What Is Restaurant Franchising?
- February 21, 2024
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Jean-Philippe Serhal
Your brand is starting to get recognized locally, your restaurant concept is seeing customers coming through your doors regularly, your back of house processes are streamlined, and your recipes are a success. The next step for you may be to open a second location, but you may not have the capital or time for it. This is where expanding your business via a franchising business model comes into play.
Growing through a franchising expansion model, whereby you sell the rights to use your brand name, your products, and your restaurant’s processes to a 3rd party investor, is a business model that enable corporations to expand their business a lot faster, and a lot cheaper, than expanding via new locations opened and managed by the corporation.
In this article, we’ll explain what franchising is, what are its advantages for both corporations and investors, and how much you should expect to put down, as an investor, to operate a franchise.
Table of Contents
1. What Is A Franchise ?
A franchise is a business expansion model where a corporation or brand gives third party operators the rights to use the brand’s name, branding, and business model in exchange for fees or royalties. The products that the franchisee (the person or investor who owns a franchise) will sell will typically be the same products that the corporation sells.
The franchise business model requires a franchisee to take care of the upfront cost necessary to launch a new location (real estate, construction, equipment…) and pay the franchisor (the corporation selling the rights to use the brand name, model, and branding) monthly fees or royalties based on a percentage of gross sales ranging from 5% to 50%. The monthly fee is justified by the fact that the franchisor supports the franchisee with marketing, brand recognition, advertising, advisory, equipment, and more, depending on the corporation’s franchising conditions.
It follows that as part of the agreement, franchisees must rigorously adhere to the branding rules and guidelines of the franchisor, down to the smallest details, such as tableware. A customer wouldn’t know if the restaurant they’re eating in is owned by the corporation or by a private individual!
Vocabulary Review
Corporation: The business entity that owns a restaurant concept and its associated rights and trademarks.
Franchising: A business model whereby a corporation grows its business by selling the rights to use a brand’s name, business model, branding, and processes to an external investor, and collecting fees and royalties from this business’s gross sales.
Franchisor: The owner of the corporation that owns all the company’s assets.
Franchisee: The external investor who bought a franchising license; giving them the right to use a corporation’s trademarked concept.
2. What Does It Take To Run A Franchise Business ?
Not all corporations will open the opportunity to franchise their brand to just anyone, and each corporation will have its own sets of rules and conditions prior to getting a discussion going.
For example, a parent company might look into the investor’s track record in running fast-food restaurants. The corporation may also look into the investor’s ability to cover the initial costs required to get the business going. The conditions required to get a franchising discussion going can be found on a corporation’s franchise webpage.
Did You Know ?
For example, if you wish to open a Mcdonald’s franchise, the applicant must have a minimum of $500,000 in liquid assets, and must also pay a $45,000 franchise fee.
In fact, you should expect to invest between $1.3M and $2.3M to launch a new McDonald’s franchise.
It is worth noting that every restaurant corporation will have its own set of ownership conditions. For example, McDonald’s is unique in that it owns 45% of the land on which its restaurants sit, and 70% of the buildings.
NYC’s Halal Guys, on the other hand, ask for the applicants to have a $2 million net worth, and $1 million in capital to be considered. Another condition is that the franchisees must also commit to opening 5 Halal Guys locations, and must demonstrate significant business experience.
Some companies may lower the acceptance rate and cover the upfront costs in exchange for a higher monthly fee. For example, Chick-Fil-A asks for an initial $10,000, and will pay for land, construction, and equipment. But it’ll then rent the restaurant to the franchisee for 15% of sales and 50% of pretax profit remaining. This means that the startup costs are kept low in exchange for higher monthly payments. Taco Bell, to take a final example, will require a $45,000 upfront fee, plus a monthly fee of 5.5% and 4.25% of gross sales for service and marketing support, respectively.
It is also worth noting that every corporation will provide a different kind of franchisee service. Some corporations will provide a research service to analyze the area in which a franchisee is thinking of opening. Analysis ranging from foot traffic to clientèle mix to potential competitors is done, thus maximizing the chances of success for the franchisee and the brand.
Here are some numbers of what you should expect per corporation.
Finally, it is worth mentioning that a part of the agreement between a franchisee and a franchisor specifies whether the franchisee will be buying or leading the store. Leasing is usually cheaper up front, but includes higher monthly fees (Chick-Fil-A’s model).
