Running a restaurant franchise ranks high on my list of fastest ways to lose a ton a money. Now if this were inherently true for every entrepreneur, there wouldn’t be any fast food restaurants or people getting rich from running food establishments. If you’re a busy doctor looking for a way to stash your hard-earned cash to work for you, keep moving along. Running a restaurant as a franchisee is by no means passive or risk-free. If you’ve always dreamed of owning a McDonald’s, it’s still an option for you once you’ve built up at least $2 million in the bank…literally.
Restaurants can be high-revenue businesses.
Every time I’ve walked past the McDonald’s on 8th Ave across from Penn Station in New York City, it’s packed. The place is open 24 hours a day. Hell, the other McDonalds one block over on 7th Ave is also open 24 hours and also packed. Chick Fil-A looks even more successful. In the suburbs, the Chick Fil-A drive-thru line is packed at all hours…2pm, 3pm, 4pm, 8pm. Insane. Owning one of these franchises has to be gold mine, right? A busy restaurant can generate around $1.5-$2 million in revenue annually!
The advantages of franchise ownership.
The franchise company wants its subsidiaries to succeed. They have well-developed business models, plans, and statistics that help you establish the appropriate market to succeed. There is typically strong brand placement to the public. Everyone knows what the Golden Arches symbolize. There should not be any difficulty with customer awareness. Additionally, the products that each franchise carries have been tested. There is no unknown in the product.
The business model from top to bottom is clear cut: the construction, permits, materials, flooring, appliances, electronics, food suppliers, and staffing is laid out in the business plan. As a franchisee, you simply front the construction and operational costs. The rest of the supply chain will take care of itself.
Cons of running a franchise.
Unfortunately, I can think of an equal number of issues running a franchise. There is never a free lunch. The market research and business model that is provided to the franchisee comes at a cost. There is almost always an initial franchise fee that owners pay to the parent company. This often ranges in the mid-five figures. Royalties have to be paid monthly, and the initial investment costs can be high.
Let’s look at one of my favorite restaurants: McDonalds. The typical initiation fee is $45-$50,000. The initial cost to construct and acquire the facility is at least $1 million. Last I checked, you have to prove to them that you already have a certain amount of cash in the bank, like $750,000. If you construct a brand new building, you will have to abide by the constraints set by the parent corporation.
Once you’ve finally set to open your doors, you have to pay a monthly royalty fee of around 4% of your sales. The food supply purchases all have to go through McDonald’s recommended supplier, which may or may not be the cheapest option you have. Some franchises like McDonald’s also has an annual renewal fee that you have to maintain. It is not cheap running a franchise.
How much can I make owning a franchise?
Restaurant franchises have huge revenue streams. According to QSR magazine, an average McDonald’s sold approximately $2.5 million worth of goods in 2014!
How much of that revenue actually translates into your pockets? The numbers vary, but I’ve seen profits on McDonald’s to be as low as $60,000 to the low six figures! Is that worth it if you already have a busy job that pays relatively well? I don’t think so.
How do restaurant franchisees actually make big bucks? I think that the secret is in the numbers. After speaking to several store managers at my local fast food restaurants, most of the owners actually were larger corporations or small businesses who owned several locations. Every one of them managed restaurants full-time.
Even then, it’s likely that you may never see your business flourish in one generation. Should doctors consider opening franchises? My take: no way. Park your money elsewhere.
(Photo courtesy of Flickr).