How to Franchise a Restaurant
In the restaurant industry franchising is one of the most proven methods for achieving unit growth and expansion. In the most recent data published by the United States Census Bureau franchises represent over 54% of fast-food and fast-casual restaurants in America. As the Census data is updated for 2020 and as the restaurant industry recovers from the Coronavirus COVID-19 pandemic we expect to see bigger trends with franchised restaurants gaining even more market share in the restaurant industry.
If you are a restaurant owner, founder, or management team member, in this article we will discuss how to franchise your restaurant, and the steps involved. Once you have determined that franchising is right for you, the steps in franchising your restaurant include:
- Franchise Disclosure Document (FDD) Development;
- Operations Manual Development;
- Protecting your Intellectual property;
- Establishing your new franchising company;
- Issue and Register your FDD;
- Developing a Sales Strategy; and
- Develop a Franchise Plan and Budget.
Although we discuss each step in detail in our Ultimate Guide to Franchising Your Business, below we discuss the specifics for franchising a restaurant.
Franchise Assessment – Should You Franchise Your Restaurant?
Multi-unit restaurant expansion is achieved either organically where you personally or with the backing of investors and private equity invest-in, build-out, grow, and manage multiple restaurant locations, or through franchising where you achieve growth through unit expansion funded, managed, and operated by franchisees.
There are advantages and disadvantages to each form of expansion and there are many examples of success. For example, multi-unit restaurant brands like Chipotle, Starbucks, and In-N-Out Burger are company owned and controlled and are not franchises, restaurant brands like McDonalds, Dunkin Donuts, and Jersey Mikes are franchised outlets and examples of franchise success.
So how do you know if franchising is right for your restaurant? Well, first and foremost you need to evaluate the 5 franchisability factors that include: (a) Is you restaurant successful? (b) Is your restaurant scalable? (c) Is your brand protectable? (d) Are you committed to building a franchise system? and (e) Do you have the right franchise budget?
If your answers to these questions are “yes” then what comes next is an evaluation of the steps to franchising your restaurant.
Step 1: Prepare Your Franchise Disclosure Document
The Franchise Disclosure Document (FDD) is the legal prospectus that you will be required to issue and disclose to prospective franchisees before you can sell a franchise. The FDD will provide a summary of your entire franchise offering including: (a) details about your restaurant and management team, (b) operational requirements, (c) estimated start-up costs for establishing a restaurant, (c) franchise, royalty and other fees will be paid to you, (d) that legal relationship between you and your future franchisees, (e) territory protection, and (d) financial information about the historical performance of your current restaurant(s).
Step 2: Prepare Your Franchise Operations Manual
The franchise operations manual is the confidential manual that you will provide to your restaurant franchisees. It’s the how to guide for developing and operating your restaurant and will include information that includes: (a) standards and requirements for developing a restaurant, (b) pre-opening training, (c) menu recipes and standards, (d) approved suppliers and vendors, (e) marketing, (f) maintaining front of house operations, (g) maintaining back of house operations, (h) rules for take-out, delivery, and catering, (i) systems for dealing with app based ordering and third-party delivery services, and (j) many other system standards. Operations manuals evolve and change over time as you improve, supplement and modify system standards.
Step 3: Protect your Intellectual Property
When you grant a franchise, one of the most valuable assets that you are conveying to your franchisees is a limited license to use your trademarks. So a major step in franchising your business will include reviewing your trademarks, making sure they are protectable, and registering them with the United States Patent and Trademark Office.
Step 4: Establishing a New Franchising Company
Although you have an existing business and, most likely, an existing company or LLC, when you franchise you will also be establishing a new franchise company, i.e., XYZ Restaurant Franchising, LLC. There are many reasons for this but the most basic is to limit and confine your future franchise business from your existing restaurant operations. By doing this, also, within your FDD you will be required to disclose financial statements for this new corporate entity and not the financial statements for your current restaurant operations.
Step 5: Issue and Register your FDD
Once your FDD is complete, i.e., your team and your franchise lawyers have developed a franchise system and offering that is legally compliant and that competitively positions your brand, it’s time to “issue” your FDD and, within the franchise registration states, “register your FDD.” Issuance is a self-certifying process where your franchise lawyers complete the preparation of your FDD, determine that it complies with the franchise laws, and put an issuance date on your FDD. Once issued you can start offering and selling franchises in the non-registration states (i.e., states that do not require a special filing or registration) and file your FDD for registration in the registration states. Learn more about state-by-state franchise filing and registration requirements.
Step 6: Develop a Franchise Sales Strategy
During the franchise development process its important to plan out a franchise sales strategy. Far too often start-up restaurant franchises waste money on marketing that they are not yet ready for. Franchise brands need to “season” and so should your marketing strategy. During the launch of your restaurant franchise we recommend focusing on: (a) developing a franchise sales landing page that tells your brand story and is focused on the value proposition that your restaurant franchise can provide to the right franchisee, i.e., how can a franchisee transform and improve his or her life by establishing their own franchised restaurant location; (b) organic leads comprised of qualified individuals and customers who are familiar with your restaurant and may be interested in buying a franchise; (c) limited public relations focused on third-party storytelling that creates reusable content about your restaurant, your story, how your brand can transform the lives of your franchisees, and, overall, provide validation; (d) empowering yourself and your team to learn franchising and various franchise marketing channels, franchise vendors, events and organizations. Check out our free industry leading learn franchising webinars.
Step 7: Develop a Franchise Plan and Budget
Franchise success requires a 1, 2, 3 and 4 year planning strategy. In year 1 you will be focused on organic expansion, selling to a few well qualified franchisees, and “seasoning” your brand. In year 2 you will focus on more sales and leveraging digital media and marketing including, organic lead generation, SEP, public relations, and broker relations. In year 3 you will be focused on accelerated franchise growth and the success and satisfaction of your existing restaurant franchisees (i.e., the franchisees who you sold to in years 1 and 2) will be critical to your future success. If your existing franchisees validate your brand, are earning money and, potentially, achieving a good return on investment, they will provide important validation for future franchisee recruitment. Learn more about budgeting and planning in our how much does it cost to franchise your business article.
To learn more about how we can help franchise your restaurant with our fixed fee legal + franchise development representation franchise contact us at (718) 979-8688 or by email.