This article are provided for information purposes only, and are not intended as legal advice.

Why buy a restaurant franchise?

March 18th, 2009

Ever thought about starting a franchise?  Was your first thought Subway, Dunkin Donuts or other fast food concept?  You aren’t alone. When most people start to think about owning a franchise, the default industry seems to be restaurants.  I guess that is because everyone knows that McDonalds, Subway, Dunkin Donuts and all the other popular quick serve restaurant (QSR) brands are franchises.   A really important question to ask yourself is why are you interested in a restaurant?  The funny thing is that when I ask a client why they are interested in a restaurant, most can’t give me even one reason.  I think that there may be something rewarding to the ego to be able to say that you own and operate one of these well known brands.  But assuming you want a business that makes money, don’t let your ego steer your decision process.


Applying Business Logic to the Franchise Concept Decision
Let’s first look at the typical restaurant operating model: 7 day per week operation, long hours, often employee intensive, high turnover, and lately, impacted by the economy and rising commodity prices.  You have to be ready to put in long hours and learn to manage a relatively complex business if you are going to invest in a restaurant franchise. 


How about the cost of a restaurant business?  In most cases the initial investment is $225,000 to over $1 million dollars.  Whether you are paying for the investment with available cash or a combination of cash and financing, the payback on the initial investment is typically 6 to 10 years.  That’s a lot of capital to put at risk for a 6+ year return on investment.  Take Subway as an example; it costs about $300,000 to establish a new Subway franchise and a typical Subway franchise will produce on average about $40,000 – $70,000 in annual net profit.  That means it will take 5 to 10 years to beak even on the initial investment.  Unless you are a seasoned restaurant operator, is it logical to get into a complex business with long hours that takes over 5 years to break even?  Want or need a 6 to 7 figure income?  How many of these can you afford to own to get you there?


What if you could invest in a business that is Simple to Operate, Breaks Even in 8 to 18 months, generates the same $40,000 to $70,000 in annual net profit as the example above, and the total Initial Investment is between $50,000 and $100,000?  That means for the same investment as a typical restaurant, you can own multiple units of a different franchise concept and be earning a solid six figure income.  Oh, and you would have more time available to enjoy life.

To be fair, there are food concepts that meet the Success Formula of simple operation, low initial investment, 8 to 18 month ROI, 30% or better margins, and that have available territories to support growth.  If for whatever reason you just have to be in the food business, make sure it meets this formula.










author:  Dan Fragen has a unique perspective on the franchise industry having been President and CEO of a national franchisor and now as a franchisee himself.  Dan is President of Ligero Group, Ltd in Charlotte, NC.  Ligero Group helps people interested in franchising decide if franchising makes sense for them and if it does, helps them find the best fit for success based on an individual’s specific situation.    








Filed under: Franchises — Gary Landa @ 8:11 am

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