Starting a restaurant franchise is, for many, the ultimate sign of success as a restaurant owner. Whether or not this is entirely true is up to your own discretion, but the simple truth is that it’s a major feat. Creating a restaurant franchise is a sign that your business has grown to the point that expansion is not only realistic, but inevitable. So inevitable, in fact, that you’d willingly allow someone else to tack their name on the door!
So, how does starting a franchise work? In this blog, we’re discussing the finer points of how to franchise a restaurant.
Understanding Restaurant Franchising
Before we do anything else, it’s important to establish a baseline of what a restaurant franchise is.
What is Franchising?
Put simply, franchising a restaurant is the process of creating a business and allowing a third party (or parties) to independently invest in and, ultimately run, a branch of your business. This process generally comes with a large number of rules and regulations for the investor that affect how they can operate, where, when, and so much more — but that’s why we’re here! So, why exactly would anyone want to franchise a restaurant?
Benefits of Franchising Your Restaurant
You know the saying that “it takes a village”? This applies to running a restaurant (let alone a chain of them). You physically cannot operate a chain of restaurants alone — that’s why we hire management and extra staff. But on that same note, it’s why many people opt to franchise. Once your business reaches a point that you’re managing multiple locations, a franchise can actually be a great option.
Franchises allow owners to create a wider reach for their brand (with more brand recognition) and, eventually, to bring in passive income through royalties.
Challenges to Consider Before Franchising
Franchising your business is no easy feat. It requires a massive amount of preparation and, most importantly, that your business be able to stand entirely on its own. You need your business to be built down to a science and, importantly, to be confident in its ability to run — even when you’re not involved.
While there are plenty of things that can make the process of franchising a restaurant difficult, one of the largest risks you’ll take are your franchisees. While they can certainly provide extra cash and a bit of a wider reach, they can also impact your brand. Poor management and toxic leadership are quite dangerous in the world of franchises, meaning it’s crucial that you asses your franchisees well ahead of time.
Preparing Your Restaurant for Franchising
Evaluate Your Restaurant’s Franchise Potential
First things first, it’s important to understand your business’s strengths and weaknesses. One of the most important aspects of any franchise is that it’s organized to the point of near automation. Each of your pre-existing businesses should be able to run autonomously, without your constant supervision, and do so well.
Beyond that, though, it’s important to understand how well known your brand is in your area (or any new areas that you’re considering expanding toward). This is because franchising leans heavily on the weight that your name carries. If it’s well known in your neck of the woods, great! If not, understand that you’ll be fighting an uphill battle for brand awareness and recognition.
Standardize Your Business Model
Remember how I mentioned that your business should be able to run autonomously? That begins with standardization. Each aspect of your business, from portion sizing and menus to pay, inventory, and brand standards, should be clearly defined. Every part that’s not standardized runs the risk of new franchisees disrupting your brand.
Protect Your Brand with Trademarks and Legal Protections
Perhaps unsurprisingly, a very large part of franchising is its legal side. One of the most important parts of this legal work that you’ll need to do is working on trademarks and other legal protections for your brand. This is important because you’ll be trusting strangers with your business’s name and branding.
Developing a Franchise Business Plan
Outline Your Franchise Structure
Every franchise has a pecking order that’s established well ahead of any outside investments. This is because, once again, we’ll be working with strangers under the same banner. As such, it’s important to have a clearly defined command structure; each question should have a clear, predefined answer and someone to give it. More often than not, you (the owner) will be at the top, and any early investors will be your board to run decisions past.
Financial Projections and Startup Costs
Hiring professionals will become a very common theme in this article, so let’s just get this out of the way now — when planning to franchise your business, it’s crucial that you invest in hiring professionals. This extends to legal and marketing, but for now, we’re talking about your finances. Hire an accountant if you haven’t already, and start looking for a team to help you properly plan your startup costs. This will allow you to properly budget and plan for the future, which is something that every franchisor needs to become very familiar with.
Marketing and Support Strategies for Franchisees
Remember how I mentioned marketing? Yeah, now is the time to get started on that. Begin building a campaign that will ensure your brand is well-known and accepted. While you don’t need to launch it now, it’s important to have the plan in place.
Additionally, there should be a clear path for franchisees to pursue support. Things are bound to go wrong at some point, so being ahead of the curve with a clear plan in place is crucial.
Creating Your Franchise Disclosure Document (FDD)
Just as we’ve discussed the importance of a training manual for your restaurant, a Franchise Disclosure Document (FDD) is crucial to your franchise’s success.
What is an FDD and Why It’s Important
Put simply, a FDD is a document that lays out how your franchise will support and interact with franchisees. These documents are big, so be prepared for a good bit of work getting this ready for action. Now, let’s talk about the most important parts of FDDs.
Key Components of a Franchise Disclosure Document
FDDs contain 23 separate sections, each of which is incredibly important in its own right:
- History: How long have you been around? Did you have any predecessors?
- Experience: How experienced is your leadership?
- Legal: Disclose any pending legal action being made by or against you.
