4 factors to consider when choosing a franchise

Bob House

Buying a restaurant franchise can be a great path to business ownership. Unlike starting a business from scratch, you’re able to leverage the benefits of an established brand and a proven operating plan. But how do you decide which restaurant franchise to buy?

Determining which restaurant franchise is the right fit requires careful evaluation and research of the brand’s market potential, competition and management flexibility—just to name a few key aspects. Needless to say, you have to do your homework. Don’t select your franchise based on who makes the best burger or cup of coffee. Here are four factors to consider when navigating the search process for your ideal restaurant franchise:

1. New versus an existing franchise. Do I go with something that’s already established or start fresh? This should be the first consideration when looking at restaurant franchise businesses. Both routes have their pros and cons, so it’s crucial you look at each carefully before making your final decision.

For starters, purchasing an existing franchise offers an established track record, in-place supplier relationships, a trained staff and an existing customer base. But all of this doesn’t necessarily mean it’s the business for you. Ask the seller for detailed financial statements that go back a minimum of three years. Doing so will give you a better understanding of the business’ high and low points, which is critical when negotiating terms of the deal. It will also reveal any warning signs you should know about.

Investing in a new franchise carries somewhat more risk, but also great value. With a new franchise you’re able to start from scratch and build the business you want. You don’t have to worry about former customer impressions or the mistakes the previous owner might have made along the way. New franchises also tend to cost less because you aren’t purchasing past cash flow or paying a higher fee for goodwill. Yes, this approach requires a little more elbow grease. But you’ll get satisfaction in knowing you built a thriving restaurant franchise on your own.

2. Total cost. Too often, restaurant franchise buyers lose sight of the total cost of their purchase and end up spending more than their original budget. Additional fees and royalties are a good example. They might not seem like much on their own, but when added to the total cost of the business they could influence your investment decision.

It’s also not unusual to have to pay an upfront franchise fee, which can range anywhere from $5,000 to more than $100,000. If the initial fee exceeds $200,000, you might want to reevaluate your options. If you are putting that much into a franchisee fee, ask yourself if you would you be better off considering another option that allows you to invest that extra money in operation of the business instead.

You may also be required to pay other fees for renovations, marketing campaigns, training programs, additional supplies or possibly even have to hand over a certain percentage of your annual sales. These fees are sometimes hidden in the franchising agreement, so make sure you read the fine print.

3. Brand perception. Never purchase a restaurant franchise without evaluating consumers’ perception of the brand. There’s nothing worse than getting stuck with a franchise that has a reputation for providing poor service or delivering inedible meals. This just creates another obstacle that you have to spend time and money on. Save yourself the hassle by choosing a franchise that already has the kind of strong customer appeal that is likely to endure.

4. Management flexibility. Purchasing a restaurant franchise includes certain operational limitations. Most franchises have a set of guidelines on how the business should be operated and marketed—some stricter than others. Be sure you explore these limitations with the franchise’s corporate office to see how much control you actually have. You also have to decide how much control you want to have over your franchise. If you want the freedom to choose what promotions and seasonal deals you run or what suppliers you use, then look for a franchise that offers more flexibility. If you’d rather focus your efforts on day-to-day operations, then it’s probably best to select a franchise that handles most of those details for you.

Owning a restaurant franchise isn't for everyone. But for those who have taken the time to do their homework, and who know what to expect, it can be an extremely rewarding and lucrative experience, both financially and professionally.

Bob House is g.m. for BizBuySell.com and BizQuest.com, the internet's largest and most heavily trafficked business-for-sale marketplaces.