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Should You Buy a Restaurant Franchise?

The reason I like franchised restaurants are plentiful and you will understand that buying a franchise as it relates to restaurants might just be the right fit for you.

I have been selling restaurants as a Specialty Business Broker for about 11 years and I recently sold our company’s 600th restaurant. In my years as a Restaurant Broker, I have sold small one’s, as low as $50,000 and those into the millions, but the problems I see are not selective among large or smaller restaurants. These problems are universal, at least in the restaurant world.

Restaurant owners and their managers have real problems controlling their food costs. Typically, food costs in this type of business should be 25-30%. The more complex the restaurant, the higher the costs will be toward the 30% threshold.

For instance, if you purchase a Diner franchise, you will be serving a variety of food and your inventory will be greater. If you serve alcohol, like a sports bar franchise, you are dealing with beer, wine and spirits. There is a greater opportunity for spoilage as well as theft.

If your franchise concept is a fast-casual take-out place, you will have less inventory as well as a simpler menu. Employees who are not trained properly will be a major problem with increased food costs. Instead of pouring a 12 oz. Beer, they may offer good customers free beer as well as over pouring cocktails. When this happens, the overall food costs begin to creep up.

Employee theft is a major consideration in all business and to keep it under control a good operator is vigilant about inventory control and a watchdog when it comes to daily financials.

Rents and unfavorable leases are another issue that increases costs and raises havoc with bottom line profits. The biggest problem is that you usually only get one opportunity to negotiate a lease and many new franchise owners opt to do this themselves.

There are a wide number of issues with leases and you need somebody who understands them to help you gain the most favorable terms. Items like options, whether they are personal or not, what the term will be and how many options are available are all important considerations when dealing with Landlords and Property Managers.

Typically, rent payments should remain at 10% of sales. If you get too much higher than that you are going to have to work very hard to maintain profits.

Payroll is another major factor in operating a business. The type of business will demand higher rates and more or less staff, but payroll should be in the 28% range.

All this leads to the idea of buying a franchise instead of starting your own small business and trying to implement these financial constraints yourself. Franchisors already have done the work and figured the math in order for you to be successful. They know how much inventory you need and will tell you exactly what your food costs will be if you follow their plan designed for you. Franchisors have already figured out how much beer you need in your sports bar and how many brands of hard spirits you are going to need to remain profitable.

Whenever I sell a franchise, I know that my client is going to walk into a proven business model and as long as they follow the blueprint already laid out, their chances of being happy and profitable increase dramatically.

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