Do Your Homework Before Becoming a Restaurant Franchisee
Make sure you know what you are getting into before you become a fast-food restaurant franchisee. According to a recent article in the Wall Street Journal, Wendy’s unveiled a new cost-cutting plan in an effort to save money as the chain reportedly faces record-high beef costs and “pressure from the implementation of the Affordable Care Act.” USA Today, reporting on the same story, noted that even with the cost cutting measures being implemented, the future of Wendy’s looked to be “challenging.”
Many people nationwide have at least thought about owning a fast-food restaurant franchise. Indeed, buying a restaurant franchise can be financially rewarding. However, one must keep in mind that, in becoming a restaurant franchisee, you have linked your fortunes-for better or for worse-on the success of the franchisor. Often, the franchisor’s financial challenges can become your financial challenges as well.
The Small Business Administration notes that the food service industry is the largest and most prominent sector in franchising today. Although not risk free, buying a restaurant franchise is regarded as being a safer investment than other business ventures. Inc. magazine notes that buying a restaurant franchise can be less risky than starting a restaurant from scratch if the franchisor has: (1) good brand name recognition; (2) a solid business plan; and (3) a good marketing and advertising plan.
The Food Service Warehouse website observes that franchise restaurants are ideal for individuals who want to own a restaurant but do not have a lot of experience in a commercial kitchen. The website lists several characteristics of an ideal restaurant franchisee. First, one needs to have a degree of personal wealth in order to buy into a franchise system since most franchisors will require a certain amount of startup capital from personal non-borrowed funds. Second, ideal candidates will be “team players” in the sense that they can follow the rules of the franchisor for the betterment of the brand. Third, many downsized or retired corporate managers are a good fit since they already have managerial experience.
FACTORS TO CONSIDER
Restaurant Hospitality magazine offers some factors to consider when buying a restaurant franchise. First, consider buying an existing franchise restaurant as opposed to starting fresh. An existing franchise restaurant will have an established financial track record, giving you a better understanding of the business’s high and low points. Importantly, the restaurant’s prior financial track record could reveal “warning signs” that you should be aware of.
Second, take into mind the total cost of the purchase. In addition to the money spent for buying the restaurant, you need to consider additional costs such as royalty payments, and outlays for renovations, marketing campaigns and training programs. Third, make sure that the franchise has a good reputation among consumers as to service and quality. Fourth, determine how much management flexibility you will have since some franchisors offer considerably more flexibility than others.
The Intuit Quickbooks website advises that you should take note of whether the franchise you are considering buying into has a large number of franchises that have been terminated or not renewed since this could be a proverbial “red flag” about the franchise. Another factor to consider before entering into a franchise agreement is whether the franchisor has a strong and effective marketing plan in order to retain current customers and reach out to new customers.
SEEKING LEGAL ADVICE
If you are considering buying a restaurant franchise, you should contact a franchise lawyer experienced in evaluating franchise agreements. Having a franchise attorney review a Franchise Disclosure Document and franchise agreement could help you avoid subsequent unpleasant surprises as a restaurant franchisee.