Franchising is a step not to take lightly. Our guide explains the process.
Your restaurant is running great: people love the food and you’re making a tidy profit. An out-of-towner says she wishes your restaurant was nearer her. Is it time to consider franchising?
Franchising allows you to have someone else – the franchisee – open your restaurant in another area. The name, the food and the environment are the same, but the franchisee owns the business and pays you a monthly royalty for use of your brand. In the long run, it’s an easier and less expensive way to expand your restaurant business, but it takes a lot of work and consideration beforehand. Our guide takes you through the process and tells you what to expect.
Pros & Cons of Franchising Your Restaurant
Franchising is not a step to take lightly; it involves significant initial expense, obligations and legalities. However, it can also be a profitable and rewarding venture. Weigh these advantages and disadvantages to franchising as you make your decision.
- You’ll have multiple restaurants without having to manage the day-to-day operations of each.
- The franchisee takes on the bulk of the financial commitment.
- It’s a less expensive way to grow your business.
- Franchisees take on liability for what happens in their locations.
- You can share your unique take on dining with people outside your local sphere of influence.
- Giving up control. You set standards, but do not get involved in the day-to-day details.
- You are head of a corporation as opposed to direct manager.
- Initial expense can run upward of $100,000.
- Your marketing responsibilities not only increase in reach, but also include a new area – marketing to get franchisees.
Should You Franchise your Restaurant?
Having great food and local popularity is not enough to justify franchising. Before taking the next step, ask yourself these questions:
Is your business mature enough? Experts recommend that you show 10% to 20% profits consistently over three years. That’s because franchisees need to be able to make a profit after paying you their franchise royalty fees.
Can you clone your restaurant? The appeal of a franchise is that customers can expect the same food and atmosphere no matter where they go. Therefore, you must be able to replicate the food and the dining experience from location to location. If your cuisine depends on a black-hat sous vide chef, you might not be a good candidate for franchising. The same applies if your dining experience relies on staff with special skills – cliff divers or a wait staff that’s fluent in a particular language, for example.
Do you have a compelling hook? It’s not enough to have a friendly atmosphere and great food. You need something unique or especially attractive that will garner interest and that you can make into an advertising campaign that works nationally. Look at national chains that are similar to your establishment; determine their hook, and it can help you figure out your own.
Is there enough interest? Local popularity can indicate potential for national success, but it’s not guaranteed. Doing some market research to make sure there is a need or desire for your unique cuisine or dining experience can save you from failure in the worst case and help you focus your initial efforts in the best case.
Are you willing to share the family recipe? Obviously, to make the same food, your franchisees will need access to your secret recipes. There are ways to protect them, just like you need to protect your logo and brand, but others will have access to the knowledge.
How to Franchise Your Restaurant: The Process
Hire a lawyer. This is not a process you want to do on your own; nor should you necessarily trust it to the family lawyer. The Federal Trade Commission has set compliance guidelines for franchising a business, with protections in place for both the franchisor and franchisee. Download the franchise compliance guide here. In addition, around 15 states have their own additional franchise laws. Franchise contracts are complex, but protect your brand and your prosperity. Therefore, find a lawyer that specializes in franchise law.
Decide the guidelines of your franchise. These guidelines determine the future of your franchise:
- Territory size for each franchise. Will you give each franchisee rights to a specific area and let them open as many restaurants as they wish, or will you limit it to one location per franchisee? How large an area will you grant each franchisee, and how will you determine it? Some franchises use concentric circles, while others divide a map by population or political regions (districts, counties, etc.)
- How much individuality can each franchisee exercise? Must recipes be followed exactly? Can a franchise add a local specialty to the menu? What about uniforms, discounts or loyalty programs?
- What items will you supply? If you have specific décor or equipment, you may need to find manufacturers from which your franchisees will get their supplies. In addition, you will need to decide if you are going to have pre-made ingredients, such as spice packs or specifically prepared meats, or if you will provide those recipes to the franchisee.
- What support will you provide and how? Franchisors must at a minimum provide guidelines, training and national marketing. Some provide financing, usually through a lender they have established a relationship with. Other considerations include POS or inventory systems, bookkeeping help, local advertising support, and on-site training.
