Franchising your restaurant is an excellent method to maximize the profitability of your business and expand your brand awareness. Make the process a lot easier with this step-by-step guide on how to franchise a restaurant.
1. Evaluate your current business model
To ensure your restaurant can be franchised, it must have a proven system in place that is easily replicable and satisfies some specific requirements. You must also be willing to train and support new franchisees and have the required time and resources to do it.
The following are the considerations you must assess before starting the franchising process:
Financial performance of your business
Ensure your business is profitable enough to attract franchisees that are ready to invest in it. You need to show audited financials to prove your restaurant offers a high return on investment and a steady income for at least the upcoming five years.
Assess whether you can afford the expansion and keep in regard your business needs to be profitable enough for both the franchisee and you, the franchisor. Being established for more than five years while having healthy financials increases your possibilities of attracting investors.
Scalability
Your business should have the capacity to provide the same quality services at a broader level. Are there enough resources to satisfy the needs of multiple locations? Is there enough demand for your product? If your business is already supporting more than one location, it may be a good signal that it can be profitable elsewhere.
Standardization capacity
You need to ensure your restaurant business has solid standard procedures that are replicable and can be easily followed by anyone.
The way your restaurant is managed should be consistent in every location in terms of sales reporting, inventory, supply management, and service delivery.
The meals your restaurant offers should be as similar as possible in terms of quality, price, and flavor. Additionally, you need to ensure your locations have relatively the same atmosphere, furniture, and interior design.
Budget
Franchising your business involves registering trademarks, creating operating manuals, hiring franchise attorneys and accountants, and making other franchise development expenditures. Although the cost of franchising your business varies, franchisors may spend an average of $50,000 depending on the complexity of their business and their consulting team.
2. Build your franchise consulting team
Franchising your restaurant will involve a series of legal, financial, and managerial procedures that require specialized knowledge. Once you are sure your business is apt for franchising, verify the viability of your decision with a team of franchise experts. This team will also advise you throughout the process, help you make informed decisions, and avoid costly mistakes.
The team of experts you need to surround with includes:
Franchise attorney
A franchise lawyer will ensure you comply with federal and state regulations and that the franchising process is conducted accordingly. The lawyer will assess intellectual property concerns and draft and review the franchise agreement, FDD, employment agreements, and other necessary contracts that protect your business.
Franchise accountant
An accountant will verify the feasibility of your business and help you determine royalty fees and the amount of investment your franchise needs to maintain its profitability.
These financial projections will help both the franchisor and franchisee make informed decisions that concern their investment.
Franchise consultant
This specialist will assist with the marketing part of the franchise and collaborate in the creation of a business plan that aims for the franchising objectives of your restaurant. A franchise consultant will help you understand who is your ideal franchisee and contribute to the operations manual and training program.
3. Develop a business plan
Now that you know your restaurant is apt for franchising, you need to adapt your existing business plan to one that fits your franchising needs. With this document, you will demonstrate to franchisees that you have a structured plan of action to develop your franchise network. Some of the key elements your restaurant business plan must include are:
Short and Long-Term Goals
Create a five-year plan that encaptures your business objectives and details how much you plan to grow through this venture.
- How many locations do you plan to sell, and at what rate?
- In what geographic zones do you want the new restaurants to be located?
Current financial analysis
Analyze the current performance of your business and set financial expectations based on them.
Current cash flow
Expected growth rate
Expected cash flow
Payback period
Cost estimation
Determine an approximate investment cost for franchising your business. Make sure you give an accurate description of the necessary investment in your end and the franchisees\’. A transparent cost estimation will help you have a healthy business relationship with interested investors.
Startup investment
Licenses
Infrastructure
Working capital
Royalty fees
Financing
Establish how you will structure the funding of your franchise and if you need third-party financing. Decide whether you will finance your franchise with your own capital, a term loan, or if you will use your first franchisee’s fee.
Support
The extent to which you will provide support to franchisees to help them run their restaurants and continue growing. Define how you will assist with
Marketing materials
Management systems and technology
Hiring and training staff
Business statements
Ensure your franchisees are heading in the same way as you. Detail the restaurant’s mission, vision, and core values.
4. Set up legally
Business Formation
As your franchise formation attorney will advise you, you should create a separate legal entity during the franchising process and before issuing your FDD. This separate entity will perform the role of selling franchises, supporting franchisees, and collecting fees and royalties.
Forming another franchise company will enable you to keep your future franchises from your current restaurant operations. This new entity will prevent you from disclosing the initial company’s financial statements, so you will only have to disclose the information of this new corporate entity.
Intellectual property
One of the most important steps before involving third parties in your restaurant is ensuring your trademarks, patents, and trade secrets are protected and registered with the U.S. Patent and Trademark Office.
Make sure you register your brand’s logo and that you acquire a trademark so can warrant your franchisee’s right to use them without any worries.
Your restaurant’s intellectual property includes
Trademarks
Restaurant name
Food creations and dish names
Trade secrets, recipes, and preparation methods
Logos and slogans
Fonts
State regulations
Franchise and business laws differ according to the state they\’re applied in. A franchise attorney can help you ensure your franchise complies with the laws of the state in which it operates. Even the requirements to be a franchise differ from state to state.
