Why You Should Think Twice Before Opening a Fast Food Franchise

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If you dream of owning your own business, you may have considered buying a fast food franchise.

At first, it seems to make sense. We’ve all waited in long drive-thru lines and there seems to be a McDonald’s on every other corner. So they must be making money, right?

Not so fast.

Despite what the franchise pitch decks might tell you, owning a fast food franchise is not as easy as it may seem. Plus, there is almost certainly a hefty upfront cost that prohibits all but the wealthiest of entrepreneurs from even getting started.

In this article, we’re going to discuss the basics of franchise ownership, how to get started and why you should think twice before opening a fast food franchise.

How Do Franchises Work?

In short, when you buy a fast food franchise, you are purchasing the rights to use that franchise’s name and to gain access to their intellectual property (i.e. recipes, systems, processes, etc.).

You also agree to operate the restaurant in accordance with the franchise’s rules and regulations. The franchise will support the franchise owner by providing resources like real estate development, design, advertising and training

Keep in mind, you are never the sole owner of the operation. While you may be the “owner” of that fast food location, the main company, McDonald’s for example, is also an owner.

There is typically an upfront cost that you have to pay the franchise. Once you are up and running, you’ll continue to pay the franchise company an ongoing fee and a percentage of your profits.

How Much Does it Cost to Start a Fast Food Franchise?

The cost of starting a franchise ranges based on the company. According to Business Insider, it only costs $10,000 upfront to start a Chick-Fil-A. On the other hand, the upfront costs of starting a McDonalds are between $1 million and $2 million.

Why the huge variance?

Because the fee structures are very different. While McDonald’s charges a fee of 4% of gross sales and an additional fee for rent (which is also a percentage of sales), Chick-Fil-A charges “an ongoing fee equal to 15% of sales plus 50% of pretax profit remaining” according to the Business Insider article.

Entrepreneur magazine maintains a list of the Top 500 franchises (not just fast food) and gathers the potential investment amounts.

Here’s a look at the top 10:

The top 10 franchises according to Entrepreneur. Source 

How Much Time Does it Take to Own a Fast Food Franchise?

It can take months or even years to get a franchise up and running.

First, you have to decide on which franchise you want to pursue; then you’ll need to look into financing options. Keep in mind, some franchises don’t allow for third-party financing, meaning you need to be 100% self-funded.

After you make a decision and figure out how you’re going to fund the startup costs, almost every franchise has a strict approval process.

The approval process will not only look at your business experience and financial well-being, but  it will also dive into market research of where you want to open the business. No franchise will want to open a new restaurant in an area where it isn’t financially feasible. That’s why they’ll look at the number of potential customers, the cost to rent or purchase the land, the cost to develop the land and myriad other factors.

According to the U.S. Small Business Administration, “[t]he franchise purchasing process — from the search to the purchase — will take three to four months. Typically, it will take another two to six months before you open your doors to customers.”

If you want to speed up the process, you can try to purchase an existing restaurant. This will not only cut the time in half, it is often much more affordable.

Is Opening a Food Food Franchise Worth it?

If you’ve read this far, you’re probably thinking, “That doesn’t sound so bad.” And you could be right. If you have experience opening and operating a restaurant, then we haven’t covered anything new.

But the biggest problem that most people have when opening a fast food franchise is that they have no prior restaurant experience.

If you have never worked in a restaurant at a high-level (waiting tables helps, but that doesn’t mean you can run the whole shebang), then fast food franchise ownership is probably night right for you.

Anyone who has managed or owned a restaurant knows that it’s not all that it’s cracked up to be. The hours are long, the kitchens are hot and the employee turn over rate is high.

And to top it off, you have to worry about much more than the day to day operations. You need to manage the budgets, timesheets, insurance, etc. While some people can build successful franchise empires with 50+ restaurants, for most people, maintaining the success of a single restaurant is more than a full-time job.

Of course, you can always hire a manager to do everything for you, but that’s going to cut directly into your bottom line.

Another issue to consider is the actual franchise agreement. “Franchise agreements are long, complicated, and one-sided. They are often written by some of the best lawyers in the country, whose sole job is to protect franchisors – not franchisees,” says Mark Lyda of Lyda Law Firm, a firm focused on helping small businesses and entrepreneurs. “Many first-time franchise owners get in way over their head because they do not understand the contracts well enough and they do not negotiate hard enough.”

Who Should Open a Fast Food Franchise?

We don’t mean to be super pessimistic. For many people, owning their own restaurant is a life-long dream and buying a franchise is one of the easier ways to make that happen. If the below list sounds like you, then by all means, go ahead and pursue your dreams:

  • You have prior restaurant experience. You should know what it’s like to do every job in a fast food restaurant. That means that you’ve worked the deep fryers, helped customers at the register, manned the drive-thru window, and mopped the floors at the end of a long day. Plus, you should know how to act when the kitchen is in the weeds and the lines are piling up. No one wants to work for someone who cracks under pressure.
  • You have prior business management experience. You need to know how to manage people, budgets, timesheets, vendors, etc.
  • You have enough capital. Most people will need to take out a loan to purchase a franchise and that’s ok (sometimes). But you need to make sure you have enough money to provide for you and your family while the business is still up and running. You can’t expect to sign the franchise agreement and start making money the next day. Every entrepreneur knows that it takes time and money to get off the ground – make sure you have both.
  • You understand the fee structure and franchise agreement. Before you make any investment, you need to have realistic expectations when it comes to recouping your losses. When opening a franchise, that means understanding the fee structure. Don’t expect to pocket 100% of your profits, remember that a healthy junk of that cash will go back to the franchise.
  • You are ready to put in work. Owning a restaurant is not a “set it and forget it” type operation. For the first few months (or years) of opening a restaurant, you should be prepared to go into work every single day. Have you ever been in a freshly open restaurant and no one knows what they’re doing and there isn’t a manager in sight? Those restaurants don’t last long.

So, if you have the money and experience AND you’re willing to show up for work every day, then maybe fast food franchise ownership is right for you. If you’re looking for a business venture that doesn’t involve any work, or you’re looking to get rich quick, you better look elsewhere.

If you do choose to open a restaurant, don’t expect to build your empire overnight. It takes time.

And once you have one restaurant running like a well-oiled machine, you can start to think about opening another, and another and another.

Maybe one day you can even afford to hire someone to manage those franchises for you so you can sit back and spend some time relaxing. You’ll deserve it after all of the hard work you’ve put in.

Darin Evangelista

Darin Evangelista

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