critical to a restaurant’s success. Many franchisors provide connections to real estate expertise
  • While many franchises require you to have a certain amount of unborrowed assets available to become a franchisee, it’s easier to secure loans for a proven business concept when you do need cash, than for a new restaurant.
  • Thanks to collective buying power from other franchisees, you’ll be able to access cheaper supplies than if you had opened an independently-run restaurant.

Cons of investing in a franchise restaurant

These are some of the downsides of owning a franchise you should be aware of before investing in one.

  • Most franchises require you to invest a lot up front. While buying a franchise can cost anywhere from $50,000 to $6 million, most startup investments for franchise restaurants start in the $200,000 to $300,000 range.
  • You might not be allowed to borrow funds to cover these startup costs. Some franchisors require unborrowed funds and a minimum net worth for approval.
  • After paying startup costs, you’ll have to pay royalties to legally license the restaurant’s brand and proprietary systems, which means you’ll be giving away a portion of your profits forever.
  • Buying a franchise means giving up creative control. You have to serve the food the corporate office tells you to serve and run your restaurant according to their rules.
  • Even though you technically own your own business, you’ll always be held accountable to the franchisor and will need to ensure you meet their standards, or else face consequences. 

 

How much does it cost to invest in a franchise restaurant?

Buying a franchise isn’t cheap, but it gives you the framework for a turnkey restaurant that’s already proven to be successful. Here’s what you need to know about how to buy a restaurant from a franchisor, including a breakdown of the startup and ongoing costs associated with investing in a franchise restaurant.

Pro tip: Check out our starting a food business checklist for resources for opening your restaurant.

Franchise restaurant startup costs

There’s a lot that goes into the investment you’ll have to make up front to become a franchisee of your favorite restaurant. You’ll need to pay a startup investment that includes a franchise fee. While some startup investment quotes include real estate costs, many do not. Most franchises will also ask you to have a minimum net worth and liquid assets available to ensure you can cover unexpected expenses.

Total investment to startup

What it costs: Total franchise restaurant startup costs range anywhere from $50,000 to $6,000,000. While you can find franchises on the lower end of the spectrum, most popular chains start in the $200,000 to $300,000 range.

These are the startup costs from well-known franchise restaurants:

What it gets you: Total startup costs give you access to use the brand, management systems, training and support in marketing, equipment, inventory, marketing, staffing, support for your restaurant’s grand opening and more—basically everything you need to get the business off the ground.

Franchise fee

What it costs: A franchise fee is typically included in the total investment startup quote the franchisor provides.

Here’s a look at the franchise fee that popular restaurants charge:

What it gets you: The franchise fee is a one-time fee for access to the restaurant’s name, training, website, software access and startup inventory. 

Real estate costs

What it costs: Real estate costs vary greatly because of several factors. First, space in urban areas tends to be more expensive than space in rural areas. Second, it will depend on whether you’re building a new restaurant or buying a pre-existing location from another franchisee. Third, real estate prices will depend on whether you’re looking to invest in a large or small restaurant for sale.

What it gets you: Real estate costs can include anything from paying the lease for a turnkey commercial space to buying a commercial space and renovating it. 

Financing your franchise restaurant

Franchises have hefty startup costs. Many of them require you to have a certain net worth and a minimum in liquid assets to ensure you can sustain the business until profits kick in. Many franchisors require that these funds be unborrowed.

Here are some net worth and liquid asset requirements from popular franchisors.

Liquid assets: Cash that you can quickly access.

Net worth: The total value of your personal wealth, including cash and assets, minus any debts.

Ongoing fees for franchise restaurants

After you pay startup costs, you’ll owe ongoing fees to the franchisor to be able to keep using their license and resources. All franchisors charge royalties, and some also charge a marketing fee on top of that.

Royalties 

What it costs: Franchise restaurants typically collect between 4% and 8% of your gross revenue each month. 

Here’s a look at what popular chains ask for:

What it gets you: These royalties allow you to keep licensing the restaurant’s brand and maintain access to corporate resources.

Marketing fee

What it costs: Some franchisors also collect a separate marketing fee of between 2% and 5%. 

This is what some franchises charge: 

What it gets you: This fee is an investment into ongoing marketing support in the form of anything from promotional materials and TV commercials to mailed coupons and social media ads.

 

The bottom line: Franchise restaurants can be a great business opportunity

If you want to enjoy the lifestyle and revenue that owning a restaurant gives you, without having to do the heavy lifting of coming up with a concept, creating recipes, or focusing on marketing, investing in a franchise could be a great option for you.

Lightspeed’s all-in-one cloud-based point of sale system can make running a franchise even easier. Talk to us to learn more.

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