When thinking about starting a restaurant many people consider the idea of opening a franchise. On the surface it seems like a great way to succeed- the menu, planning and marketing is all done already so it just requires a financial injection and the success is a sure thing, right? Unfortunately, no, or everyone would be a restaurant millionaire.
It depends a lot on the franchises themselves and how they are run, what the cost of opening a restaurant in their system is and the structure of their expenses and how much of a burden they put on their franchisees. In some cases if the franchises were run as independent restaurants they would be fine but the extra costs associated with the franchise make them money losers. In other cases there isn’t enough help or discretion in choosing locations or finding appropriate demographic areas.
You have to remember that the franchisee’s and franchisor’s goals are not completely aligned. That means you should never forget they are SELLING franchises and are subject to the same desire as any salesperson- to sell you a deal even if it isn’t necessarily the right deal or right for you.
You also have to keep in mind that just because you are buying a franchise doesn’t mean you are excused from doing a thorough job of restaurant business planning and due diligence on the business opportunity and specifically how well it might do in the location you are planning. Just because some other owners are making a killing where they are doesn’t mean you will have the same results or see the same profits. You might do better, but you also might do worse.
The key things to do before investing in any particular franchise are:
- Make sure you speak with other franchisees and find out what all the costs of running the business are, not just the franchisee royalty or obvious ones- sometimes these fees can be the real killer
- Understand who the customers for the restaurant are and whether there are enough of them in your area and your location to make it work for you (ice cream in North Dakota? hot soup in Phoenix?)
- Determine whether the franchise has proven its brand and marketing strength are worth the extra cost involved in being part of the system versus being an independent owner- after all, this is what you are really investing in. If neither you or the people in your area are very familiar with the brand and it doesn’t stand out as a location you’d want to patronize then why would it make sense to pay for that brand?
Beyond these investigations, make sure you do complete your own plan and financial projections to see if it makes sense for you.
Now, from the article, here is the list of franchises and their failure rates. This list is from the SBA, so it only deals with owners who took out SBA loans and what percent of the loans have gone bad. It isn’t the total failure rate of each franchise. Still, the numbers are pretty informative and shouldn’t be ignored on that basis.
The table below shows the Small Business Administration (SBA) loan failure rates for select franchises. To no surprise, Quiznos is on the wrong side of the list with a 25% failure rate. But they are not alone. Blimpie, Blockbuster (recently filed for bankruptcy), Coldstone and many others have 20+% default rates. Sound the alarms! On the other hand, Pizza Hut, Jimmy John’s, Burger King, Wingstop and Papa John’s lead the pack with below 15% failure rates. Which franchise would you invest in?