Living in Denver, I wanted to be able to use the number 18 (Peyton Manning’s jersey number, of course). However, “7″ was John Elway’s jersey number, and seven reasons will cover the main negatives to consider when thinking of buying a franchise.
Before I point out my negatives to buying a franchise with my “7 defensive plays” to be considered, there is much good to be said about owning a franchise. This is especially true if you do not have a restaurant management background or the services of a reputable consulting firm.
A statistic given by the National Restaurant Association a few years back stated that 86% of the major franchise owners succeeded. The same report stated that 82% of the owners who did not buy a franchise, and had no restaurant management experience or consulting help, failed within the first 12 months. Pretty scary!
The main reason that these first time restaurant entrepreneurs failed was because they just did not know what they didn’t know about opening and running a restaurant. So, if you are inexperienced and want some security, it may be best to buy a franchise or hire a reputable restaurant consulting company.
Here are my 7 significant disadvantages to buying a restaurant franchise:
1. Lack of Owner Flexibility
If being an independent owner of your business is important to you, then a franchise may not be the way to go. As a franchise owner, you will be told exactly what you can and cannot do by your franchisor. You are an owner of your restaurant franchise business in name only.
Defensive play: consider the concept.
2. A Franchise is Expensive
An upfront licensing fee of typically $10,000 to $50,000 is the normal franchise licensing fee. Then for the life of your restaurant business you will typically pay 6% of your gross sales to the Franchisor.
Defensive play: consider the royalties.
3. Marketing Fees
In addition to the onetime licensing fee an additional 2% is normally added and paid into a national advertising fund. So with the 6% franchise fee you are now paying 8% of your gross sales, which can easily amount to 40% to 50% of your net profit. The numbers that I have used are typical, and will vary. There are some franchises that are less expensive and some that are more expensive.
Defensive play: consider the recurring fees.
The franchisor’s national “brand” and advertising may not be of value to you if you are in a small market not covered by the franchisor’s advertising. They will give you the brand advertising material, but you will have to pay for the local advertising.
Defensive play: consider the market.
5. Menu Flexibility
A national franchise companies menu (that you cannot change) is designed to appeal to a national audience and does not take into consideration local or regional preferences. For example grits, is a very popular breakfast component in the southern states but not so much in states like CA or NY.
Defensive play: consider the menu.
6. Operational Freedom
The franchisor will dictate the days and hours that you are to be open. If the franchisor requires you to be open late night hours, you will have to stay open, even though you may not be in a late night demographic location. Remember the franchisor is primarily concerned about your GROSS sales, not your cost of doing business.
Defensive play: consider the demographics.
7. Architectural Flexibility
The franchisor will give you design and equipment specifications but you will need to pay for a local architect and the engineering cost. You will be paying for a building that you will have no say in its design.
Defensive play: consider the building.
There are viable restaurant consulting alternatives to buying a franchise that will give you the necessary expertise needed to open a restaurant and the freedom of ownership that most entrepreneurs desire, without paying those costly fees.
W&W Restaurant Consulting Group is such a company. The two principles of W&W have collectively opened, operated, and or consulted on over 70 restaurants. W&W specializes in taking their client’s idea for the restaurant they want to open and developing it into a feasible business plan, and then molding that plan into the reality of a successful restaurant.
The W&W website is noroyalties.com. The website name indicates that W&W does not charge royalties and gives their clients all and more than a typical franchise.
Photo credit: Chris Humphreys-USA TODAY Sports