Some of the most successful food businesses in the restaurant industry come in the form of franchised restaurants. The franchise model allows the owner of a food business (the franchisor) to grow their brand and revenue while a third party (the franchisee) undertakes the operational management of the franchised business. If your restaurant concept is streamlined, easily replicated, appeals to a wide customer base, and is profitable, you might be wondering how to franchise your restaurant.
In this article, I break down the steps it takes to franchise a restaurant and go into detail on the process you can expect, plus how to tell if your restaurant is one that would do well with the franchise model. I also give the pros and cons of restaurant franchising and give insight into the best practices you should adopt. Let’s dive in.
Step 1: Assess If Franchising Is a Fit
Knowing if your restaurant can be a franchise is the first very important step in this process. Franchising is not a model for every restaurant, and this is for good reason. Answering a few questions can help you determine if franchising your restaurant is a good idea.
Is your restaurant profitable?
The first step in knowing if you should franchise your restaurant is if it is profitable and successful financially. Profit margins between 5%–8% are usually a good indicator your restaurant is performing well, especially closer to 8%. That being said, when you are successful as a restaurant, and there is demand for more of your product, then that is when you should feel comfortable branching out.
Can your concept scale?
The next part in assessing if a franchise model is right for you is your ability to scale your food. The most successful franchise models serve the same great quality food consistently across various locations. This could be one of the biggest struggles in making a franchise restaurant business, as it takes time, organization, and an operator who is very in tune with why the restaurant does well. So having standardized recipes, replicable systems of managing the business and serving guests, and access to comparably sourced ingredients are just a few of the many aspects you need to replicate your restaurant.
Do you have the funds to franchise?
Lastly, being liquid enough to cover your bills and support expanding into another location is absolutely vital to whether you can franchise or not. The costs to build out a restaurant are still there, albeit supplemented by the franchisee you bring with you. But there will still be financial obligations, and you will need to help fund the new business as your franchisee works on getting it up and running.
Step 2: Craft a Franchise Business Plan
Your franchise business will be a separate entity from your original restaurant. So you’ll still have your original business (i.e., “Awesome Restaurant, LLC”), and you’ll add a separate business to handle the franchising aspect (i.e., “Awesome Restaurant Franchising, LLC”).
The next step to creating your franchise business is writing a franchise business plan. This business plan articulates the overall vision of your franchise model and gives your franchisees a blueprint for financial success. A franchise business plan is also how you will ensure that you, as an operator, have thought of everything and are not making this decision on a whim.
Your franchise business plan should include:
- The structure of your franchise, including leadership as the business grows
- Target market
- Key demographics
- Regions expected to branch out into
- Supporting data for key expansions
- Growth projections
- Final expectations
The final step in the business plan should be articulating how you can support your franchise owners when they come under your network. Often, franchisees are people with capital and a willingness to start in the food industry but many lack the basic knowledge to open a restaurant on their own. With a solid business plan in place, you offer not only confidence but the guiding documentation they will use to understand and execute your concept’s goals and the brand vision you may have.
Many aspiring franchisors reach out to franchise consultants or lawyers who specialize in franchise businesses at this point. These experts have set up dozens of franchise businesses and can ensure your franchise business plan is complete (and viable). They will also be invaluable in the later steps of your franchising process.
Step 3: Create a Franchise Disclosure Document
The Franchise Disclosure Document (FDD) is a legal document that provides information to potential franchisees. The FDD describes the terms of the relationship between the franchisor (you) and future franchisees.
Your FDD should include:
- Details about the franchisor (you)
- Details about the management team that prospective franchisees can expect to interact with
- Required start-up costs needed to start a franchised restaurant, along with
- A list of royalty percentages and other licensing fees
This FDD will also contain the relevant trademarks, patents, and other company information that is specific to your business that franchisees would be privy to. Sourcing restrictions, territory expansion, public figures related to the restaurant, and any other item that could have financial implications in owning a business are also typically included.
