Motiva Business Law

Motiva Business Law Logo
5-Star Rating

Florida

401 E Jackson Street
Suite 2340
Tampa, FL 33602

Illinois

2021 Midwest Road
Suite 309
Oak Brook, IL 60523

How to franchise a restaurant

how to franchise a restaurant

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,

    1. The business requires a fee from a third party
    2. The fee payment is in exchange for the use of a trademark
    3. 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