How to Lower the Cost of Expanding Your Franchise
A method for reducing the cost of franchise expansion
The entire franchise universe is synonymous with foodservice brands and restaurant franchises. It is what the average consumer things of when asked what a franchise system is. Chicken, burgers, hot dogs, and pizza have all been franchised to such a large degree that most people don’t know the franchise industry for anything other than foodservice businesses. So why then do so many foodservice brands that seemingly have all the right ingredients, systems, and business modeling in place go into franchising and fail to launch?
In short, the answer is expenses. Typically, a restaurant franchise model will require an investment of anywhere between $250,000 and $1 million depending on the build out and operating model. Real estate, furniture fixtures and equipment, leasehold expenses, inventory, and a laundry list of other expenses come along with a new restaurant opening. Many times, these expenses can be drastically increased with unforeseen obstacles, such as permitting and construction expenses. A recent project I was involved in was required to invest in four sets of professional drawings in order to even begin the permitting process, including HVAC, mechanical, structural, architectural, which can all add enormous expenses to a new restaurant build out.
One of the expansion strategies I have seen new restaurant franchise brands have success with is what we call a buy and convert growth plan. The buy and convert model can be an effective way to get the first franchise units open, but it does require a significant amount of time and energy as every situation is unique. As the name suggests, this model incorporates either purchasing an existing restaurant operation and converting the location into your brand or finding a closed restaurant location and retrofitting the unit to fit your model. The benefit is significant cost savings and exponentially faster time to market for the new unit.
A recent scenario with a food service client where this model was implemented incorporated the brand’s second location, which many times is the most difficult to accomplish. This move involved the owner purchasing a failing restaurant in the Orlando market. The previous owner had closed the restaurant location, but the hood system was still intact, permitting was in place with the city, and much of the furniture, fixtures, and equipment could be repurposed for the new business. My client was able to open the restaurant for under $100,000 and quickly built a successful second location for his brand. His strategy then incorporated selling the new unit as a franchise model to an independent owner operator at a slight profit and completely removing himself from the operational responsibilities. This model worked perfectly, considering the client had marketed for a year looking for a franchisee to open a new franchise location of his business model without success.
Elements to consider with this business model include a variety of variables that need to be considered with each potential unit. Due to the nature of the transaction, each buy and convert opportunity is also full of potential bad scenarios, which means you need to know what to look for. If you are purchasing an existing business, you probably need to get assistance from an experienced business broker who can help with your evaluation. Issues like unpaid taxes, outstanding debts, permitting adjustments, or consumer references to the previous business could all make what seems like a good deal a very bad one. In addition, because you are essentially moving into someone else’s restaurant, you are inheriting space, design, and location specifics that you will need to incorporate into your new business location. Spend the time necessary in the location, hire an architect to visit the location, do your due diligence to confirm that the space will actually work for you, and that you aren’t getting into a new location that can’t be used for your business model.