As you can imagine, this legal document is extensive and is key for doing business within the law and with good standing. If you didn’t consult with a franchise attorney when writing your business plan, you absolutely need one to help create your FDD. You can find franchise attorneys from a simple internet search, or find attorneys that specialize in business formation and franchise disclosure on legal services sites like LegalZoom.
Step 4: Build Out an Operation Manual
When you first started your restaurant, you likely wrote an employee handbook and recipe book to ensure consistently great quality in your food and service. Take this same mindset and apply it to your franchise business. You’ll need to create a guide for franchisees to ensure consistency and lay out the expectations for anyone running a business with your brand name attached.
An operations manual that is intensive, easy to follow, and offers guidance on the major tasks a franchisee will perform is something that will help elevate your business and determine how well you grow and succeed at gaining multiple franchise locations.
Your operations manual should be able to share how exactly to perform certain tasks and the philosophies behind why you approach problems and other tasks within the business, including:
Staff Management
- Hiring, onboarding, and training staff
- Performance expectations
- Promotion expectations
- Management hierarchy for each location
- Termination process
- Any other relevant employee-specific information
Food & Beverage Handling
- Food preparation
- Vendors and vendor sources
- Standardized recipes
- Philosophies on the overall guest dining experience
Operational Proficiency
- Specific contracts with repair services
- Equipment maintenance
- Safety system checks (such as fire suppression)
- Best practices for:
- Opening and closing the restaurant
- Inventory and ingredient tracking
- Performing restaurant forecasting
- Performing restaurant audits
You basically want to give your franchisees the playbook of success that you had with your guests in your first restaurant. This manual is the key to how your restaurants will function, so being as detailed as possible in how the people leading these businesses should perform is vital.
Step 5: Establish Your Legal Structure & Other Items
Establishing how your franchise business is legally set up is key. Standard practice in the industry dictates that you often will have your own parent company that establishes the franchise network. You then want to have each business be its own legal entity—for example, having your own original restaurant and the newly expanded restaurant separate. This helps protect each individual business and keeps them all in standing order financially in case one business is confronted with a difficult situation.
The legal structure is important as it allows your businesses to operate with peace of mind while also protecting each of them in their own right as operating businesses.
Other documents you may want to file for are trademarks and restaurant-specific patents you may come up with. These specific legal filings keep the successful parts of your business that drive business yours and help avoid any bad faith actions in regards to copying or taking away from your business. All of this should be done with the oversight of a lawyer or someone familiar with restaurant and individual property law.
Related: LLC vs S corporation vs C corporation: Which Is Best for Your Business?
Step 6: Determine Fee Structure
The next step is to determine the fees and other charges the franchisee will incur and pay you while operating. You need to be able to decide whether you will charge your franchisees only a royalty on top-line sales, for marketing support, or just an upfront fee. This is very important, as it gives you the game plan on how you will make money in the franchise process.
In this process, you will also look at some other important criteria. Many franchise programs require an individual franchisee to have a net worth of a certain amount to qualify. This would mean their cash and assets minus any debt they may have. For example, Subway requires a franchisee to have a net worth of $80,000 to participate in their franchise program. They also require applicants to have $30,000 in liquid assets alone to be given a shot at owning and operating their own location.
It is important to note that the percentage of top-line sales requested may change by concept. For example, Taco Bell has a 5% rate for monthly fees to operate, and this is built into the contract your franchisee will sign when starting out. It is up to you to determine the rate you would like to charge, but do note higher rates may make some franchisees wary. So, a rate that financially makes you a profit but also gives the franchisee a chance to make money is what you should aim for.
Step 7: Build Out Your Financial Targets
Knowing the financial goals you will have for your franchisee leaders is key to their success and your ability to track them. The good news is that the basis of franchising restaurants is the success of your own business, so copying this over should not be too difficult of a task. But you do need to be aware of the costs of goods, the market pricing that you will have on items, and how much it will cost to operate based on that individual location and the geographical location it sits in.
With franchised restaurants, it is very common to perform restaurant audits and have monthly financial goals that involve profit and loss (P&L). So having targets on food cost, liquor cost, labor cost, total sales, and any other important financial markers you value is essential to ensure your restaurants perform to where they need to.