- Bankruptcy: Have you (or your business/es) ever declared bankruptcy? This is where you disclose that.
- Starting Fees: All beginning fees are disclosed here.
- Other Fees: Disclose any fees that may come up over time.
- Initial Investment: What is your high and low expectation for return on investment?
- Restrictions: Discuss any requirements for what and from whom your franchisees purchase product.
- Franchisee Requirements: Disclose any requirements of investors.
- Financing: Lay out all stipulations to any financing agreements that you may have.
- Assistance: Lay out what assistance you’ll provide to franchisees.
- Geographical: Do you want to restrict the franchise to a specific area? Here’s where you do that.
- Trademarks: Show all trademarks for your franchise.
- Patents, Copyrights, etc.: Disclose any patents, copyrights, or proprietary information that franchisees will need to know.
- Actual Operation: Establish how involved you’re expected to be in the operation of franchises.
- Restrictions: Can your franchisees run specials? If not, put that here.
- Renewal, Termination, Disputes, and More: Clarify the processes of the aforementioned items along with transfers and any other similar situations that seem reasonable.
- Public People: Do you have a celebrity/public figure endorsing you or involved with your business? Disclose that here.
- Financial performance: Optional; disclose any expectations that you have on a franchisee’s financial performance.
- Franchise Info: Disclose all locations, both franchised and company-owned, for the past three years.
- Financial Statements: Have your financial advisor disclose three years of your company’s financial statements.
- Contracts: All contracts that must be signed to become a franchisee live here.
- Receipts: Provide any remaining information and allow the franchisee to request amendments.
Setting Up Legal and Financial Structures
Franchise Agreements and Legal Compliance
As you can tell from the above section, your legal team will have a field day when setting up a franchise agreement. It’ll take a lot of manpower and time, and as such, should be an early priority of yours. You’ll need to find an attorney (or several) that specialize in franchising and work with them to build your franchise agreements and ensure you’re in full legal compliance for your jurisdiction.
Establishing Franchise Fees and Royalties
Franchise fees and royalties are a major part of why many groups choose to franchise. As such, you should have a clear idea of what you need and want in terms of initial investment, as well as outlining your long-term income — also known as royalties. Most franchises take a percentage of annual or quarterly sales as royalties from their franchisees.
Setting Up Support Systems for Franchisees
Your franchisees will need support, it’s just a matter of life. Some franchises opt to provide assistance with startup and then choose to keep more of a distance in terms of day-to-day. But if you want to be able to support your franchisees more directly, there needs to be a clear path to do so. Establish “if/then” (if equipment fails, then we pay to replace it) concepts to narrow down when assistance is needed.
Recruiting and Training Franchisees
Recruiting is an important part of franchising, as you can’t franchise without franchisees!
How to Attract Potential Franchisees
There are three ways to attract potential franchisees: marketing, brand recognition, and headhunting. The first is rather explanatory. The second relies on franchisees coming to you because they’re familiar with your brand. The last requires that you actively hunt down qualified professionals, often through the use of a recruiting service.
Screening and Selecting the Right Franchise Partners
Each franchise screens differently, but the standard steps to take involve finding people who are experienced in this industry. From there, you’ll need to do a deep dive on their financial history and, more likely than not, speak to former employees and employers before making any major decisions.
Marketing Your Franchise Opportunity
Marketing is the lifeblood of restaurant work, and franchises are no different.
Leveraging Digital Marketing to Attract Franchisees
Digital marketing is a major part of the world that we work in now. As such, it’s likely best that you invest in a digital marketing expert (or agency) to help build your online presence. Keep active on social media, reach out through email marketing, and work to optimize your online presence for SEO.
Using Trade Shows and Industry Events
Trade and industry shows are a great way to build your brand recognition in the industry. While they’re few and far between, taking the time to rub shoulders with other franchise owners and restaurateurs is an excellent way to learn more about franchising and network.
Creating a Franchise Sales Website
You should already have a website for your restaurant, but it’s time to build out a site to help with franchise sales. This will allow you to more easily bring in new potential franchisees and, over time, ensure those interested have a suite of resources to call on.
Supporting Your Franchisees for Success
Ongoing Training and Development
Training and development never ends in restaurants, and franchises are no different. In fact, you should be more focused on training in franchises, as there are more moving parts. Most franchises opt to develop their best management members into a training team that can move between locations and get things on track. While you don’t need to do it that way, it’s best to invest in a clear path for training new and current employees.
Monitoring Franchise Performance
Just as you did with your restaurant(s), it’s crucial that you keep an eye on the KPIs of your franchises. Monitor the financial health of each location and, should you notice something awry, this is where your support network and training programs come into play.
Providing Marketing and Operational Support
Over time, it’s possible that your franchisees will become more self-sufficient. While that’s all well and good, it’s best to provide them continued support for marketing and day-to-day operations. This may take the form of digital marketing and email campaigns, it may take the form of assistance with big-picture maintenance of the building and equipment, or it may involve training for management — what matters is that you’re there to help.
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