We’ve talked a lot about franchises in prior posts. Assuming you have decided that a franchise is in your future, how do you know which type is right for you? This question comes to us quite a bit, so here are some thoughts to consider in each of the common types of franchises:
I worked at a McDonald’s when I was fifteen, and it was a challenge. I now have the opportunity to advise people considering fast food chains like the “Golden Arches,” and my perspective is a little different.
Fast food is a great opportunity. Especially when you go into a solid chain, like McDonald’s or its ilk, you certainly know that you’ll get the support you need, the training, and some relative consistency of revenue.
Of course, you’ll work hard for those dollars, and because volume is your friend, you’ll deal with many, many hungry customers. You’ll also have the challenge of high turnover for your employees.
The other thing to consider is growth. Many franchise owners don’t realize on the front end that fast food is very much a real estate play. In other words, you won’t make much per restaurant (often $50,000 – $250,000 per year in most profitable cases). However, if you acquire several restaurants together, there can be real opportunity. That opportunity, though, is highly driven by the location of the real estate in each case.
Fine (or Higher End) Dining
On the other end of the spectrum from fast food, fine dining is another traditional outlet for franchises. Restaurants like Outback can also do very well. You often make more per customer than in fast food, so you don’t have to cycle nearly as many people through the door. Further, in relative terms, the turnover for waitstaff is not as severe. While real estate and location are still important, you don’t have to have as many restaurants because of the higher profits based on food price.
However, there are still challenges. These types of restaurants nearly always sell alcohol, so in Texas, you have to deal with the Texas Alcohol and Beverage Commission (the “TABC”). Alcohol also increases your liability, so additional insurance is necessary both for your customers and your own employees. Finally, there are also tips to consider, and restaurant owners are responsible for reporting tips to the IRS.
In Between: Fast Casual
The last category spans both fast food and higher end dining. It’s the new kid on the block: “fast casual.”
The recent economic downturn has seen a tremendous boom in these concepts, including Pei Wei, Le Madeleine, Chipotle. The upside to fast casual is that it’s less expensive to build these restaurants, and yet the price point is higher than at most fast food chains. However, you do have most of the same problems of both fast food and higher end restaurants, including alcohol issues and higher turnover of employees.
Ultimately, you should consider the following issues in your choice of franchise:
- Higher volume, lower profit versus higher profit, lower volume
- Whether you want to serve alcohol
- What type of customer you’ll be dealing with
- What type of employees you’ll have
- The relative costs of building lots of fast food or fewer higher end
What made you choose your franchise? Please help our readers know what went into your decision!