When you look around the neighborhood, you’ll most probably see a number of familiar restaurant franchises from McDonald’s to KFC. These global brands franchises provide employment opportunties in local communities and push the economy forward. In fact, the franchising industry produces $787.5 billion yearly in the United States.
And what’s not to like about a franchise? Everything is prepared for you from branding to recipes to marketing. But it’s not all sunshine and roses. Though a restaurant franchise can seem like a no brainer, there’s still so much to unwrap like ongoing royalty fees and an ongoing labor shortage. These can be expensive with ongoing fees and contract terms that can last 10 – 20 years.
If you’re looking into franchising, but can’t decide whether or not to go for it here’s the good and bad of running a restaurant franchise. By the end of this guide you’ll have a clear understanding of the risks that aren’t always disclosed by a franchise rep. You can also take our 7-minute franchise quiz to be matched with a restaurant based on your interests and location.
Disadvantages of Restaurant Franchises
Before you sign that franchise agreement, there are a couple of things you need to know about franchising. Here are several disadvantages you should be aware of.
1. No Full Control of the Business
While it’s true that franchising is a means for you to have your own business, it does not entirely mean that you have full control of it. Do you wish to change suppliers? Are you thinking of adding a different type of equipment? Do you want to add something new to the menu? Unfortunately, you don’t get to decide these things. The franchisor makes these decisions.
As an example, McDonald’s is required to use specific suppliers for many of its ingredients, such as beef, chicken, and potatoes. These suppliers are often large, multinational corporations that can provide McDonald’s with the consistency and quality that it demands. If you found a local farm that provides organic beef, you don’t have the option to use this alternative ingredient.
You may be able to pitch in your ideas and give them some feedback. But it’s still up to the franchisor to decide. If you like to be creative with menu sourcing the franchise route may not be the right path for you.
2. Limited Freedom
It’s bad enough that a franchisee doesn’t have control over the business but they also have limited freedom when it comes to management. For instance, a franchisor might require franchisees to be fully present at all times to run the business.
Another example from McDonald’s is that they recently required franchise owners to invest in ordering kiosks and remodeling of outdated restaurants. As a franchise owner, you are legally obligated in most situations to follow these guidelines even if you can’t afford it. If you think you can just sign that agreement, pay for the franchise, and leave things running, you’ll need to think again.
3. Can’t Try New Things
Let’s say you’re running a restaurant franchise. You’re thinking, hey a buffet during the weekends sounds nice or having a promo on drinks during happy hour can reel in the customers. Sadly, you can’t just try out new things to apply to your franchised business. As mentioned above, you won’t have control over this and you’ll need to run it by the mother franchisor if it’s even allowed.
Franchising can be expensive. Investments can reach millions of dollars that not everyone can afford it. Take for example Dairy Queen. The minimum investment to franchise with them is $1,151,155. These also depend on the size of the business. If you franchise a full restaurant, the investment also gets more expensive. This is one of the main reasons why people usually back out of franchising.
5. Ongoing Fees
As if it’s not enough that investing on a franchise is expensive, you’ll also have to take into consideration the cost of the ongoing fees. These can be in the form of royalty fees and advertising fees that can reach around 5% of the gross sales. Ongoing or recurring fees can take a toll on your expenses which can be such a huge disadvantage when you get into franchising.
Did you know Shaq invests in restaurant franchises?
One wrong move from one franchisee affects all the franchises. For example, if one franchisee is embroiled in a lawsuit, it could drag the whole brand into a bad light. So all your efforts in making your franchised store successful could go to waste because one bad reputation from one location can drag the rest down.
7. No Say on Advertising and Marketing
Franchisees usually don’t need to worry about advertising their business because the franchisor is responsible for providing the necessary materials and doing all the marketing. Though this might sound like a good thing, it can also be a disadvantage. One famous example of marketing gone wrong is with Jarrod Fogel from Subway who ended up going to prison. A spokesperson or insensitive ad campaign can result in a backlash that impacts your franchise based a decision you didn’t have influence over.
