contact@emhstrategy.com

EMH Insights

To Franchise, or Not to Franchise

Calling all restaurant owners:

So you own a successful restaurant, and you want to know what to do next. Options include expanding into another location, opening an entirely different restaurant, or…franchising. Sounds scary, right? Giving control of your “baby” to someone else can be stressful to consider. This reluctance is understandable, but if done correctly, franchising can be a viable and profitable alternative for growing your restaurant. Here are some key factors to consider.

BENEFITS

1. Increase in Revenue

By granting a franchisee access to your brand, you earn the right to charge various fees. The franchise fee, a flat fee ranging on average from $20,000 to $30,000, is the initial cost to join the system. In addition, a franchisor can charge and collect a royalty fee, which is usually a percentage of sales. The percent charged varies across industry; in 2006, it averaged 4.6% for the restaurant industry. Finally, an advertising fee may be requested (typically 1-2% of sales) that will contribute to a large scale marketing fund to benefit the entire franchise system.

2. Increase in Brand Awareness & Consolidated Image

Franchising also gives you the ability to enter new geographic markets, which creates the opportunity to touch more customers and catalyze Word of Mouth advertising. Increased brand awareness will strengthen your restaurant identity, which can increase the price you are able to charge for each individual franchise down the road. Furthermore, the process of establishing a franchise network requires the standardization of operations, which helps you tighten your business model and consolidate your image. A greater number of stores effectively provides you with economies of scale and bargaining power for crucial business activities such as sourcing inventory and marketing.

3. Growth with Mitigated Risk

The beauty of franchising is its ability to grow your restaurant without investing your own money in new locations. Aside from an up-front investment in your operations and franchise infrastructure (see below) and ongoing training, a franchise requires no capital expenditure on your part for each new restaurant, which greatly mitigates the risk. Of course, no franchise is risk-free; there are risks associated with a tarnished brand image from mismanagement on the part of the franchisee. However, this can be hedged by investing in training and carefully selecting your franchisees.
COSTS

1. Up-front Investment of Time and Money

Once your business model is franchise-ready, your restaurant will be scalable and on the path towards geographic expansion. However, getting to this point can be costly and time-intensive. In terms of paperwork (and expensive legal expertise), you must work with a lawyer to prepare Franchisee Disclosure Documents and the Franchise Agreement. In addition, you must compile an operations manual to present to future franchisees, concoct a plan for a reliable training system, and coordinate a sales process for acquiring franchisees. Finally, you must put money toward perfecting your operations and supply chain to prepare your concept for replication.

2. Ongoing Support to Franchisees

Training your franchisee does not happen just once, and ongoing support is crucial to ensure a fluidity between you and your franchisees. This support can take the form of regular training sessions, open channels of communication (which can be a drain on your time), and advertising. Hiring additional personnel to manage the franchise network can also be a costly burden. Many large chains such as Quiznos provide training to franchisees at centralized facilities (in this case Quiznos University) which can assist with maintaining standardization across stores.

3. Loss of control

Potentially the most difficult change to embrace, handing over ownership of your concept to franchisees can tarnish your brand’s reputation if the relationship is not carefully managed. A delicate balance between control and flexibility must be established to ensure both brand consistency and franchisee satisfaction. Therefore, it is wise to carefully select and vet franchisees and clearly outline expectations before entering into a partnership.
Franchising is not the solution for every restaurant, so proceed with caution and carefully consider the pros and cons before making any decisions. And stay positive! If you are battling with this question right now, it means you are in a profitable place and poised for growth.

For more information, please contact our resident chef/consultant, Francisco Robert.