You’re finally going to do it. You’ve done the 9 to 5, and you’re only going to take orders from one person for the rest of your working days: you. Owning and operating a restaurant franchise can be a lucrative business with the security of an already established brand.
While your passion and drive are applause-worthy, there are a few things you should consider before signing a restaurant franchise agreement. Owning a franchise takes a lot of the risk and guesswork out of the equation when opening a restaurant, but the cost and hard work will still play a major role in your financial success.
How Much Does It Cost?
The first thing you need to ask yourself when deciding to purchase a restaurant franchise is: what’s your bottom line?
There are several different costs associated with buying a franchise, starting with the franchise fee. This money is the fee charged by the franchisor just to get your foot in the door. Franchise fees range widely in the cost and include the license to use the brand, as well as training services the franchisor provides.
They do not include anything of what you’ll need to launch your business, like a storefront or equipment. Below are examples of franchise fees from four well-known restaurants to give you an idea of what to expect.
- Burger King: $50,000
- McDonald’s: $45,000
- Tropical Smoothie Cafe: $25,000
- Subway Store: $15,000
After deciding how much you’re willing to pay to purchase a restaurant franchise, consider the initial investment required to open your doors. This investment is where the physical materials required to serve your first meal come into play. It is less expensive to buy an already established franchise rather than to find your own location to build, but the costs are still astounding.
McDonald’s estimates your total investment in expenses will be from $989,352-$2,217,045. Subway estimates the cost to be between $116,000 and $263,000, which although significantly lower than the famous double arches, is still a significant amount of initial capital.
In addition to these costs, some companies mandate buyers have a set dollar amount of liquid assets before they allow them to acquire a restaurant franchise. McDonald’s looks for $750,000 in assets, and Burger King expects $500,000.
Additionally, some franchisors consider your net worth. You can calculate your net worth by adding up all your assets and subtracting the total amount of your debts. Jersey Mikes requires a net worth of $300,000, but the more popular chain Burger King requires a net worth of $1,500,000 just to be considered for a franchise opportunity.
Most restaurant chains will also require the franchisee to pay royalty fees on income earned. Subway, one of the less expensive franchises to purchase, charges 12.5% in weekly royalty fees, which includes an advertising fee. Burger King, although must more expensive to start up, requires only an 8.5% royalty fee, also including advertising.
Restaurant Franchise Financing Options
There are several different ways to find the financial resources needed to start a restaurant franchise.
The first place you need to start is with yourself. How much money can you invest? The U.S. Small Business Administration (SBA) recommends investing no more than 15% of your net worth.
It is unlikely you will make a profit immediately upon grand opening, and you’ll still have to pay your bills while your business grows. After you have decided how much you can invest, you must then figure out how much you’ll need to borrow.
Some franchisors offer financing to open new storefronts or to purchase already opened locations. These options vary in term and interest. Check with your franchisor to find out if they participate in financing programs.
Some franchisors will even offer partial financing to help with the initial cost of necessities like discount restaurant equipment, which is considered the biggest chunk of the initial cost. Unfortunately, offering financing does not mean you won’t have to comply with net worth or liquid asset requirements.
Another option is to go through an organization whose purpose is to find loans for new franchisees.
There are online search engines for restaurant franchise loans, that help buyers prepare their loan package, and then help them find lenders willing to fund them. National Business Capital and Franchise America Finance are two other examples of organizations who help franchisees find loans.
The SBA also offers loans to help franchisees get started. Instead of lending directly to the borrower, the SBA guarantees loans taken out by the borrower from a lender, so the lender has less of a risk. If the borrower were to default on the loan, the SBA would pay back a percentage of the loan lost.
The SBA will ensure you have personally invested a reasonable amount of capital and that you have a financial need for the dollar amount requested. They also charge the lender a guarantee fee, which is sometimes passed on to the borrower. Interest rates and terms are negotiated between the borrower and lender.
Finally, check with your bank or credit union to see if they offer franchise loans. As with all the options above, have your loan package ready. Think through how much you will need, justify it with research analysis and be ready to answer questions from prospective lenders. This loan is your first step in becoming a business owner, and you’ll want to present a professional image and be prepared.
How to Gauge the Market
Before jumping in and deciding which franchise is right for you, determine if there’s a need or desire in your area for the services you’ll provide. Start by asking around or taking an informal survey to get feedback on what the locals think your hometown is missing.
Decide who your competition will be and how your product or service differs from theirs, then drop in to see how well they’re faring. Is their business steady? Is there a certain market they are or are not using? What will you do to improve upon their business model or to avoid pitfalls they didn’t?
Try to contact the owner and ask them directly about their personal experience with their franchise. Do they have any advice on your region?
You should also calculate what you believe is your market share. There’s a difference between the total dollar amount that is spent on a product or service and the total dollar amount that you will receive between the competition. If you subtract one from the other, that’s called your market share. Lenders will want to know you’ve done the math and what you believe your prospective market share will be, so make sure to include it in your loan package.
Last Word on Your Restaurant Franchise
Purchasing a restaurant franchise is certainly not impossible, as proven by the reported 90% success rate of new franchises. Starting out with a trusted brand that sells is less risky than building a new business from the ground up. While the fees paid to the franchisor may be intimidating, the investment can pay off with hard work and diligence on your part.
Don’t rush in, do the research, justify your budget and listen to your boss. Oh, wait, that’s you!
Need a handy guide for opening your first restaurant (or the second… or the third)? Download our free “Essential Checklist to Opening a Restaurant” today: