Do you run a restaurant and you want to expand it by franchising? If YES, here are 20 best tips on how to franchise your restaurant business successfully.
When an entrepreneur sets up a restaurant and it begins to earn a sizable profit, it is only natural that he or she will want to expand his or her restaurant. One of the ways of achieving this is through franchising and it is advantageous mainly because of the lack of time and the resources required to expand a Restaurant Brand.
What is a Franchise?
A franchise basically involves a party (known as the franchisor) granting another individual (known as a franchisee) the permission to make use of its name and trade mark, according to an identified system, usually within a territory or at a location, for an agreed upon term. The franchisee is granted a franchise license to use the franchise company’s trademarks, systems, signage, software, and other proprietary tools and systems in accordance with the guidelines in the franchise contract.
Going for a franchise Business model allows business owners to grow their businesses without having to spend substantial amounts of their own money to build new units. In this vein, the risk that is associated with establishing and running a new business will be transferred to the franchisee that is responsible for coming up with the initial capital.
For new entrepreneurs who have very little business experience, franchising gives them a successful business model to follow, which can relieve some of the uncertainty associated with starting a business venture from scratch.
The franchisee will have to not only abide by the franchise contract and run their business according to the operations manuals, but they will also have to pay an upfront franchise fee (license fee), and ongoing royalties.
A franchise license can range from $25,000 -$35,000, even though some businesses have been known to fix the price for their franchise license at $100,000 or more, as in the case of what’s called a Master Franchise where the franchisee buys the rights to an entire area, and it’s usually based on population.
The franchisee will also have to pay royalties to the franchisor. The royalties are usually based on a percentage of gross sales. Royalties range anywhere from 4 percent to 9 percent. Some franchisors on the other hand charge a flat monthly royalty fee.
In addition to royalties, franchisees usually buy into a national monthly advertising/marketing fund, which amounts to 1-2% of gross sales. Franchising can make your company extremely successful, but it can be disastrous if you don’t have things properly set up at your end.
20 Best Tips on How to Franchise and Expand your Restaurant Business
A lot of people think that franchising a restaurant is a very difficult process. This is however not true. Granted, like any other business expansion project, it will not happen overnight, but that does not mean that it is a very difficult process. If you think you are ready to expand your restaurant business and venture into Franchise Restaurants, here are the 20 tips that will guide you.
1. Evaluate your current business model: before your start seeking out business partners and before rolling out your Franchise Restaurants License, you should thoroughly evaluate your business. You should consider the scalability of your concept. Can it be systemized and standardized? It is not uncommon for Franchise Outlets to fail because they are not able to maintain the consistency and standards of the main Brand.
There is always a risk that a franchise that is underperforming can bring a bad name to the whole brand. Also, the current business model needs to be profitable. Evaluate the cost structure of the cash flow for the first year and what would be the five-year-return to the Franchise.
The cost structure includes the following-
- Initial set-up cost
- Infrastructure development
- Equipment required
- Marketing plan
- Human resource et al.
2. Register your Trademark and Logo: registering your brands logo and acquiring trademark for your brand is a very integral process that you have to complete before franchising your business. When you franchise your restaurant, you give someone the right to use “Your” logo and trademark.
However, it is still surprising that a lot of people forget to do this. To protect your Intellectual Property, the Franchisor should get everything registered to protect from a fraudulent Franchise party.
3. Cost Estimation: you need to prepare an initial set-up cost or investment plan for the Franchise Restaurant. It should have all the possible types of expenditure. Based on your restaurant’s business model, divide the initial setup costs.
- Location (Rent for three months)
- Electric and Electronic Fittings
- Branding / Signage (Interior / exterior)
B. Licensing and Establishment Cost
- VAT/GST registration
- Local Municipal Licenses
- Liquor Licenses
C. Franchise Fee
Working Capital Requirement (For the first six months)
4. Prepare a Brand Profile: you should craft a Brand Profile that will give a better understanding to your Franchisees. The documents should contain the vision of the brand. It should also give a brief detail about the products and services offered along with the schedule of the opening of the new outlet.
You also need to mention what kind of support you would be providing to the restaurant franchise before and after the establishment. This will enable you to induce some level of consistency in the brand.
5. Crafting the Franchise Agreement: there are no laws specific to Restaurant Franchising, therefore, it is important to have a registered agreement between the two parties to protect the rights of both the Franchisor as well as the Franchise.
The agreement should speak about the payment, plan, tenure, schedule, royalty, and the support the Franchisor will provide to the Franchise. At times, the Franchise Restaurants stops paying the Royalty once the business has been set up. And there is no law to protect the franchisor under which it can sue the franchisee or take away the rights to continue the business.
6. Training: it is very important to train the staff in order to maintain the standard of the products of the original franchise restaurant. It is up to the Franchisor to execute the training of the entire staff, right from the Head Chef to the busboys. The induction and training of the new employees should be done much before the opening of the Franchise Outlet.
Most successful Franchisors prefer to recruit at least a few employees one month before the opening of the new outlet and give hands-on training to the existing outlets to give the recruits an idea of the level of services expected from them. Some Franchisors also employ some of their old staff at the new Outlet to train the new employees.
7. Specify the type of support you will give: The franchisor should clearly spell out the support it will give to the Franchise. For instance, some Franchisors only offer support in Infrastructure Development, operations, training, and Software, while some also supply raw materials. The Support should be mentioned in the Agreement to avoid any confusion later on.
8. Have an in-depth knowledge of your business: The directions provided to each franchisee will likely have to be precise. However, some restaurant owners, are used to running their restaurants on intuition, and as such it may be difficult for them to itemize all the small but important obligations they fulfill every day. Franchisees will not have the freedom to improvise, and will need to be told how to do everything from keeping the books to ordering supplies. Every step of the process must be carefully outlined.
9. Screen your franchisees: just because you want to expand your business does not mean that you should go into a franchise with anyone who approaches you. Anyone who goes into a franchise with you will be representing your brand, so be sure to have a system in place to make sure they’ll take your company in the right direction in a new market.
10. Set the right restrictions: Even after giving franchisees very specific instructions on hiring, training, and other practices, there will be, and should be, certain freedoms they are allowed. They are small business owners too, and as the franchisor begins to step back from daily operations, he or she will have to rely on the judgment of the franchisees as they explore new business opportunities. Give them freedoms, but keep those freedoms circumscribed.
Different franchises will have different ideas about the restrictions they want to place on their franchisees. They struggle with how to balance preserving brand identity with the touch and sensibilities of individual franchise owners.
11. Support your franchisees: Even as the franchisor begins to remove him or herself from the daily business of the franchises, he or she should spend extra time getting to know the franchisees.
A franchisee is unlike other types of small business owners. He or she has opened a new store or service provider and is responsible for its performance within a designated area. He or she derives a livelihood from the business, and oversees all daily operations.
Yet, there is always a larger corporate structure overhead, and how the franchisee works within that structure varies from franchise to franchise. A franchise model presents some particular challenges because, if business is good and new stores are opening, the company is always working with new recruits.
12. Find a Good Consultant: find a good consultant to take you through the process of becoming franchise compliant. This person is an expert and will be your franchising mentor before, during and after you’re franchise compliant.
13. Build an Online Presence: if you want to give your restaurant maximum exposure for a possible franchise, then you have to give them an easy way to learn about the opportunity and get in touch with you. These days, that means you need to have an online presence and it does not just end in owning a website. To effectively market your franchise to potential franchisees online, you also need to include your franchise opportunity on listing sites, work social media and create content that is relevant to your target.
14. Attend Franchise Events: another way to create awareness about your restaurants franchise opportunity is to attend franchise events. These events can be expensive for exhibitors, but fairly reasonable for attendees. And by attending, you can take advantage of networking opportunities that can help you find franchisees directly or make valuable connections that can help you grow your franchise network over time.
15. Understand that the roles of franchisor is not the same as that of a business owner: As the business owner, it is your job to deliver mouthwatering dishes; you do a great job and have a lot of loyal customers. Soon enough a potential business partner offers to open a franchise and you jump at the opportunity. You have made the right decision, right? Not exactly.
You need to recognize that being a franchisor and a business owner are two different skill sets. You may be a great chef, but that doesn’t mean you will be a great franchisor. Franchisors must be focused on finding and recruiting franchisees.
Processes need to be put into place, manuals need to be written and franchisors need to invest time into training franchisees and lower level employees. These duties can take away from those related to owning your primary business.
16. Know the right time to franchise: just because your five month old restaurant is having good sales every night doesn’t mean that the time is right for franchising. It is advisable to wait for at least three years before considering the business model. You need to have everything figured out first before you proceed.
17. Don’t underestimate the costs: even though franchising can bring in a lot of money for both parties involved, it can also sink you in a massive hole if you don’t have enough money on the outset. Most startup costs go to legal representation and the drafting of regulatory documents.
And regardless if your franchise is doing well or not, the Federal Trade Commission mandates you update them once per year. On the legal side, costs can range from the “low teens to the mid-20s.
From there, you must file with your state’s attorney general, which could cost you another $1,000 to $2,000. Then there are the accountant fees (franchised businesses must be audited once per year, even if you don’t sell any units), which could ring you anywhere from $7,500 to $15,000.
18. Marketing and Advertising: Based on the geographies franchisor can support the franchisee in marketing and advertising by including it in the major plan, or help them understand the market and execute marketing activities on behalf of the franchisee in the initial days. It is important to have a clear Brand Guideline for the Franchisees to adhere to.
Clearly outline what all tasks the individual Franchise Outlets are responsible for, such having a Social Media presence, listing on Restaurant Review Sites, et al. Remember to provide templates, logos, and other Brand specific items such as menu design to ensure consistency across all outlets.
In conclusion, is not always easy to duplicate the success story of an already established restaurant. There are a lot of challenges, the main ones being maintaining the consistency in terms of the taste of the food and the service provided.
It is also important to the entire Guest Experience because you want your franchise location to feel exactly like the parent branch. Even then, there are several factors such as the target customer base and the Location that play a crucial role in the success of the restaurant. Franchising can be really profitable for everyone involved in it when it is done right.
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