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Should I Franchise My Restaurant?

For restaurateurs who want to create a food empire, turning to franchising may be the best option. Find out if your restaurant would make a good candidate.

Do you think you have a restaurant that could be the next McDonald's? Ever wonder if the Colonel knew something you don't? Maybe you, too, should consider franchising.

According to a recent study by PricewaterhouseCoopers, more than 760,000 franchised businesses generated a total economic output of over $1.53 trillion and generated jobs for 18 million Americans in 2001. This represents nearly 10 percent of the U.S. private-sector economy and 14 percent of private-sector employment. And while there are 75 identified industry groups operating within franchising, restaurants are by far the big kid on the block.

So what separates these restaurants from your restaurant, and, perhaps more important, should you be thinking of joining them?

In general, restaurant owners decide to franchise for one of three reasons: lack of money, people or time.

When it comes to growth, the big barrier for any restaurateur is always capital. Since the franchisee provides the initial investment in the restaurant, growth can occur at a much lower cost. As a franchisor, your investment in growth is largely limited to the development of your franchise documentation and franchise recruiting costs-a substantial reduction from the typical costs involved in opening a restaurant. And since it's your franchisees who'll sign the leases and commit to various service contracts, you also grow with virtually no contingent liability, greatly reducing your risk.

Another barrier facing many restaurateurs is finding and retaining good restaurant managers. With turnover rates that can exceed 100 percent per year, a restaurateur can spend months recruiting and training a manager only to see that manager leave-or worse yet, get hired away by another restaurant.

Franchising allows restaurateurs to avoid these problems by substituting a highly motivated franchisee for that restaurant manager. And since the franchisee has a stake in the unit, restaurant performance will often improve. From a management perspective, since a franchisor's income is based on the franchisee's gross sales-and not profitability-monitoring unit level performance becomes significantly less difficult and requires less staff.

Finally, opening additional locations takes time. You need to find a site. Negotiate the lease. Hire the architect and contractor. Obtain financing. Recruit your staff. Purchase or lease your equipment and inventory. Train your staff. The list is endless. The bottom line is, the number of restaurants you can open at any one time is limited.

But for restaurant owners with too little time, too little staff or too few resources, franchising solves your expansion problems by having the franchisees do most of the heavy lifting. Franchising not only allows restaurateurs to have financial leverage, but allows "resource leverage" as well.

Can Your Restaurant Be Franchised?

Almost any type of restaurant can be franchised, provided it meets three basic criteria: salability, "clone-ability," and ROI.

In order to sell franchises, your restaurant must be credible in the eyes of prospective franchisees. Is it professionally designed? Is it unique in some way? And, most important, does it have "sizzle?" A good measure for the "sizzle factor" is whether you currently receive unsolicited franchise inquiries. If you do, that's a good indication your franchise will sell well.

Second, you'll need to be able to clone your restaurant. While some high-end restaurants like Ruth's Chris are franchising successfully, the primary criterion here will be teachability and systemization. If your restaurant needs a Cordon Bleu chef, for example, you may want to rethink your expansion strategy.

Most important, however, is that your restaurant will need to provide an adequate return to both you and your franchisees. That means you'll need to adjust your franchisees' potential returns by deducting a royalty. If your franchisees can generate an adjusted 15 percent return on investment on a mature franchise, then your restaurant may be a good candidate for franchising.

If you do make the decision to franchise, your first task is to address the numerous issues confronting a new franchisor: speed of growth, territorial development, support services, staffing and fee structure, to name just some of the topics you'll need to think about. And obviously, your plan should be subjected to rigorous financial scrutiny.

You'll then need to develop a franchise contract, an offering circular (as required by the FTC), and, depending on where you'll be selling franchises, state registrations.

Quality control generally translates into the development of an operations manual and a well-defined training program, if these things are not in place already. Your manual should contain everything your franchisees will need to know about how to open and operate your restaurant, although there are certain safeguards you may want to build in relative to the protection of recipes (use of spice packets, for example). You'll also want to include quality control checklists, policies, procedures and tactics that will allow these systems to be uniformly enforced-while being careful to avoid anything that creates liability.

Finally, you'll need to generate franchise prospects and develop marketing materials that will help make the sale. You'll need to incorporate your franchise message into your Web site, and since the franchise sales process is highly regulated, you'll need to be educated in proper sales, disclosure and compliance techniques.

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