You also need to have a plan on how to support your franchisee partners to hit these goals. You need to remember that some franchisee partners are joining your brand because they want support and guidance on how to build a successful restaurant. Having clear financial goals and a roadmap on how to support their ability to achieve them is key in order to find success for all parties involved.
Use our guide on how to perform a restaurant audit to learn more about this process.
Step 8: Market Your Franchise Availability
Letting people know that you are offering a franchise opportunity is key to attracting potential franchisees. You will also want to highlight and champion why it is such a good prospect to franchise out a piece of your business. Some of the items below I have seen in the market are examples of what you should do to make potential franchisees more interested in your brand:
- Add a franchisee information page to your website. This page will sell the reason why choosing your business model to franchise is a good decision. Take, for example, Tim Horton’s page, where the coffee giant sells the perks of franchising out a location.
- Advertise in franchise industry publications (franchise listing websites, Franchise Times, Franchising Magazine USA, etc.).
- Consider social media marketing. Targeted ads on Facebook, Instagram, and other social media sites will allow you to reach your desired demographic while spreading the word more organically. Another site to share your opportunity is LinkedIn. Consider a post on the franchise opportunity and share it within your network to get possible leads.
- Publishing a press release on your franchise opportunities is another great way to get the word out. Local newspapers and online journals can share this as well, so having a formal announcement for traditional media centers to publish is key.
- Share the word at industry nights, local culinary American Culinary Federation meetings, and other events where industry and business professionals will gather. Work on your franchise pitch and be comfortable sharing it with others in the food space.
Related:
Step 9: Select Your Franchisees
Maybe one of the most important steps, if not the most important step, in franchising restaurants is finding leaders who will take the reins and help grow your brand. The people you choose to franchise your restaurant to are literal extensions of your brand. They represent your food, your image, and how your product is sold to customers and are in control when you are not around. Your vetting process for choosing who gets to franchise your restaurant needs to be one that is intentional and finds the best candidates.
First, being enthusiastic about your business and wanting to grow it is the first aspect you should look for in someone. You will want your first franchisees to also have a proven track record in restaurants and food business management, as it is these first few that will lay the groundwork for the rest of your franchise network. They should meet all capital and asset requirements that we discussed earlier, and finally, should be able to prove a track record of good business practices.
Step 10: Support & Train
Training your franchisees will allow you to get their businesses running in the quickest time possible. It will also allow you to instill the methods, practices, and philosophy you have when running your restaurant. The training for franchisees should be in-depth and offer them the ability to truly learn how to run your restaurant concept. It would be wise to have a training program laid out by the time you’ve selected your partners. This program should be able to detail their daily tasks, expectations for customer experience and end product, and how to manage higher-level tasks for the businesses they run.
You can start with support by helping with hiring and training staff and teaching your franchise partners how to vet and hire employees. You should also teach them and support them in marketing and how they can get their business out there. Helping set up systems—point-of-sale (POS) systems, audio systems, security systems, staff and customer safety systems—and ensuring their facility is in working condition is vital in this process as well. While some franchise programs do not offer this level of in-depth training, you should definitely consider it for your first few franchises.
Your goal is to replicate the dining experience that has made you so successful that you can actually begin to franchise out. Do not waste the opportunity with a lack of support, especially when franchising your first few locations.
Step 11: Monitor Your Locations
The last step in franchising your restaurant is monitoring each location for success. This can be done by requiring restaurant monthly audit reports by each franchisee, reviewing sales, and also by reviewing customer reviews. Additionally, performing in-person visits and sitting down to dine as a customer lets you see how your locations are doing.
The more effort you put in, the more you can catch, and the better you can help build out the number of franchise restaurants you have to offer. While franchising your restaurants takes the pressure of managing multiple locations, your involvement in guiding all of your franchisees is what will determine the amount of success you have overall.
