05 Mar Should I Buy a Franchise. How to Avoid Business Mistakes
After several years conducting a restaurant audit, working on new projects, studying hundreds of franchise offers, meeting with the successful restaurateurs, we decided to write a short article about what investors are facing when they start a new business in the hospitality industry. The idea to describe the main pitfalls when choosing franchises came about a long time ago, but a recent phone call and a story from a businessman, who, unfortunately, was forced to close his franchised restaurant, for quite common reasons, encouraged us to reveal some facts to help future entrepreneurs to be more knowledgeable, and therefore armed during future negotiations. We strive to ensure that franchisors, who are also sincere with new partners, maintain common standards and a positive reputation for the franchise market.
For the sake of confidentiality of information, we will not indicate a company’s brands or personal names.
The franchise business is very popular all over the world. A large number of proposals cannot but arouse interest in such, as it seems at first glance, an advantageous financial mode
And here you are after several months of searching for different offers, visiting the famous franchise exhibition, where you were told about all the advantages of their business model and successfully working projects, unique cuisine and restaurant concept. You even visited its the best venues in several cities, tasted food and drinks, part of the tables was occupied at the time when you were for the purpose of tasting, everything was delicious. And you, already as an expert, made a calculation and imagined that everything will be the same in your new restaurant, and you have started counting the profit.
The first, important point.
In order to understand how the franchise is financially successful, you need to ask to provide you with a P&L report for the last 6 months or 1 year from several units for comparison. Before concluding an agreement, you will need to spend days from opening till closing and from Monday to Sunday, to get the most accurate information about the operation, defining table turnover and calculate the approximate average check based on what the guests order. Meet with several owners to hearing the opinions about the business. Note, what you see being as a guest is only not more than 50 percent of the overall restaurant operations.
The second, important point.
Just if you think you got a great idea and asked about it your friends and relatives who promised to go to your new place every day, does not mean your restaurant will be liked by customers. It won’t be possible to generate revenue to cover operations expenses only from people you personally know. We trust in detailed market study and analysis.
The third, important point.
Several main benefits of franchising, brand recognition and the number of loyal customers. It is worth knowing the real number of regular guests registered in the loyalty program. We advise you to organize a preliminary survey of at least 1000 people within a radius of 3 kilometers from the location of the premises of the future restaurant.
Fourth, an important point.
You should understand the it’s a ready-made business, so you invest and develop someone brand and manage the restaurant ourselves. Coordinating and controlling of any work, purchase of equipment ect. are going to be your responsibility. Everything related to the franchisor begins and ends with the granting of the rights to use the TM, preliminary training of staff and consultations. (read the contract carefully!) The quick start that they like to advertise is necessary for the franchisor, and not for you since one of the parties is interested in the speedy completion of the project in order to start work on the next one or return to work in their own restaurants. Under the clause, a financial audit or analysis of indicators means the calculation of royalty interest, and yes, you will pay them monthly, even if the restaurant has not reached the breakeven point. When your regular guests want you to add something special to the menu or there any new market trends, you will not be able to make any changes to the menu or format of the establishment without the permission of the franchisor. In case of non-compliance with the conditions prescribed in the contract, the restaurant may be closed with a ban on the use of TM.
Brand book, a beautiful word and a bright book that you open once. Expert analysis of the location, of course, your premises will be ideal for the franchise offered to you with a minimum amount of competition, where the second floor is even an advantage, as our client said from his own experience. Do not be naive that having arrived at a Mercedes car dealership, you will be happy to be offered to buy a BMW that you need, although you still do not understand this. The truth of the market, you are the buyer. You will have to solve all operational problems, for example, due to a shortage of qualified staff or trying to find an experienced manager by providing the required salary will be a difficult task because of the considerable cost of “Royalties.” Marketing fees, many Ukrainian brands are exempt from payment, but marketing – This is an eternal process of gaining new and retaining old customers, requiring huge resources and the top professionals in this field.
Therefore, the reluctance or not the opportunity to engage in marketing, demonstrate indifference on the part of the franchisor to the large-scale development of their brand, which casts doubt on the relevance of the proposal and forces you to do it consistently. In the event that you have a successful project and you have been asked for help to open the same project, you will not be able to do so under the brand is being used, and the franchisor will receive all the benefits, the exception is when you have a master agreement. If mistakes were made in the creation of the project (location, concept), this will lead to 100% closure of the restaurant, since you will not have the opportunity, in the short term, at no cost! Rebrand and change the concept! And it will be much more difficult for you to profitably rent out or sell a restaurant!
Not a single Ukrainian franchise has international certification of quality management systems, 0 franchises are presented on foreign markets and there are only a few companies offering to implement the project abroad. Franchisors do not give any documentary guarantees that your restaurant will make a profit, which is indicated in their presentation (read the contract!) Accoding to our background and the experience of well-known brands show, the number of completed projects does not guarantee the success in opening a new restaurant, since each project is a new idea and challenge. If you will rent a restaurant, then your net profit will be approximately distributed from 80/20 to 50/50 with the franchise owner, respectively, the investment return period will be shifted. The financial part, we will describe in more detail in the following articles
The story of our last client ended with the restaurant being put up for sale. According to our calculations, it will be impossible to return the invested money, and it did not make sense to engage in the development of the project due to the mass of elementary miscalculations and mistakes in choosing a location, studying the local market and competition. Fails could be avoided by contacting specialists in their field who, at the documentary level, could provide additional guarantees and comprehensively accompany the opening of the restaurant.
Should I buy a franchise?
– Of course, it’s worth it if you are sure that the adopted child will be better than your own.
– After collecting the needed amount of money, buying a new apartment and moving in it, you are so happy that you continue to pay the rent.
Eugene Chernyak in one of his interviews answered the question, what he thinks about Franchising.
– Franchising is a good business, but you need to know how to work with it.
We believe that the creation of a restaurant is an art and business with a reasonable approach, and calculations, when you reveal your inner world, taking into account the wishes of guests’ needs, want to give new emotions and experience.
The Proriat team will open an independent restaurant and create a unique brand with subsequent stable development or provide the necessary support in selecting a franchise, taking upon itself all the obligations and responsibility for the implementation and project management.