If you’re thinking about buying a restaurant franchise, it’s a big step. Before you sign on the “dotted line,” you need to do your homework and due diligence. I’ve been in the restaurant franchise business now for more than 30 years. If you’ve indentified a restaurant franchise of interest, here are suggested steps to help steer your decision and hopefully guide you to a successful win-win.
1. Learn background about the franchise operation and study what is called a Franchise Disclosure Document” (FDD). It details important information and the solvency of the company. This is information the franchise company is required to disclose by law.
2. Check the company’s projected overall return on investment. This is important to know for long-term insurance on the partnership being successful. You need to know what the profit versus liability is. How much is the total investment required by a franchise operator.
3. Inquire about the company’s management team. Do they as a group and as individuals have a successful track record? How strong is the company’s training program? This will be beneficial long-term if you need counsel moving forward in your growth.
4. Interview and talk to current and former franchise operators. This is critical. Have the current franchise operators had a good experience? Are they in it for the long haul? Are they making a profit? It’s also important to know why past franchises are gone.
5. Research the long-term viability of the company. Do they have a track record? Are they a start-up? Do they have good food? A franchise operator should go into the partnership expecting to have a 10—30-year deal and commitment. You should be in it for the long haul.
6. Examine the market where you want to locate the restaurant franchise. A pioneer territory (or state) is more risky and difficult than an established market area. Most franchise companies have exclusive market rights with a franchise operator for three-to-five miles in an existing territory. Real estate, location, parking, and competitor proximity are key elements for a good location.
7. Investigate the level of complexity to operate. With the right guidance and thorough franchisor training, is it somewhat turnkey? Some are complex, while others are easier. Do your homework.
8. Determine your intended management scenario. Do you plan to be an owner/operator? Is your plan to invest in hiring a manager? Regardless, the owner/operator must have an intimate knowledge of the operation and be able to jump in. What happens when a manager abruptly quits? If you don’t know the operation, that means trouble.
9. Find out about the average system sales growth. If the company makes available strong resources and back up to franchise operators, this is a good sign. Are comp store sales growing, flat or declining? All important things to know in advance.
10. While some companies will provide financial assistance, my experience has proven that an all-cash upfront investment is the way to go. If you have some peaks and valleys in business, you don’t want to be over your head. Even better is to have a cash surplus to help you through some business downtimes.
Buying a restaurant franchise is a big step. But it is a step that can be lucrative if all the pieces fit. Use these tips as a road map to help you travel the “road” to restaurant franchise success.