At the federal level, a restaurant that meets the following three elements is legally considered a franchise,
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- The business requires a fee from a third party
- The fee payment is in exchange for the use of a trademark
- The original restaurant owner has an amount of control over the other’s business
In the state of Illinois, the franchise requirements vary slightly. While the business owner collects payment for the use of their trademark, they must also provide a marketing plan for the business to be considered a franchise.
If your restaurant meets the franchise elements, you are required to provide a Franchise Disclosure Document and register. Not complying with franchise laws exposes you to the risks of a shutdown of your restaurant, receiving a fine, or facing lawsuits.
In this video, we explain the requirements of franchises and what can happen if you accidentally form one:
5. Create an FDD and a franchise agreement
According to the Federal Trade Commission, a franchisor is required to provide a Franchise Disclosure Document, which includes a summary of the franchise model and its key elements. An FDD acts only as an informational document so the franchisee can make a decision, and it should be disclosed to a potential franchisee no less than 14 days before the franchise agreement signing.
An FDD will include:
A description of the company and its history
Franchisor’s business experience
Franchisor’s past litigation history
Any franchisor’s past bankruptcy history
Initial and ongoing fees or complementary payments
The initial investment required to establish the business
Product or service restrictions for the franchisee
Franchisee’s legal and day-to-day business obligations
Whether the franchisor offers financing facilities and its terms
How will the franchisor support the franchisee in terms of training, advertising, and systems
What territory is the franchisee allowed to set their location and under what conditions
Intellectual property that will be provided, including trademarks, patents, copyrights, and recipes.
Contractual obligations regarding renewal, termination, transfer, and dispute resolution matters
Public figures that are used and the amount they are paid
Audited financial statements for the past three years
Locations of existing franchises
A list of the contracts the franchisee must sign
On the other hand, franchisors should also prepare a Franchise Agreement, which is the binding document that sets a legal relationship between the franchisor and the franchisee.
The franchise agreement should include
The duration of the collaboration
The franchise model
The structure of fees and royalty payments
The franchise disclosure document
A franchise operations manual
Legal and tax responsibilities for both parties
By signing a franchise agreement, a franchisee obtains the right to utilize the franchisor’s trademarks in exchange for paying the settled fees and royalties and adhering to the mentioned obligations.
6. Prepare your franchise operations manual
An operations manual is a guide that will detail the information about your system standards, operating procedures, suppliers, and requirements for the management of the restaurant franchise. This confidential document will usually include the following information:
Story of the restaurant, unique value propositions, management team, and franchisee directory
Milestones regarding the development of the business, from securing the location to its grand opening.
Initial and ongoing training and day-to-day operations
Food preparation and sourcing
Health and food safety regulations
Guest Service
Instructions for equipment and software
Maintenance and cleaning of areas
Employee position requirements and shift management
Quality and standards of service
Branding protocols
Dress code and uniform
Approved suppliers and vendors, inventory requirements, and food-preparing procedures.
Sales and marketing practices
7. Build a training and support system
To have a higher probability of success, you need to ensure your franchisees understand and follow specific management procedures.
One way of reducing unwanted practices and costly mistakes is creating an elaborate training and support program that will serve as a guide for your franchisees and their workforce.
A complete training system will document the exact steps of starting the new franchise.
The program should contain the following elements:
Initial training: Involves educating franchisees on the basics of the restaurant and everything they need to know about the business they invested in. This includes:
Company’s history
Tour of the facilities
Menu and ingredient knowledge
Daily restaurant management
Reporting requirements
Safety
Best practices are to conduct the initial training a couple of months before the grand opening.
On-site training: After the franchisees have a clearer idea of their roles in their restaurant, it’s time for them to have a closer look at their management duties.
During on-site training, they will learn exactly what their daily work routine will be and clarify doubts that arise in the process.
Some topics that could be covered are:
All the components of daily restaurant management
Customer satisfaction checks
Guest experience
Inventory management
Human resources
Financial management
Resolving conflicts
Ongoing training: Franchisors need to periodically review the consistency and efficiency of the procedures and look for areas of improvement. It’s key that a franchisor has effective communication with its franchisees and supports them through webinars, on-site visits, refresher sessions, or other methods.
8. Market your franchise
Now that you have prepared everything to franchise your restaurant, you need to launch a marketing campaign to promote your brand and help you generate franchisee leads.
Some considerations you need to have include:
What am I looking for in a franchisee?
What is the unique value proposition of my franchise? What makes my franchise restaurant different from others?
What sales marketing channels do I plan to invest in?
Creating a lead capture form for potential investors on your website is a great place to start, so make sure you add relevant information to capture possible franchisees.
Other marketing channels you can add to your campaign are:
Franchise brokers
Email marketing
SEO
Social media
Pay-per-click ads
Online franchise portals
Tradeshows and networking events
9. Vet possible franchisees
Recruiting franchisees is the final part of franchising your restaurant business. Ensuring your team is capable of managing your restaurant is an essential part of the process, for you need to have several considerations when vetting franchisees.
Before recruiting them, make sure the franchisees…
Have enough restaurant experience
Have the financial resources that are required to pay the startup and fee costs
Understand your business goals and vision
Show commitment and can work independently in an efficient way
Is trustworthy and capable of adhering to the established rules
Now that you have selected your ideal manager, it’s time to start running your first restaurant franchise!