3. What Are The Advantages Of Running A Franchise - For An Investor ?
Instant Brand Recognition
Any franchisee will automatically benefit from the brand recognition of the corporation they’re franchising. This means customers will be going through your door with little to no investment in brand awareness. Even if a franchise is opened in a new area, the regional or national marketing campaigns run by the corporation will support the franchisee in getting customers.
Recently, Krispy Kreme opened their first branch in Paris. People waited in line while waiting for the store to open. The brand plans to open 500 points of access across France, including stores, smaller kiosks, and vending machines in supermarkets.
When Philippines’s Jollibee opened their first branch in Philadephia, a long line could be seen waiting outside. This is yet another example of how franchisees can benefit from a strong brand recognition that is more easily acquired than needing to invest in your own.
Support To Franchisees
A franchising business handles 2 main businesses : the restaurant business, and the franchising business. In other words, for restaurant businesses who grow through franchising, the latter part needs to be taken seriously and a lot of resources need to be invested in making it work.
Franchisees are eligible to receive training and can access the brand’s know-how, which is invaluable for first-timers. Part of that support includes software, supplier contracts, equipment, sales and marketing support, supplies, parts, and recipe management. It is also worth mentioning that franchisors also sometimes provide administrative support, such as legal paperwork, and support with visas for investors and their staff.
In other words, a franchisor will focus on creating and maintaining a concept that customers love. They also need to ensure that the entire process required to run operations smoothly is as streamlined as possible. Franchisees invest their capital in the location they would like to open, and invest their time in running the business according to the corporation’s guidelines and verified processes.
Lowered Risk For Franchisees
Opening your first restaurant comes with its own set of risks. As an investor, you will need to think about the concept, figuring your first location out, designing your menu, working on the marketing strategy. It ain’t for the weak !
Launching a franchise, on the other hand, helps you minimize those risks by betting on a brand that’s already achieved recognition amongst consumers. Not only that, the franchisor provides support packages that include training, marketing, and operation advice.
In a matter of months, you could have a restaurant to your name.
4. What Are The Advantages Of Running A Franchise - For Franchisors?
Reduced Liabilities, Less Capital Needed, Accelerated Growth
Expanding your business by opening locations under your management is a stressful, costly, and risky operation.
One of the most common recommendations by F&B experts is to optimize and streamline your operations as much as you can. Use data to make profit-making decisions, trim costs, cut waste, and maximize the performance of your menu. All these tasks require time and focus, and as a restaurant operator, these are the activities that will benefit your business the most.
By transferring the need for capital to a 3rd party investor, you could continue to focus on your operational efficiency and not risk any of your capital. The franchisee takes care of the upfront costs, and in exchange benefit from your knowledge in operations, menu optimization, and customer knowledge. It’s a win-win for both parties.
Furthermore, franchising helps you open the door to external stakeholders who see the potential of your brand in locations you may not be aware of! Not only will you attract investors who see the potential of your brand, but you can also deal with several of them at the same time for several different locations. Imagine needing to focus on opening several locations yourselves : this would be quite the (expensive) challenge !
This means that you’ll be able to grow your business at a much faster pace, with much lesser risk.
Increased Feedback
Working with third party investors who run the restaurants for you means you have additional eyes and ears on the ground. This increases the amount and the quality of the feedback you will receive, which in turn helps you make decisions that will benefit the other franchises. Keep in mind that these investors will have invested the majority of the capital required to get going. They want the business to win just as much as you, and they’ll be motivated in ensuring information is communicated often and clearly.
Increased Revenue
If you do all you can to ensure that your franchisees are supported and operate compliantly, then you can expect to increase your sales as they increase theirs, since fees and royalties must be distributed to the parent company. Furthermore, it’s worth noting that your assets may increase as well, if you share the upfront capital required to launch a new location, as you’ll be a part-owner of the walls.
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5. The Disadvantages Of Being A Franchisor
A franchise business is a business that includes a parent company and a (sometimes large) group of franchisees. Franchisees are considerable stakeholders in the business, and their voice and opinion need to be heard. This means that all decisions made need to be somewhat approved by them for the decision to take place. Indeed, franchisees may, through their own experience, adapt the way they run their restaurant to a way that seems to be working for them. This means that some of the decisions you will want to make as a franchisor may not ultimately be applied, and this may put the consistency of the business at risk.
