Independent versus Franchise II
This article continues on with the discussion of the pros and cons of opening a franchise vs an independent restaurant.
How Much does it Cost?
Franchises are broken down into three main cost components.
- Initial franchise fees are a one time fee for buying into the franchise. This can range from $25,000 to $40, franchise. Fees on the higher end tend to be concepts that can generate higher revenues such as $2 million or more. Generally, most franchises charge $25,000 to $35,000.
- Royalty fees are normally paid as a % of gross sales on a weekly or monthly basis. Royalty fees allow the corporation to share a percentage of the franchisee’s profit. On average this can range from 4% to 8%. Faster growing concepts generally charge a 5% royalty fee.
- Advertising & Marketing fees is the right to use the company’s advertising programs to promote your business. Depending on the marketing and advertising requirements of the company, fees can range 2% to 4% of net sales. For example, a company may require you to spend a certain amount for the grand opening or on local advertising.
How to Evaluate a Franchise?
If you are considering a franchise, then you need to know how to evaluate one. There are six main points that can be used to choosing the right one.
- Return on Investment. Are you making money? For example, if you have a unit that earns 20% operating profit and you owe 5% in ongoing royalty fees, you are still left with 15% return on investment.
- Brand name. Do you have a positive connection with the brand? Is the brand recognizable? For example every kid and adult knows McDonald’s as the fast-food hamburger restaurant. Regardless of whether a person likes McDonald’s, everyone knows the brand.
- Marketing and Sales Tools. Does the franchise provide tools to assist you in marketing the restaurant? Is the restaurant constantly searching for a new product to develop? You should want a concept that believes in ongoing research and development.
- Purchasing and Distribution. Will you receive favorable supplier contracts? You want to be able to purchase your supplies at a better price since you will be part of a larger organization.
- Reliability and Consistency. Are you able to rely on the company to create something that will keep your business attractive in the competitive marketplace? You want to remain a strong competitor for years to come.
- Support. What kind of franchise support does the company offer? You want a company that will support you in both the good times and the bad.
What else should I know?
Companies screen applicants based on several factors – net worth, liquid assets, experience, and education and two most important factors, passion and commitment. Restaurant franchise agreements generally require a 10 year commitment with options to extend. From a company’s perspective training and setting up takes significant time and money. Therefore, a company wants a person who wants to be there because they enjoy it and they are totally committed to building the brand.
I want to be Independent. A Franchise isn’t for me.
So you evaluated the franchise option and you have decided that it wasn’t right for you. Starting a restaurant on your own requires hours of research and money. Unlike a franchise support system, you have to create every component of your business from concept, site allocation, logo and branding, training, operation, and marketing. This doesn’t mean a support system cannot be in place. As an independent restaurateur, you have the ability to create your own type of support system by building contacts, networking and partnering with other businesses. As your network of contacts become larger, access to your resources will widen. On a more positive note, an independent restaurant owner has the potential to significantly earn more money than a franchisee. With no franchise fees or ongoing royalty fees, you have the power to control the direction of your own business. A successful concept remains independent until you want it to grow more. You too can build your restaurant into a successful franchise system. If you have the passion and drive, anything can be accomplished.
What is my Opinion?
As for myself, I did not choose a franchise. My wife and I truly believe with both our academic and work experience, we have what it takes to start a successful restaurant on our own. This is a personal decision that you have to make. Do I believe in franchises? Yes, I do. However, just like planning your own, you need to do research. Check out which restaurant franchise ranks well and see if it works for you. In addition, like any business, choose with precaution. Do your homework and ensure you are receiving a fair deal.