 Owning a business has always been a powerful way to get
ahead in America, but running a business on the side from your main
employment or during retirement can be time-consuming and stressful.
For many investors, restaurant franchises have been a low-time,
stress-light investment that can greatly expand over time. For those
starting out, buying a franchise seems like an obvious first step to
financial independence by providing revenue in the short term and stability
in the long term. For those closer to retirement, restaurant franchises
can provide steady income while being run part-time. For other
investors, the appeal of a brand that is tried and tested is very appealing.
Recent
headlines, however, have given potential franchisees many reasons to be
concerned. Throughout June, McDonald's made headlines with
under performing profits, and its response has been to put more pressure on
individual franchisees to renovate their stores, improve wages, and customize
their menus. All of those demands incur costs to franchisees. As McDonald's
announced it would no longer be reporting its sales, franchisees and
investors alike started to grumble. The sight of the nation's
second-largest franchise chain struggling so publicly has left many potential
franchisees wondering if it is worth the risk.
Restaurant
franchises are simple enough to understand. An investor gives a
corporation a fee to use its name, menu, and other resources, then pays a share
of their profits to the corporation annually. In exchange, they get
support, advertising, and a franchise exclusivity in their territory.
In theory, this makes franchises a much safer investment than opening a
non-chain restaurant, which is typically one of the riskiest businesses to
open.
For
McDonald's, as an example, franchisees pay between $45,000 and $60,000 for a
20-year franchise, depending upon their location, and then send 12.5% of
their annual sales back to McDonald's corporate headquarters. Other
chains charge different amounts. In fact, the lower price tag is one of the
reasons Subway has surpassed McDonald's for the largest restaurant chain in
the world. This also makes them easier to run inside non-traditional
locations like Walmart's and service stations. Subway charges a
franchise fee as low as $16,000 to start a small location, but its stores
have much lower average revenue than McDonald's, at just below $500,000
compared to McDonald's $2.5 million.
Once a
restaurant franchise is running properly, it can be an excellent source of
revenue. Anyone who's recently tried to walk into a Subway or
McDonald's at noon can attest to the long lines of people, and simple
multiplication shows how lucrative the business can be. On average, a
typical franchise owner made about $47,000 per location last year, but that
number was much higher among restaurants that were run by franchisees with
restaurant or management training - many McDonald's franchisees earn
six-figure salaries per location.
Considering
that franchise owners may work a few hours per location per week and can own
multiple franchises, it's easy to see how the revenue stream from a franchise
could ease retirement or build into more franchise locations for the future.
If
you're thinking of buying into a franchise, be careful with your funding.
The Small Business Administration has been tightening policies and more
Americans have turned to non-traditional lenders, whose reputations are often
murkier than established financial institutions. Others have turned to
new-economy financing strategies, like crowdfunding, microloans, or
Internet-based lending, although none of those strategies has an established
track record and many require the time-commitment that franchisees were
looking to avoid in the first place.
If
you're interested in pursuing a small business of any kind, check out the
small business loans from Pen Air. We already know you and we'd love to show you all
the ways we can help local businesses, including competitive loan rates. We can help talk you
through the process, provide additional resources and more. For more information, contact the Business Lending Department at 850.505.3200 ext. 7380 or visit www.penair.org/BusinessSolutions.
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Wednesday, August 12, 2015
Getting Started In Small Business: Restaurant Franchises
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