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Should I Franchise My Restaurant?

By Mark Siebert

Think you have a restaurant that might be "the next McDonald's?" Ever wonder if the Colonel knew something you don't? Maybe you, too, should consider franchising.

According to a study by PricewaterhouseCoopers more than 760,000 franchised businesses generated a total economic output of more than $1.53 trillion. 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 importantly, should you be thinking of joining them?

WHY FRANCHISE?

In general, companies franchise for one of three reasons: time, people, or money.

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 of opening a restaurant. And since it is the franchisee that signs leases and commits 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 unit managers. With turnover rates that can exceed 100% per year, a restaurateur can spend months recruiting and training a manager only to see that manager leave -- or worse yet, hired away by a competitor.

Franchising allows the restaurateur to avoid these problems by substituting a highly motivated franchisee for that unit manager. And since the franchisee has a stake in the unit, restaurant AUVs will often improve. From a top management perspective, since the 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 a unit takes time. Find a site. Negotiate the lease. Hire the architect and contractor. Financing. Recruit your staff. Purchase or lease your equipment and inventory. Train staff. The list goes on and on. Bottom line: the number of restaurants you can open at any one time is limited.

But for restaurants with too little time, too little staff, or too few resources, franchising solves that problem by having the franchisee do most of the heavy lifting. Thus, franchising not only allows the restaurateur financial leverage, but it allows "resource leverage" as well.

BUT IS MY RESTAURANT "FRANCHISABLE?"

Almost any type of restaurant can be franchised, provided it meets some basic criteria.

First of all, you need to sell franchises. And in order to do that, your restaurant must be credible in the eyes of prospective franchisees. Is it professionally designed? Is it unique in some way? And, most important, does it have "sizzle?" A good measure for the Sizzle Factor is whether you currently receive unsolicited franchise inquiries. If you do, that is a good indication that your franchise will sell.

Second, you will need to be able to clone your restaurant. While some high-end restaurants like Ruth's Chris are franchising successfully, the primary criterion here will be teachability and systemization.

Perhaps most importantly, though, your restaurant will need to provide an adequate return to both you and your franchisee. That means, you will need to adjust the franchisee's potential returns by deducting a royalty. If your franchisee can generate an adjusted 15% return on investment on a mature franchise, then your restaurant may be a good candidate for franchising.

THE PROCESS OF FRANCHISING

If you do make the decision to franchise, your must first address numerous issues confronting a new franchisor: speed of growth, territorial development, support services, staffing, and fee structure, to name several of the most important. And obviously, your plan should be subjected to rigorous financial scrutiny.

You will then need to develop a franchise contract, a franchise disclosure document (as required under FTC Rule 436), and, depending on where franchises are being sold, state registrations or filings.

Quality control generally translates into the development of an operations manual and well defined training programs, if they are not in place already. Your manual should contain everything on how to open and operate your restaurant, although there are certain protections that you may want to build in relative to the protection of recipes (use of spice packets, etc.). You will also include quality control checklists, policies, procedures, and tactics that will allow these systems to be uniformly enforced. At the same time, you must be careful to avoid the inadvertent creation of an agency and scrupulously avoid discussions that could create claims of negligence to maintain an effective shield from liability.

Finally, you will need to market and sell franchises. You will need to develop a plan for attracting prospects and the necessary materials (brochures, mini-brochures, videotapes, etc.) that will help make the sale. You will need to incorporate your franchise message into your web site, and since the franchise sales process is highly regulated, you will need to be educated in proper sales, disclosure, and compliance techniques.

As a franchisor, the first thing you will learn is that you have entered a completely different business. Your new role as a franchisor will be selling and servicing franchisees. The key to success in franchising is successful franchisees. And if you can make your franchises succeed, perhaps you can become the next McDonald's.



Mark Siebert is the CEO of the iFranchise Group, a management consulting firm specializing in franchising. During his 25-year career, he has consulted with some of the world's most prominent restaurant franchisors. He can be reached at 708-957-2300.

 







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