- What are your limits? Aside from failure to pay royalties on time, what violations would cause you to repeal franchising rights? For example, many franchisors include a clause that breaks the contract if the franchisee does not pass the training program to the franchisor’s satisfaction.
Determine your fees. As a franchisor, your operating budget and profits come from the fees you charge the franchisee. These are the most common:
- Franchisee Fee: This covers the cost of assistance and training, plus expenses involved in territory analysis, site identification, recruiting hires, and launching the new location. This fee averages $35,000, but can range from $10,000 to $150,000.
- Royalties: This weekly or monthly fee is a percentage of the gross revenue of the new franchise and usually runs between 4% and 15%. Think carefully about the percentage you charge. A decision between 5% and 6% may not seem like much when you are starting out, but it can mean millions of dollars once you have a dozen or more successful franchises running. On the other hand, too high a royalty and your franchises might be profitable enough to stay in business.
- National Advertising Fee: Not all franchises charge this, but this fee goes into your marketing budget for any advertising and promotion of the brand in general as opposed to the individual locations. However, it allows all franchises to benefit from promotions that they might not otherwise be able to afford, like television commercials. This fee can range as high as 5%.
Prepare Your Franchising Documents
As you work on your documents, consult not only with a lawyer but with a mentor if you can find one – someone who has been through the business of franchising – or better yet, franchising a restaurant – and can guide you through any unique circumstances and give you the benefit of their experience.
The Franchise Disclosure Document (FDD): This is the most important document you will prepare, not only because it’s required by law, but also because it is your primary selling tool for franchisees. This report can run 200 pages, and acquaints a prospective franchisee with everything they need to know about your company, from past litigations to sales figures to the obligations of the franchisor and the franchisee. You can find a sample table of contents on http://www.franchise.com.
Franchise Agreement/Contract: This supplements the FDD and includes anything required by state regulations, definition of territory area, licensing rights, fees, services, and transfer or termination of franchise license.
Operating Manual: This document protects your franchise brand. It includes standards, processes, recipes, marketing guidelines…anything you think is vital to the preservation of your restaurant’s unique style as it grows to new locations. The clearer and more comprehensive your operating manual is, the less you will have to deal with discrepancies or questions.
Training Documents: You will not be able to train every individual personally. The training document should contain not what a manager needs to answer questions after his training, but also what he needs to train subordinates. It should focus on the important aspects for your brand. For example, the generics of bussing tables may be lightly touched upon, while the specifics of creating local marketing may need more attention. If you have proprietary equipment, you should include those manuals as well, adapted to how your franchise uses them if needed.
Prepare Your Training
A training document alone is not enough. A training program, in person or through webinar, not only gives your franchisees a chance to ask questions and fully understand the program, but also gives you a chance to evaluate your franchisees and address any weaknesses they have. Further, it emphasizes the importance of your brand. In many ways, it’s like training your managers of your local restaurant, but with the knowledge that they will be running their own restaurant under your specifications.
If there are aspects of your restaurant that are vital to promoting the brand – whether it’s a special menu item or the fact that the wait staff breaks into song – you may need to provide training for employees other than your franchisee. Or you may train a trainer – an employee of the franchise who then trains everyone in his location.
You must decide not only what to train them on but also how. Some companies use webinar software and train on a regular basis; others have training centers where the franchisees go; still others take the training to the franchise location. Finally, it’s important for the staff to use specific equipment or services you are getting through a vendor, you may want to arrange for that vendor to provide system-specific training.
Prepare Your Marketing
One area where franchising expands your work is in marketing. Now, you not only market to customers on a regional or national level, but also to people who may open a franchise.
Advertising to Customers. Marketing a franchise differs from marketing on a local level. You need to come up with an appealing brand, including logos, banners, brand coloring, style, even fonts. You’ll not only use these materials for your own promotions but also provide them to your franchisees to use.
You also need to determine how you run your online presence. Will you have a mega website with each franchise getting its own page for listing hours, location and local information? Or will you provide guidelines for each franchise to make its own website?
You’ll also want to set standards for individual ads by franchisees. You may need to set up an approval process as well.
Finally, most franchisees expect significant marketing support in the first few months. Many successful franchises provide a complete marketing plan that starts from pre-opening hype to the end of the first three months and includes timetable, promotional materials (at least the templates) and basic cost breakdown.
