It doesn't take long for a successful restaurant owner to look around at what they have created and ask themselves a serious question - is one enough?
At some point, all restaurateurs consider opening up another location. However, managing more than one restaurant can be extremely difficult for one person. This is where franchising comes in.
But how do you franchise a restaurant?
Before we begin, let's take a look at some fundamental franchise terminology.
- Franchise: (verb) granting rights for another entity to use your name, recipes, look & feel, trademarks (aka Intellectual Property) to conduct business.
- Franchisee: (noun) The entity that purchases the rights to the business and runs its day-to-day operations.
- Franchisor: (noun) The entity that owns the intellectual property.
With restaurant franchising, you allow someone else to open up a location of your restaurant after paying you a fee. Franchising can be a wise venture for your business for several reasons. Here are a few:
- Your brand's name is expanded at no cost to you.
- You often collect licensing fees and a percentage of the new location's sales for doing very little - it is the responsibilty of that location's staff to do all the work. Free money in your pocket!
- Franchising is considered to be the safest and least risky strategy for restaurant expansion. Assuming nothing terrible happens, you are at almost no financial risk. If the franchised location fails, it predominantly falls on that location's owner - not you.
In short, restaurant franchising can create massive growth for your brand without risking your own capital.
However, deciding to franchise your restaurant comes with some lesser known risks. While franchising is often the goal of new restaurants, I encourage all owners to take a step back and assess if your restaurant is really ready for this new step.
Let's go over whether or not restaurant franchising is right for you and how to franchise a restaurant if you think you're a good fit.
The Risks of Restaurant Franchising
There's no reason to immediately learn how to franchise a restaurant if you feel the risks are too large to ignore.
Beyond the legal complications, expenses, and massive time commitment to preparing and marketing your franchise, you must be aware that your brand will be front and center for the public to see on a business that you do not operate. While a good franchise agreement will have operating standards with penalties for non-compliance, the business is still being operated by another party. Therefore, you will no longer be able to control all the details the way you do in your restaurant.
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Typically, the public generally does not know, care, or understand if a store is company owned or franchise owned, so poor operators can really effect the way your brand is perceived in new market. This can make future growth very difficult. For example, a bad experience at one branch of a nationwide restaurant chain could change that customer's perception of the entire business and brand.
Are You Ready to Franchise?
We hear about the success stories, but nobody is writing about the franchised units that struggle. I know about them because I talk with them everyday. I don’t just work with independents, I also work with franchisees who purchased units from an ill-prepared franchisor. Because of this, their restaurant struggles.
Nobody wins in this situation.
For traditional brick and mortar restaurants, I suggest they solely and successfully operate at least 2 units in similar demographics that are different enough to prove the concept in more than one location (i.e. 2 different cities with the same demographics, or the same city with two different demographics). The option depends on your particular concept and market, but before a franchisee is going to buy with confidence, they should know whether or not you just got lucky with your first location.
Once the concept is proven in multiple markets, make sure all your systems and processes are documented in a way that they can be duplicated appropriately by a new team.
As you prepare to franchise, ask yourself these questions.
- Do you have documented training materials and guides?
- Are your recipes documented?
- Is your POS system up properly?
- Do you have customized reporting for the KPI’s that matter to your particular concept?
- Is your IP protected by local copyright and trademark laws?
- Is your restaurant established enough in your existing area?
- Do you have proven marketing campaigns and promotions?
- Is your system ready to handle a new level of income and reporting?
Here's a simple test I give to restaurateurs before they consider expansion: Could your location(s) operate for an entire month without you? If the answer is no, then you likely need to create and document more systems before you can confidently train another operator to do what your restaurant(s) do.
Franchising is not a means to the end, and it's not a way for you to take struggling concept and create more income. Franchising is the start of an entirely new business. If your current business is not sitting on a solid foundation, this process will only expose the weaknesses faster.
Cross Your T’s and Dot Your I’s
Franchising is very complex and highly governed. This is not something you should do on your own.
You will want to make sure you are working with an attorney who is experienced in creating these types of agreements and you will want to make sure you understand everything in the documents. Tiny little differences between 1% or 2% sales can mean millions of dollars over the term of a contract and can mean the success or failure of your new business or theirs.
You may have been able to get this far with out legal representation and help from others, but do not go any further without a trusted advisor.
I would also suggest hiring a restaurant consultant that can help you develop your systems and training documents a year before you plan on making your offerings to the public. This is not something that can be done overnight. Plus, the added benefit of auditing all your systems and creating the training materials is that your current location(s) will start to operate far more efficiently and profitably.
If you're ready to get started, check out these 7 Steps to Starting a Franchise from FitSmallBusiness.
The Next Step
If you think you have a concept that is ready for the market and would like to start getting your systems in order, it's time to get to work on franchising your restaurant! If this is new to you, definitely consult with an expert on how to franchise a restaurant before moving forward. Most of the time, the decision to franchise is a safe way to build your brand and increase your profit.
DISCLAIMER – Neither the Toast Blog or myself are licensed to provide advice in this area. Consult a licensed professional to help you determine what would be best for your business.