You’re considering opening your very own restaurant franchise. Congratulations, exciting times are ahead! One of the first questions you’re probably asking is: Okay, how much money do I need to make this happen?

This is not always an easy question to answer, partly because restaurant franchises come in all different shapes and sizes.

How much you need will be determined by the type of model you want to pursue. When it comes to restaurant franchises, the main categories are Quick Service (QSRs) or Full Service (FSRs).

Quick Service tends to be less expensive, and ultimately less complex because some QSRs don’t require seating areas, licenses to serve alcohol, and are generally smaller square footage.

On the other hand, FSRs tend to require a larger investment because of the increased logistical requirements, licenses, and the need to hire chefs, hosts, servers, and bartenders among other staff. However, FSRs on the whole tend to provide more return on investment because of the top line earning potential.

The value proposition of opening a franchise is in the fact that you as the business owner can rely on history and brand equity to obtain brand recognition— that’s all been done for you. You’ve got the benefit of starting with an established brand that consumers already recognize and trust. You will be able to leverage their intellectual property and be part of a well-developed franchise family.

As you’re considering your options, remember that the money you need to set aside depends on the type of business you want to run. At Recipe, we have the benefit of offering several unique established brands within the QSR and FSR model. Because there isn’t a “one-size-fits-all” to match a franchisee’s preference, it helps to have some options to choose from.

Let’s take a look at some of the terms and definitions involved with what you’ll need to bring to the table.

IS THERE A START UP FRANCHISE FEE?

Some franchise businesses will expect you to pay a startup fee referred to as a Franchise Fee. This is usually a one-time fee that is collected at the start of your franchising agreement.

Franchise Fees for QSRs usually range from $20,000 and $50,000 (source: The Costs Involved in Opening A Franchise , Franchising.com). These fees may be higher for higher-end Full-Service restaurants. At Recipe the franchise fee can be between $25,000 and $75,000, depending on [the brand].

WHAT ARE MY UPFRONT COSTS?

The main costs associated with opening a new restaurant are the hard costs required to build the actual restaurant. In most cases (to obtain the best real estate), the franchisee will lease space from a landlord in shell condition (meaning with nothing in it) in a dominant retail node in their desired market. The franchisee will be responsible for the costs of fitting the site out according to brand standards.

It is critical as you begin to explore restaurant franchising that you fully understand your financial capabilities and risk tolerances.

DO I NEED LIQUID CAPITAL?

Many franchisors will have minimum equity requirements built into their Franchise Agreements. This is the best way to ensure that the franchisee is set up for success and not paying disproportionate amounts of their profits to the lending institutions through principle and interest payments. At Recipe, we require our franchisees to have 40% minimum unencumbered cash available.

WHAT SHOULD MY NET WORTH BE?

Just like minimum equity, most Franchisors will require that the Franchisee have a certain amount of Net Worth to support the transaction. The Net Worth acts as insurance that you have enough assets and cash to cover your investment. Keep in mind that the franchisor is investing in you, the same way you are investing in them.

At Recipe, we require our franchisees to show three times cash in Net Worth For example if a Swiss Chalet costs $1.0MM, the franchisee would need $400,000 in unencumbered cash and $1.2MM in Net Worth to be approved.

WHAT ABOUT A ROYALTY FEE?

Royalty fees are commonly recurring fees that you as the franchisee pay to the franchisor for the continued use of the brand name and its associated assets and trademarks. This represents the franchisor’s profit line for the business.

A royalty fee can sometimes be charged as a fixed fee, and sometimes as a percentage of gross earnings for the year. (Source: Franchise Royalty Fees: Percentage Versus Fixed? - Forbes) Royalty fees for QSRs are usually on average 5.3%, and for FSRs they are 5%. (Source: A Look at Franchise Royalty Fees - 2018 - FRANdata)

ARE MARKETING FEES INVOLVED?

Some franchisors will charge fees payable either monthly or annually that go towards marketing collateral that they develop on behalf of the brand. This can be referred to as a Marketing Support or Advertising Co-op, and it includes commercials, digital advertising, signage, menu printing, pop-up displays, handouts, mobile app updates, etc.

These fees can vary depending on the franchise. Some franchises bundle their marketing fees into ongoing royalty fee costs.

WE ARE HERE TO HELP

Starting your own business is an exciting endeavour. Starting with an established franchise brand gives you the benefit of starting from a strong foundation. Just like any investment, you need to be clear about what you can bring to the table. Having a sense of the items listed in this article will help you make your decision and choose the path that is right for you for the long term.

As always, if you have specific questions about getting started, the franchising team at Recipe is happy to help.

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