Quick-service restaurants around the world start every day for guests. Many of which have a dream of one day becoming the next big brand or icon in the food business. In order to expand at such a pace a restaurant owner will need to secure funding to open the additional locations plus have the staff and management to operate the daily operations.
To make that dream a reality, a restaurant owner will most likely consider the following options as a strategy for expansion:
The most common method for a restaurant owner to try to expand is by using internally generated cash flow. Essentially, the owner will use operating profits to open up additional locations. While there might be enough cash flow to open up two or three restaurants, often times, there is not enough to springboard to a regional or national expansion.
Another option for restaurant owners to consider is borrowing the money from a financial institution of some kind. This will include the local credit union, a conventional bank loan, or other related task. Most of the time a lender is most interested in the assets the borrower has so this tends to have serious limitations for the total amount available to borrow. Then there is the biggest problem for any restaurant owner that borrows money … the owner needs to pay it back with interest.
Restaurant owners often times consider taking on investors or getting private equity involved. This often creates a challenging situation where the investors and the owner have a different viewpoint on the exit plan. Most investors like to see an exit after three to five years, which very often does not fit in with the restaurant owner’s plan. In addition, the restaurant owner will have to dilute the equity in the business as well.
Franchising is a strategy in which it uses other people’s money to grow and expand without giving up control or equity in the original business. In franchising, the franchisee pays to the franchisor a franchise fee plus a percentage of the top line revenue which is commonly referred to as a royalty. Additionally, the franchisee provides the people power behind the daily operations as well and it allows for the brand to expand at a more expeditious rate.
Franchising is a unique expansion model in that it solves three critical problems faced by most restaurant owners:
- Capital restrictions
- Management and staff issues
- Inability to open restaurants more quickly.
To determine the viability of franchising a restaurant there are many factors that go into this assessment. Some of the most common aspects to consider before franchising a restaurant include:
- Is there at least one existing operating unit?
- Is the restaurant profitable before owner benefit and EBITDA?
- Can the restaurant owner and/or management team train a new franchisee how to run the business in a few days to a few weeks?
- Can a franchisee earn a return on cash investment plus make a manager’s salary if the franchisee is an owner/operator?
- Is there a consumer market for the food product on a regional basis at a minimum?
Restaurants that meet the above criteria can now be considered a candidate for franchising. The next question becomes, “What is the process to franchise a restaurant?” Below are steps outlined on the process to franchising.
Step 1: Build a Plan
As with any new business, a strategy and plan need to be put in place before moving forward with the execution. This is the point at which things like franchise fees, royalties, territory structure, training, support, five-year financial models, and other critical items are determined. Have a sound plan is critical to success. There are many different options for getting this put together including a self-run development which is managed by the owner or a more collaborative effort by hiring a specialized franchise consultant.
Step 2: Prepare the Franchise Documents
Once the franchise business plan is prepared, it is now time to start executing. Some of the critical franchise documents to be prepared include:
This is a document that will teach the franchisees how to open, run, and operate a franchise. This is a document which typically includes much more than daily procedures. It is going to include things about insurance requirements and other business requirements to reinforce that a franchisee is an independent owner operator.
Uniform Franchise Disclosure Document (UFDD)
The UFDD is the requirement by the Federal Trade Commission to offer and sell a franchise. There are 23 points of disclosure in this document. It is very similar to a prospectus for a stock or a bond. In addition to federal compliance there many states which have some form for additional requirements as well. This is the time when engaging with an experience franchise attorney is important.
Franchise Marketing Materials
Developing a franchise marketing plan on how to attract leads and collateral documents like a franchise brochure will be an important asset for the restaurant that is franchising. This should be completed prior to launching the actual marketing efforts.
Step 3: Go to Market
Once the franchise plan, and documents are complete, the final step is to go to market. A franchise company will want to implement its marketing plan and have a sales process in place for attracting, qualifying, and awarding franchises. After a franchisee has purchased a franchise then the training and support by the franchisor will begin.
Franchising a restaurant is a big step for any owner at any stage. It takes time, patience, and hard work. It is important to remember that franchising is a business and, much like any business, it generally does not happen overnight.