Are You Considering Buying A Restaurant Franchise?
Today’s topic is a great segue from my last blog where I highlight “consistency” (or rather lack of consistency) as a barrier to restaurant success. One of the strongest offerings a franchise should offer their franchisees is consistency – brand and product consistency.
Full disclosure, I’m not at all an expert on restaurant franchises. I’ve had a window into franchises from listing and selling a franchise unit. As a former restaurant owner and chef who experienced the start-up process firsthand, I can contrast the franchisee start-up experience with the experience of the independent operator. As a restaurant broker and commercial lease listing broker, I’ve seen the contrast of the negotiation process by a franchise verses an independent operator.
This is important, not all franchises are created equal.
I encourage anyone who is considering buying into a franchise to thoroughly vet the business. First and foremost, talk to other franchisees. Younger, less established franchises will be less expensive to buy into, but they may not have all the kinks worked out. Having the kinks worked out is one of the main reasons to work with a franchise in the first place. Newer franchises may be able to capitalize on a current food trend (think, Boba), but the newer franchises offer risks. As with the example of trend, it is unknown if the concept is sustainable for the long-term. If you reach out to a current franchisee, be sure to go out, way out, of the geographic region you plan to operate so the franchisee won’t see you as a threat. Franchises have geographic boundaries between operators, but still, if you plan to operate in the Los Angeles area, reach out to a franchisee in Northern California. The franchisee may own or plan to own multiple units in the Los Angeles region, so it’s best to talk to an operator far away. If the franchise is regional, say a bay area franchise like Nick the Greek, reach out to the operator furthest away from where you plan to open shop.
**Note: The suffix “or” is used to denote the person who performs an action. The suffix “ee” is used to denote the recipient of that action. So, the Franchisor owns the business and is selling franchise rights to the Franchisee**
Years before I started the restaurant, I took a course and wrote a business plan. That business plan was a great process, but it had to be completely rewritten once I found a location. Finding a location—as most of you who as most of you who follow this series know, finding a location is a very arduous process—it’s basically why I have a job. I sell 2nd generation restaurants to buyers who, or for the most part, execute on a different concept than the seller operated with. When I started, websites such as LoopNet, BizBuySell and Craigslist did not exist. However, even with those great resources, finding a space with the right infrastructure, layout, location and rent proves to be difficult. Most franchises either work with outside commercial agents to follow their location protocols or, for the larger franchises, they have in-house real-estate teams that scout locations and negotiate leases for their franchisees.
An independent operator does this process on their own. Once the lease negotiation process starts, everything else concerning the restaurant start-up also begins. The restaurant start-up process can be brutal. That might sound like hyperbole, but it is an amazingly tough process because there are so many diverse things happening all at the same time with each requiring a different skill set. I think start-up is where the benefits of working with a restaurant franchise are most evident.
I’m going to discuss 7 crucial things that need attention at start-up:
- Décor: The franchise comes with set décor. A team will design and install the décor for the new location.
- Equipment and Small Wares: Provided by the franchise.
- Licensing: The franchise will have consultants help the new operator secure the necessary licenses and permits.
- Employees/HR: The franchise may have an HR department dedicated to supporting the franchise. At a minimum they will have application, employee training and on-boarding protocols, employment manuals, scheduling recommendations and templates, job descriptions and pay.
- Branding/Signage/Marketing: All of this will be provided to the franchisor. The franchise will help navigate the process with the local planning department and commercial center requirements and standards.
- Sourcing goods/Securing Vendors: This is a multi-pronged process. The vendor list is provided by the franchise. Each item, such as drinks, cleaning supplies, dairy, etc, is usually a different vendor. The operator must apply, do a credit application and get vetted with each vendor on the franchises list.
- Standard Operating Procedures:
- FOH/BOH duties and schedules
- Prep Schedules
- Ordering Schedules
So I just discussed a lot of upsides to operating as a franchise. Here are a few of the downsides:
- Franchise fees: these fees can vary from franchise to franchise, and they can be substantial. Talk to current franchisees to determine if there are unexpected expenses. Sometimes, advertising fees are not included in franchise fees, and they are mandatory. Check to see if the fees are fixed, which is usually the case. This means the fees are required independently of gross sales. So if an operator has a slow month, that will not affect the franchisor but it will directly affect the owner’s profit.
- Limits on control
- Hours of operation: The franchisor (the overarching business that grants rights and support to the franchisee for a fee) will determine the hours of operation and these will include days of the week, hours in a day and holidays.
- Décor: The décor is set by the franchisor and there will be little room for variation so that the unit is in line with the overarching brand. Many franchises have a set schedule (2 years, 3 years or 4 years) when an interior is refreshed, and the franchisee is responsible to pay for that. Sometimes the franchise might go through a complete rebrand that will effect signage, to-go materials, all kinds of things and those costs can quite expensive.
- Marketing: Again, in order to maintain the brand and brand message, franchisees will have little leeway in outside of the box or personalized marketing
- Exit Strategy: Ok this is where I intersect with franchises and how I know anything about them at all. When a franchisee wants to retire or move on, they’ll typically reach out to the franchisor to see if there is current franchisee who might want to purchase another unit if not, then the franchisee will reach out to business broker to list the unit for sale. I have worked with several large, national franchises. If a business broker is brought in to sell a franchise unit, more than likely there is some challenge with it which is generally reflected in gross sales or cash-flow. If gross sales are low then the unit might be operating in a challenging location—too much competition, hard to access or see, no parking…things like that. If it’s cash-flow, my guess is the rent is too high—which is closely tied to gross sales.
Selling a franchise requires more from buyers which adds on more layers to an already complicated process. I had a very successful franchise unit listed for sale, but the franchisor required that the buyer attend a one month training out of state in order to take over operations. Even though the restaurant had very strong cashflow, we could not find a buyer who could spare that much time for training. To clarify, I do not usually see trainings that require that much time or are out of state.
On the flip side, I sold a Subway Sandwich Shop in Solano County several years ago and their real estate manager was indispensable; he was able to negotiate favorable terms for the buyer and the sale went quite smoothly.
As you can see, franchises come with both pros and cons on both the buying and selling side. Doing your due diligence to ensure that owning a franchise is a right fit for you is your best option before making the plunge. Don’t be afraid to ask questions. Those questions just might make your decision easier. And remember, not all franchises are created equal.
Ryn Longmaid is a restaurant broker and consultant at Santa Rosa Business & Commercial in the San Francisco NorthBay and the host and founder of the Facebook Live Series, Deep Dish: discussions on the business of restaurants for restaurateurs, restaurant buyers and sellers and the restaurant curious.
As well as being a licensed real estate broker, Ryn is a CBB with the California Association of Business Brokers (CABB), a CBI with the IBBA and she holds an MBA in Sustainable Business Management. In addition to being a proficient business broker, Ryn has over 20 years’ experience in the restaurant, hospitality, and food industries. She has served as the executive chef for Amy’s Kitchen, personal chef to actor Don Johnson, she founded and operated a successful and longstanding restaurant. She has also held teaching posts in restaurant management at the Art Institute-San Francisco and The Culinary Institute of America-Greystone.