Advantages & Disadvantages of a Restaurant Franchise
The purchase of a franchise – any franchise presents itself with both advantages and disadvantages. Many of these so called “advantages” and “disadvantages” are similar between different types of franchises. However‚ when dealing with the purchase of a “restaurant” franchise‚ prospective franchisees must be aware of unique factors particular to the restaurant industry.
A recent article in Food & Drink Digital addresses some factors that prospective restaurant franchisees should evaluate and consider when purchasing a restaurant franchise. In the article the author lists the following factors/considerations [I have included my comments after each point]:
Advantages of a Restaurant Franchise
A well established name
Most franchise locations have a well known and established name. This is especially true of restaurant franchises. From people on lunch breaks to those traveling to the person having a craving to eat the franchised company’s food specific food franchises are usually well known enough that people already know if they want to eat the product. The only major thing that must be considered is the most beneficial location for the restaurant franchise.
[My take: Don’t “overestimate” the value of a franchisor’s trade name. Sure there will be significant brand recognition if you are dealing with a well known and established restaurant or food service business such as a McDonalds ®‚ Dunkin Donuts ®‚ or other established national or regional franchise. However‚ the vast majority of restaurant franchises involve regional franchisors who still have a long way to go in establishing brand recognition. So‚ don’t overestimate a potential franchisors fancy trademarks and trade dress]
Funding for food operation businesses is usually simple with banks because they typically know what is involved with opening a restaurant therefore the bank knows exactly what to look for to make them feel comfortable approving the loan.
[My take: Financing is never easy and in today’s economic climate no matter what franchise you are buying‚ always assume that bank financing will be difficult. Chances are that your best source of financing may come from an equity loan on your home. If this is the route your are taking – proceed with caution]
Training and support
The amount of training and support given by a good restaurant food franchise businesses is valuable.
[My take: This is true. But every franchise is different. Some franchisors offer valuable and thorough training and others completely “drop the ball” when it comes to training. Do your research]
Disadvantages of a Restaurant Franchise
High employee turnover rate
In the food business, a large amount of employees are usually necessary to run the franchise so it operates properly and smoothly and usually the majority of the employees receive considerably low pay. This usually leads to inconsistent employees or unreliable employees with a high turnover rate. Keeping and finding good employees is usually a struggle because of the low pay and creates an environment where you will need to make sure that every new employee is properly trained to uphold the name of the franchise as far as work ethic and quality is concerned so that your franchise may continue to mirror that of other franchises.
[My take: I agree.]
Often times‚ especially when dealing with fast food chains‚ there is a very fine line between good costs and labor and making profit. Along with the price a franchisee must consider the cost of food spoilage and other unforeseen issues such as theft which are more likely to be present with employees at restaurants and fast food chains.
[My take: These are accurate factors. Also‚ you must consider the “additional costs” that you will incur when purchasing “proprietary” and “non-proprietary” products from the franchisor’s approved vendors. Increased costs associated with “approved vendors” will impact your profitability.]
Keep in mind that when buying a restaurant franchise a substantial investment is usually required. All necessary equipment including food‚ ovens‚ proper food disposal machines‚ venting‚ furniture‚ etc. should be things that are considered when buying a restaurant franchise. Other costs to consider that are associated with a franchise are royalty payments and marketing costs.
[My take: Royalties‚ advertising fund fees and premiums for proprietary product purchases will substantially “impact” the “profitability” of your restaurant franchise. So‚ it is critical that you conduct thorough due diligence and speak to existing franchisees.]
For more information on buying a franchise request a complimentary copy of “An Entrepreneurs Guide to Purchasing a Business or Franchise” by franchise lawyer Charles N. Internicola.
By Charles Internicola December 26, 2010
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