Print

News/Culture >> Browse Articles >> Restaurateurs / Entrepreneurs

+5

Should I Franchise My Restaurant?

Should I Franchise My Restaurant?

For restaurateurs who want to create a food empire, turning to franchising may be the best option. Find out if your restaurant would make a good candidate.

Mark C. Siebert | Entrepreneur Magazine

Do you think you have a restaurant that could be the next McDonald’s? Ever wonder if the Colonel knew something you don’t? Maybe you, too, should consider franchising.

According to a recent study by PricewaterhouseCoopers, more than 760,000 franchised businesses generated a total economic output of over $1.53 trillion and generated jobs for 18 million Americans in 2001. This represents nearly 10 percent of the U.S. private-sector economy and 14 percent of private-sector employment. And while there are 75 identified industry groups operating within franchising, restaurants are by far the big kid on the block.

So what separates these restaurants from your restaurant, and, perhaps more important, should you be thinking of joining them?

In general, restaurant owners decide to franchise for one of three reasons: lack of money, people or time.

When it comes to growth, the big barrier for any restaurateur is always capital. Since the franchisee provides the initial investment in the restaurant, growth can occur at a much lower cost. As a franchisor, your investment in growth is largely limited to the development of your franchise documentation and franchise recruiting costs—a substantial reduction from the typical costs involved in opening a restaurant. And since it’s your franchisees who’ll sign the leases and commit to various service contracts, you also grow with virtually no contingent liability, greatly reducing your risk.

Another barrier facing many restaurateurs is finding and retaining good restaurant managers. With turnover rates that can exceed 100 percent per year, a restaurateur can spend months recruiting and training a manager only to see that manager leave—or worse yet, get hired away by another restaurant.

Franchising allows restaurateurs to avoid these problems by substituting a highly motivated franchisee for that restaurant manager. And since the franchisee has a stake in the unit, restaurant performance will often improve. From a management perspective, since a franchisor’s income is based on the franchisee’s gross sales—and not profitability—monitoring unit level performance becomes significantly less difficult and requires less staff.

Finally, opening additional locations takes time. You need to find a site. Negotiate the lease. Hire the architect and contractor. Obtain financing. Recruit your staff. Purchase or lease your equipment and inventory. Train your staff. The list is endless. The bottom line is, the number of restaurants you can open at any one time is limited.

But for restaurant owners with too little time, too little staff or too few resources, franchising solves your expansion problems by having the franchisees do most of the heavy lifting. Franchising not only allows restaurateurs to have financial leverage, but allows “resource leverage” as well.