Despite significant growth in other sectors, restaurants remain the predominant force in the franchise industry. According to data published by the International Franchise Association, in 2017 roughly 220,000 of the 744,000 franchised outlets worldwide were quick-service and full-service restaurants.
For individuals and business partners contemplating restaurant franchise opportunities, there are a number of important factors to take into consideration. This includes franchise-specific factors, restaurant-specific factors and factors that are relevant to all businesses, generally. From a legal perspective, some of the most-important factors include:
1. Site Selection
For restaurant franchises, site selection is of paramount importance. When you are relying on a recognizable brand name to get customers through the door, you need your restaurant to be both highly visible and easily accessible. Nearby businesses are a relevant consideration as well. Are there stores nearby that will bring traffic to the area? Are there competing restaurants (or vacancies for competing restaurants) that will make it difficult to turn a profit? When negotiating your lease, these are just a few of the many issues you will want to address with your landlord.
2. Territorial Protection
In the world of franchising, intra-brand competition is an important consideration as well. Ideally, your franchise agreement will provide true territorial exclusivity with a sufficient radius to protect you against losing customers to competing franchisees or the franchisor’s company-owned outlets.
3. Initial Investment and Upgrades
Restaurant franchises tend to have large initial investments. When evaluating a restaurant franchise opportunity, it is important to conduct your own financial analysis and not solely rely on the franchisor’s estimates in Item 7 of the Franchise Disclosure Document (FDD). Prospective restaurant franchisees should inquire about the potential cost of upgrades as well. Franchisors typically reserve broad rights to require franchisees to adopt modified system standards; and, for restaurants with significant investments in furniture, equipment and point-of-sale (POS) systems, mandatory upgrades can entail substantial additional expenditures.
4. Royalty and Marketing Fund Fees
As a restaurant owner, your profit margins could be razor-thin. Will you be able to pay your franchisor’s monthly royalties and marketing fund fees and still maintain a viable business? While royalty and marketing fund fees have somewhat normalized, different franchisors still offer different rates, and doing competitive research before you develop an affinity for a particular brand will be an important part of the due diligence process.
5. Minimum Wage
As evidenced by the recent McDonald’s worker strike, there are competing interests on both sides of the ongoing battle over the federal minimum wage. As a restaurant franchise owner, payroll is likely to be one of your most-significant ongoing expenses, and upheavals in the labor sector could lead to fiscal and operational challenges for your franchise.
Speak With National Franchise Lawyer Jeffrey M. Goldstein
Jeffrey M. Goldstein is a national franchise lawyer who has over 30 years’ experience representing franchisees and dealers. If you are currently considering a restaurant franchise opportunity and need help assessing the legal risks involved, you can call (202) 293-3947 or inquire online for a free, no-obligation consultation.