In other words, contrary to a restaurant business that owns several branches which it controls, a franchise business gives up a part of that control and ownership to the franchisees in exchange of the upfront cost invested by the franchisee to get the business up, in the first place.
6. How Inventory Software Helps Run Better Operations Amongst Franchisees
The more sales your franchisees make, the more franchisors make. Optimizing costs and maximizing sales should be a priority for any business, but is especially important in the F&B world, where margins are getting increasingly low. A restaurant inventory management software helps franchisees take back control over their back of house and keep their food cost down, eliminate wastage, and analyze the performance of their menu.
The ability to input data easily, centralize it quickly, and delivery it clearly, enables the franchisor to see how the franchisees compare in terms of performance, and can investigate in order to find and fix discrepancies.
Built-In Dashboards
Access instant sales, inventory, and menu performance data across franchises
7. Conlusion
Franchising is a great strategy to adopt for corporations wishing to expand their business without risking capital . The capital to get a new location started is brought by an external investor who, in exchange for a monthly fee adapted to the gross sales the location generates, receives support from the franchisor in the form of marketing, advisory, brand recognition, training, and more.
The difference between a franchise business and a multi-chain restaurant is the amount of control a corporation has in its decisions. Indeed, a franchise business will need to take into consideration the voice and opinions of their franchisees who provide direct feedback on what they think could work, or what the business needs.
Overall, however, franchising is a pretty good deal for corporations looking to grow quickly and without investing significant capital. Not only that, this expansion model enables franchises to significantly increase their revenue.
To get started with this business model, corporations must first build their brand awareness. Also, and in order to avoid failures, brand should look into the rules and conditions they would like to set in vetting investor they would trust.
8. About Supy
Supy is the restaurant inventory management platform built to help multi-branch businesses and franchises cut costs, reduce waste, and boost profits. Designed to be accessible by anyone, Supy reduces the training time it would take to get your franchisees up and running, all while maximizing the ease of data entry related to back of house operations. Time not only maximizes the amount of data going into your systems, but also enables franchisors to gain a greater, real time insights into the performance of their franchisees. This is notably done with Supy’s suite of built-in restaurant performance dashboards, which require 0 designers and 0 training to be understood. This is the power of Supy.
Take your hospitality business
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FAQ
A restaurant franchise is a business model where a restaurant chain licenses its brand, menu, and operations to a third party who manages individual locations under the chain’s guidelines.
(Discover how centralized operations can benefit multi-location restaurants on our Centralized Procurement page.)
In the franchise model, the franchisor grants the franchisee rights to operate the restaurant using its brand and business systems, typically in exchange for fees and royalties
Benefits include brand recognition, established operational guidelines, and access to the franchisor’s support and marketing efforts.
(For efficiency tips, visit our Restaurant Operations Guide.)
The franchisor is responsible for providing support, training, and brand consistency guidelines to the franchisee.
Costs often include initial franchise fees, royalties based on revenue, and contributions to marketing funds.
Franchising allows the franchisor to expand quickly with reduced risk and financial investment, as franchisees bear most operating costs.
In a franchise, individual locations are owned and operated by franchisees. In a corporate chain, the parent company owns and operates all locations.
Models include fast-food franchises, full-service dining franchises, and delivery-focused franchises.
(Learn more about various business models on our Cloud Kitchen Business Models page.)
The franchisee keeps a portion of the revenue, while the franchisor earns through royalties and fees.
Royalties are fees paid to the franchisor, typically calculated as a percentage of the restaurant’s revenue.
A franchise agreement is a contract outlining the rights and obligations of both the franchisor and franchisee.
Franchisees follow the franchisor’s standardized guidelines on service, quality, and customer experience to ensure consistency.
Franchisees typically receive training on operations, customer service, and brand standards from the franchisor.
Marketing is often handled by the franchisor, with franchisees contributing to a marketing fund
Support includes training, operational guidance, and help with supply chain management.
(See how inventory management can benefit franchises on our Inventory Management page.)
Challenges include maintaining brand consistency, managing royalty fees, and meeting franchise requirements.
Yes, some franchisees operate multiple locations under a multi-unit franchise agreement.
Location impacts visibility, customer base, and revenue potential, so it’s essential to choose strategically.
Franchising enables brands to expand quickly across regions or countries without managing each location directly.
With modern inventory and POS systems, franchisors can track key performance metrics and support franchisees more effectively.
(Learn more about leveraging data on our Restaurant Analytics page.)
