Understanding the Pros and Cons of a Restaurant Franchise
Some people see getting involved with the franchise as a sure thing business opportunity. It is however a business like any other and it comes with its own risks. The reason franchises tend to do better than independent restaurants has more to do with their requirements that whether or not they are actually better businesses.
For example, by requiring a certain level of net worth of liquid capital franchises are trying to ensure that undercapitalized restaurants aren't being launched. If there was a similar requirement for independent restaurants their failure rates also go down. In addition, much of the planning is required to be successful has been done by the franchise and independent owners performed a similar level of planning they would likely achieve a similar level of success but likely with greater profitability because they wouldn't have the expense of the franchise fee or the ongoing cost of royalty payments.
There is no question that there are pros to joining a restaurant franchise even if you aren't necessarily buying into the strongest top tier brand. The pros include:
- A concept and menu that has already been tested
- An existing design for the logo, menu and interior
- A well-established systems for ordering, inventory and labor and food cost controls
- Specific plans for kitchen equipment requirements and kitchen layout
- Established relationships with primary vendors
- All the required HR policies, procedures and paperwork
- An established operations manual
- The opportunity for training
- The ability to speak with existing owners have identical businesses who can offer tips and insights into running the business better
- The benefit of any pre-existing marketing and brand value
- Franchises are typically easier to obtain financing for their brand-new restaurant concepts, particularly for business owners without previous restaurant experience
- The franchise generally has at least some vested interest in seeing the business succeed
There are also obviously cons to starting a restaurant franchise including:
- You typically must meet certain eligibility requirements including your net worth and liquid capital
- You have no options regarding some decisions and very little flexibility in many others
- you may be required to use service providers for certain things who are not the lowest cost option
- You may be required to purchase equipment or make changes to your business that don't necessarily benefit your particular operation
- You may be required to participate in marketing campaigns that don't necessarily benefit your business
- Your business could be hurt as a result of a problem associated with the brand even if it doesn't apply to your particular location
- Your payment of royalties is required regardless of your profitability
- Your ability to expand the business to other locations maybe difficult or impossible if other people have secured the surrounding location rights
Whether or not a restaurant franchises a good idea for you particularly hinges on a few important questions that depend on you knowing yourself well in answering these questions honestly:
- Would you do better as part of a system or would you rather have the independence of being able to make your own decisions about everything?
- Will you realistically take the time to do the planning and preparation that is necessary if you go on your own or would you rather spend some more money and feel better knowing that much of the planning has been done for you?
- Is there a franchise system that is a perfect fit for the area you're considering or would an independent restaurant make just as much sense and be significantly more profitable?
- You have significant previous restaurant experience for you new to the restaurant business?
- How much money do you have to invest in how comfortable are you putting it at risk?
How these pros and cons relate to your personal situation should be the determining factor in which route you choose for starting a restaurant.
If you decide to continue on the restaurant franchise path, make sure you take your time in carefully selecting a restaurant franchise (or more than one) that fits with your market and goals and then do a thorough investigation of any restaurant franchise you are considering.