Road To Franchising
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 underperforming 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 Walmarts 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 ACU or stop by one of the many branches. 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.