Advertising to Potential Franchisees. A significant amount of your marketing efforts must now go to finding franchisees. After all, this is how you grow your income and expand your reach. There are many avenues for this, including seeking referrals, hiring a consulting chain, attending franchise fairs, or contacting a marketing firm that specializes in B2B/franchise promotion.
Promotional materials should focus on why someone would want to open a restaurant under your brand. They should include potentials for profit, your business model and what you offer as well as what you expect.
Plan Your Staff
Running a franchise headquarters is different from running a restaurant. You’ll want a staff that can handle the administration, advertising, vetting and hiring of new franchisees, training and support, and accounting. When you first start out, you may need only a couple of people handling multiple duties.
If you don’t have a good writer who also understands how to organize guidelines and write systematic procedures, you may want to outsource the writing of your documents. In addition, you may want a lawyer on retainer.
Plan Your Budget
As noted before, the cost of creating a franchise can run to about $100,000. It may still be cheaper than opening a new location but does require budgeting. In addition, you need to think of the costs of hiring a new staff specifically for the upper-level operations and supervision of franchises. Current industry standard suggests budgeting $1,000 to $5,000 per unit sold.
Selling a Franchise: Do’s and Don’ts
Once you’ve filed all the legal paperwork, determined your brand, developed your materials and started advertising for franchisees, it’s time to consider the selling process itself.
Selling a franchise is not like selling a product so much as establishing a partnership. Many times, people looking for franchises are currently unemployed or dissatisfied with their regular jobs and are looking for a business opportunity where they can be their own boss yet have the support of an established organization. Therefore, you should ensure your applicant is a good fit for your franchise.
DO respond quickly to contacts expressing interest. Provide basic information about the company and instructions for applying. If you make this a standard autoresponder, then you present a uniform impression as well as a fast reply, which speaks to your professionalism.
DO ask for permission on the application form to run a credit check.
DON’T neglect running a credit check and background check, even if you have a good impression of the applicant.
DO invite the applicant to your headquarters for a tour and meeting. Sometimes called a “Discovery Day,” this gives you a chance to acquaint your applicants to the business: the processes, the unique variables, the expectations. They can taste the food, talk to the staff and ask questions. In return, you can truly evaluate how at home they feel with your style.
Another benefit to discovery days is that it requires an investment of time and money by your applicant. If they are willing to make that commitment, they are truly interested.
DO evaluate if the person is a good fit, personality-wise. An upper-crust, exclusive restaurant needs a different kind of manager than a kid-friendly burger-and-arcade games place. Ask yourself if you’d hire this person as a manager for your current restaurant.
DO make sure they understand restaurants. Restaurants have unique challenges and things to watch out for. If the applicant doesn’t understand this and isn’t willing to learn, your franchise might not make a good fit.
After the Deal: Supporting Your Franchisee
Your work does not end once you’ve signed on a new franchisee. You will provide support throughout the life of that restaurant.
Founding the new location:
- Site selection and development. You need to set the standards for what the franchisee looks for in terms of building size and style, location, whether in a mall or separate building, drive thru or special needs. Some franchisors use a real estate agency to support the franchisee in securing the best location.
- Blueprints or layout designs. If your restaurant requires a certain look, whether an industrial motif or a bar centered in the restaurant, you must provide that information so that the franchisor can adapt the building.
- Sources for equipment, décor and supplies. Most franchisors have specific manufacturers they require the franchisee to purchase from.
- Assistance meeting local laws and health-code regulations.
- Promotion of the new location. This includes a marketing plan and materials for the grand opening.
- Financial assistance. Optional.
Once the restaurant is established:
- Ongoing or additional training. This could include training replacement managers, a webinar showing how to prepare a new dish, or onsite training upon request. Of course, you should include how-to documents to support training.
- Marketing materials and guidelines.
- Broad marketing campaigns. These should cover their area as well.
- Website support.
- Field consultant. Someone who visits the franchise to help with problems and ensures franchisees are adhering to standards
- Hotline for contacting headquarters if they have problems.
- HR or accounting assistance.
Franchising provides excellent opportunities for restaurateurs to share their love of food and their philosophy on the dining experience. It can also be a profitable endeavor. If your restaurant has made steady profits and has increased in popularity, it’s an option worth considering, but do so with care. Paying close attention to details and getting expert assistance early in the process can ensure success in growing your franchise.
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