Why You Should Franchise Your Restaurant
Many popular restaurant and food businesses are actually franchises; McDonalds, Subway, Coffee Bean & Tea Leaf, to name just a few. Plenty of new businesses—like Crisp & Green and Big Chicken—start franchising every year. In a franchise restaurant system, the franchisor offers up their brand and proven business model for a franchisee to use to set up their own business. The franchisor benefits from franchising fees and increasing market expansion while the franchisee benefits from starting a a business that has already proven to be successful.
A financial benefit of franchising your restaurant is that, as the franchisor, your royalty payments and franchise fees typically come from top-line sales. This means you receive your fees from the overall sales of your franchises, not the bottom-line profit; you will be paid your fees no matter how well (or poorly) the franchise is managed. Finally, if you plan on exiting your business, you’ll be able to sell a business that has the added revenue stream of franchise royalties, not just the profit margin of a traditional restaurant. The upside for franchising your restaurant is very high, and when done right, it can be financially lucrative.
Examples of Restaurant Franchise Costs
There are many examples out there of popular restaurants that have gone on to franchise and expand their brands rapidly. The common denominator is that these restaurant brands have been able to offer crave-able dining experiences that are consistent in each location, no matter how large the growth has been. Check out the real-world cost examples for these popular restaurant brands.
These are the big, recognizable brands. But every day smaller brands choose to expand via franchising. If you are considering converting your successful restaurant into a franchise business, you can look at franchise brands like Toastique or Crisp & Green for inspiration.
Pros & Cons of Franchising Restaurants
While franchising a restaurant can be lucrative, there can be some drawbacks to the process if you are not careful. It can also be a challenge if the right systems are not in place to manage the growth you will experience when franchising your restaurant. Below we share some of the pros and cons of making the decision to franchise your business.
The ability to grow your brand and increase your sales with the help of other food business professionals is why franchising your brand is such a popular option in the first place. One only has to look at any major national brand that employs the franchise method to see how lucrative it can be. By expanding your business at a much faster rate than you would on your own, you get to introduce your brand to more customers and create a larger customer base to sell to. This will lead to more sales and more opportunities to grow as your brand is recognized more and more.
While this con can be avoided with the right process in place, if your consistency in great products is not there, then your brand’s image can be put in a negative light. Your business is ultimately in the hands of another. With this decision comes a risk that you need to decide to take.
If you are not able to effectively lead your franchisees into a space where they can effectively replicate the product you sold originally, then the risk of failure and alienating customers is high. It only takes one bad experience to drive a customer away, and if word gets out that the food and drink being served is not good, then customers will be wary to show up and support your brand.
Another great reason to franchise your restaurant is the fact that it will cost less with the funds from the franchisee that joins your program. You are relying on using some capital from the franchisee when building out the space, and they will often be responsible for a sizable amount of the cost it will take to get the business off the ground. This allows you to open up new units or locations with less of a cost barrier and can prove to be very useful if demand for your restaurant is high and you need to open more locations in a shorter time window.
While the goal of franchising your restaurant concept is to relieve the workload of growing your brand, it will require a lot of time upfront. This can be a challenge for restaurant operators who are already running their own business. The process of franchising a restaurant is its own full-time job, as you can see from the steps we laid out above. To make your new locations succeed, you need to ensure they are running efficiently and delivering quality products. This takes away time from other tasks and can be a large lift for single operators who are already very busy with their original concept.
The last big pro to franchising your restaurant is the fact that over time, with the right growth plan and success, you can make a large amount of profit off your restaurant brand. Not only will this come from increased exposure, but the more units you open, the more royalty fees you collect. Earning off of a set royalty fee is a much more efficient way to bring in a profit, and it also makes exiting your restaurant brand much easier if you ever decide to sell the company you have built. The long-term gains of franchising a restaurant brand can be very lucrative when done right.
Bottom Line
Franchising a restaurant that has high demand from a local customer base is a great idea if the concept can be replicated and deliver consistently great customer experiences. That being said, there is a lot of effort that goes into franchising a restaurant and ensuring that the partners you bring in to run your concepts have the tools they need to succeed. Use the 11 steps above to understand the franchise process and what you can expect to do if you decide your business is ready to take this exciting next step in its evolution.