8. Financial Requirements
Signing up for a franchise isn’t all about just being able to afford the investment or franchise fee. It’s also meeting the financial requirements which are checked by the franchisor upon inquiry. You will need to meet these requirements such as their desired minimum liquid capital or net worth in order to qualify to become a franchisee.
9. No Financial Privacy
As a franchisee, your business is subject to financial scrutiny for them to check if your business is doing well and for auditing purposes. This also means that you don’t have any financial privacy since your financial status will be shared among other store or business outlets.
Outside a Wendy’s restaurant.
10. Business Experience
Though not all franchised businesses require any experience for their franchisees, most do and it can be quite disadvantageous if your experience isn’t up to par with the franchisor’s expectations.
As mentioned above, you don’t have full control over your business’s operations if you are a franchisee and this can cause conflict. What if there are layoffs that you don’t agree with but you have to implement? What if there are rules that are set that you think is quite unfair? This conflict may build and you’re locked in a contract that you can’t get out of so there’s no choice but to follow their rules.
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The franchise industry has a lot of competitions. For example, there are many burger franchises out there that are competing against the other. Likewise there are also franchised services such as hotels or gyms that are also in a tough competition. It all boils down to choosing the best but that can also mean choosing an expensive franchise.
For example, the Subway franchise used to be a thriving sandwich concept. But over the years, the concept became saturated and competitors like Jimmy John’s and Jersey Mike’s grabbed market share. A new competitor entering your market is always a risk with a restaurant franchise.
13. Store Location
Franchisors are the ones that ultimately approve a store location for you. This is because of several factors such as an exclusive territory deal or because they already have studies and research to back up their case on which location can generate more income. Though this could be seen as more of a pro than a con, sometimes a franchisee can get disappointed when their ideal location is not selected or available.
Rick Ross invests in restaurant franchises.
Do you think your franchised restaurant’s design is out of date? Unfortunately, you can’t just decide to renovate. You’ll need to have an approval from the franchisor or you’ll have to wait for instructions from them if they want to revamp their design.
15. Operating Hours
Just because you are the franchisee doesn’t mean you have full command of your business’s operating hours. Some business franchises need you to follow a certain schedule of operations which means you might have to open on major holidays. This is especially seen in the restaurant and hotel franchises as well.
16. Sharing Profits
Did you know that you have to share your profits to the franchisor? A percentage of your sales goes to the franchisor which means that you won’t be able to own 100% of the profits. Make sure to refer to the FDD document for any restaurant franchise to determine the exact fees.
17. No Control Over Suppliers
Another disadvantage in franchising is that you won’t be able to choose your suppliers. The suppliers are fixed and the franchisor is the one that deals with them. So if you have any problems with the suppliers, you’ll have to take it up to the franchisors.
Advantages of Restaurant Franchises
Let’s get onto the upside of restaurant franchising. Here are the many advantages why investors decide to put their money into the concepts. you decide to franchise:
1. Brand Awareness
Most franchises come from a business that has already made a name for themselves. So if you decide to franchise, you won’t need to worry about people not knowing who you are because the chances are high that they know the name of your business and the services and products you offer.
2. Proven Business Concept / Plan
Franchises have a proven business concept that works. Which means that the business already has everything covered from store design to the workflow and even back up plans in case something happens. All you have to do is follow the plans according to what they trained you for and the business will run smoothly.
3. Training Programs
Most franchises will have their franchisees undergo training. The franchisees will be taught how to run the business and sometimes, they’ll even require franchisees to work for a bit in another location to understand what it takes to run a location. Such training programs are necessary and helpful so when you open your franchised store, you already know what to do.
A&W restaurant menu.
4. Initial and Ongoing Support
Franchisors don’t just stop supporting their franchisees upon opening their first location. The support still continues after the grand opening. They continuously check on you and depending on the business, some will even provide a 24/7 hotline for support.
5. Advertising and Marketing
If you’re worried about how to advertise or market your business, then it’s time to relax because franchisors usually do this for you. They’ll provide the necessary advertising materials. This comes with an advertising fee of course but at least you won’t have to come up with several advertising ideas regularly to keep your business going.
A franchise is usually considered a credible business because the franchisor is required to file the business with the government (depending on what state you live in). It’s not so easy to get scammed since you will be able to check the business registration whether it’s legit or not.
Franchising opens up several relationships with other franchisees and suppliers. This means that you’ll have many connections that can help spread your business reputation.
8. Everything Is All Set
When you franchise a business, you’ll be able to get a full business package. You won’t need to worry about where to purchase the equipment, what the menu consists of, or how to go about things since there is already a fixed workflow. When you sign that agreement that makes things official, you’ll have access to everything you need to run your franchise.
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9. Store Design and Layout
A business comes with a name, logo, store design, and layout and these are all already provided for by the franchisor. Depending on the franchise, you can also choose whether you’d like to have a store with a drive-thru or just a simple kiosk. The bottom line is that the store design and layout is something you don’t need to worry about when you decide on franchising a business.
A franchise may be expensive but some offer discounts. You may just get a discount when you sign up for a multi unit development. Most businesses also offer a discount if you’re a veteran. A lot of companies also offer volume discounts if you decide to open 2 – 3 units at one time. If you can get a discount, it will reduce your initial startup costs and make the opportunity more appealing financially.
Thinking about putting up your own business and doing all the costing for your items or services can be tiresome. I mean just think about all the different pieces of equipment you may need to operate a restaurant like deep fryers, ovens, cash registers, salt and pepper shakers… You get the point. When you decide to franchise, you’re not the one who will be tasked with sourcing every single item.
As mentioned above, franchisors usually have the last say on whether or not they’ll approve of the location of your proposed store. They’ll know if it’s a bad location that won’t be able to drive in customers and hinder you from opening one near that area. Franchisors have specific criteria to help you identify a profitable location that takes into consideration things like demographics, income levels of the area, zoning, traffic, accessibility, and competition.
You can franchise a coffee shop.
Franchises are expensive, that’s why most interested applicants find ways to finance this investment. Fortunately, there are some franchisors that can hook you up to help you with your financing issues. This can include referring you to a third party service which can most probably approve your loan since franchising is considered a credible business.
14. You’re Self Employed
You are the manager of your own franchised business. This means you are self employed and you only have to answer to the mother franchisor when needed, which is not all the time if you don’t have any problems.
15. Better Rates on Supplies
Being a franchisee means you get special exclusive rates on supplies which is great because you get to save more. Franchisors usually have a long standing and professional relationship with their suppliers which is why you get to have these perks.
Franchises gain more profits than an independent business. Though of course this depends on several factors, but in general franchises perform better. Most franchises are quite well-known which is why they are able to have several locations which in turn generate higher profits. The FDD document for each restaurant will provide insights into the profitability you can expect per unit.
What concept will you bring to the community?
17. Cult Following
Most franchises have a cult following. For instance, there are some people who love McDonalds because of their fries. Others go to Chick-Fil-A for chicken burgers alone. Franchises have this huge fan base that when you sign up to become a franchisee, rest assured you’ll bring the fans to your location too.
What are some restaurants that are franchises?
If you’re interested in franchising restaurants, check out a short list of option below:
Can you become rich franchising?
Want to get rich from franchising? Entrepreneurs who have gotten wealthy using this business model share a couple similar characteristics:
- They invested in a franchise concept with longevity over many years or even decades.
- They expanded into ownership over multiple franchise units. Adding more units (in general) will increase sales volumes and profits.
One success story that has taken this path is Bobby Pancake and Steve Wheat, the entrepreneurs behind Delaware’s Buffalo Wild Wings franchises, clinched the National Entrepreneurial Success Award from the U.S. Small Business Administration. Starting from the corporate world, they embarked on a franchise journey in 2004. Despite facing financial challenges and personal loss, the team opened six stores in just four years thanks to determination and strategic support.
A key lesson this team wants you to take away is to do your homework before investing in a franchise opportunity. You need to recognize that in business, many stakeholders get paid before the owners, and managing finances wisely is crucial for sustainability. Understanding of the numbers becomes even more important when you expand into multiple units.
Like any business, the effort and dedication the franchisee puts into the operation play a significant role in its success too. Most entrepreneurs that have gotten wealthy in this space roll up there sleeves and are active in the day-to-day operations of the business in the early days.