Expanding Smart: Is Franchising Right For Your Restaurant Concept?


The franchise model can offer restaurateurs plenty of upside, which is precisely why franchise restaurants blanket the country. As growth vehicles go, however, franchising works better for some concepts than for others. Is franchising right for you? The key is to conduct a careful analysis that takes into account the potential risks and rewards for your specific business.

The first ingredient of a successful franchise is market acceptance. Whether the business is a single unit or a smattering of company-owned stores, it must be successful from the start. How else will the startup franchisor sell prospective franchisees on the viability of the concept?

It must also be replicable. A fine-dining restaurant is not easily cloned. After all, a chef who enjoys developing creative dishes is not likely to be interested in mass production. If the restaurant’s format can not be easily described in an operating manual and taught in a training program, why bother to franchise?

The business should also clearly distinguish itself from the competition. A strong brand identity is more than just a trademark; it includes the look and feel of the shop, the culture of the business and the distinct characteristics of the products or services offered.

Be honest and look within. If you get the feeling your concept is a late-to-the party imitator, think twice about franchising until you can truly carve out a viable niche in the market.

Designing for Success

Of course, some food service operators know exactly what they are doing. They have hit upon a simple, quick-service concept that appears to be tailor-made for rapid growth. These owners stand a much better chance of becoming successful franchisors and giving lots of prospective franchisees the opportunity to start their own businesses.

The owners who have been able to figure out franchising quickly also stand a better chance of raising capital and growing through company-owned stores if that’s the path they prefer.

Compare Starbucks, which grew through an initial public offering, and Dunkin’ Donuts, which grew through franchising. At first glance, they appear to be quite different.

Starbucks actually began with an aversion to franchising. In his book, “Pour Your Heart Into It,” CEO Howard Schultz wrote that the company steered clear of franchising because he did not want to risk losing control of the link to the customer.

Upon closer analysis, these distinctions break down. Starbucks has entered into franchise-like arrangements to operate its stores, including shops within chain bookstores and hotels. These and other arrangements with third-party owners are done through exemptions to the franchise laws, which requires legal monitoring to ensure that none of the deals cross the line and trigger legal requirements for registration or disclosure. Meanwhile, Starbucks openly franchises in Europe.

Dunkin’ Donuts thrives under the franchise model, while enjoying a burst of growth thanks to a private equity investment. The difference is simply in the method of exercising quality control.

Ups and Downs

Franchising can create certain challenges. After all, franchisees can be quite independent. The best of them may be prone to objecting to certain franchisor policies and yet these stubborn, hardworking franchisees often drive innovation in ways that improve the entire system. Even with a few loose cannons on their hands, franchise owners can take steps to maintain their direct connection to the brand’s loyal customers.

Many franchisors maintain some company-owned locations even as they track the performance of their franchised locations by extensively surveying their customers.

Independent franchise owners have an incentive to succeed, which can help the overall brand be successful. These franchisees also know their local markets and are quick to let the franchisor know precisely what will work best.

Some brand owners avoid franchising because they don’t want to face disputes, such as encroachment claims. The thinking goes: ‘Just look at all of the Starbucks stores clustered so close to one another.’

If those locations had been franchises, Starbucks would have had far fewer options. Although the company did have greater freedom to ax underperforming shops, the process still involved plenty of headaches related to leases and employment issues.

On the other hand, franchisors that treat franchisees well, communicate frequently and strive to help their franchisees succeed, can achieve another end and avoid disputes.

The bottom line is that franchising has advantages and disadvantages. Before pursuing this path, it is important to carefully consider your business model and personal preferences.

If you choose to franchise, there are many successful people who went before you. Study their stories and learn from both their successes and their missteps.

Source: Food & Drink Magazine (Spring 2014)

Topics:  Franchise Agreements, Franchises, Restaurant Industry

Published In: Art, Entertainment & Sports Updates, Business Organization Updates, General Business Updates, Franchise Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© LeClairRyan | Attorney Advertising

Don't miss a thing! Build a custom news brief:

Read fresh new writing on compliance, cybersecurity, Dodd-Frank, whistleblowers, social media, hiring & firing, patent reform, the NLRB, Obamacare, the SEC…

…or whatever matters the most to you. Follow authors, firms, and topics on JD Supra.

Create your news brief now - it's free and easy »