Note: The following article has previously been shared at Acceler8Succes Cafe.
Is Franchising the Right Way to Grow Your Restaurant Business?
Another question I am being asked quite a bit of late is about whether franchising is the right way to grow a restaurant business. It’s certainly good to see restaurant operators and other business owners proactively planning for the long-term. Preparing to franchise a restaurant or any business for that matter, is a good project to undertake even if franchising turns out not to be in the cards, for whatever reason. A lot can be learned from the process itself.
It was this objective of being well informed regardless of whether franchising was the right strategy or not that I had on my mind when I was asked to conduct a seminar for RestaurantOwner.com five years ago. It’s no secret that many restaurant operators have aspirations of seeing their concept grow across a state or even across the country. Most think about franchising as the vehicle to accomplish their goals for all the obvious reasons. But is franchising right for them personally? Is their business positioned correctly for franchising? And is franchising the right or only path for growth?
After I presented my webinar, I was interviewed by RestaurantOwner.com staff for an article in their print publication. Over the next few days, I will share the article here at Acceler8Success Cafe. As it has helped a number of restaurateurs make what they’ve told me was truly the right decisions for them, two just in the past week, I feel compelled to start the conversation again in order that today’s restaurant operators that may be planning a pivot will have opportunity to explore and consider all options.
Note: At the time of the webinar and article I was CEO of Franchise Foundry. Today, with 40+ years under my belt, I am the CEO & Founder of Acceler8Success Group. Franchise Management & Development is a cornerstone of Acceler8Success Group along with other disciplines including business incubation & acceleration, business brokerage and entrepreneurship coaching.
Is Franchising the Right Way to Grow Your Restaurant Business? (An Interview with Paul Segreto, CEO of Franchise Foundry based on a RestaurantOwner.com webinar by the same name.)
The restaurant industry represents the largest number of franchised locations, thanks not only to established chains like McDonald’s Corp.; but also, smaller operators who use franchising to grow quickly. The IFA predicts the so-called full-service restaurant sector will account for the greatest growth, followed closely by quick-service units.
The risks are proportionate to the rewards. As with any complex business strategy, there are right ways and wrong ways to launch and maintain a franchise system. Franchising the right way is when the corporate unit from which the franchise model is being developed is already highly profitable,” says Paul Segreto, CEO of Franchise Foundry. From there it’s about having proven processes and systems that have been documented and will be easily replicable at franchise locations.”
Franchisors must understand franchisees have also made a significant investment in the business, and in the founder’s vision. We hear so much about positively memorable experiences for customers, but that should be the case for franchisees in their relationship with the franchisor. – Paul Segreto
Segreto’s company is a business accelerator focused on emerging franchise brands. Utilizing a hybrid coaching/consulting approach, he and his team develop and deploy effective short-and long-term solutions in franchise management and operations, change management, traditional and digital marketing, relationship and business management technology, and domestic and international franchise development. The company also assists franchise brands in raising capital and exploring merger and acquisition opportunities.
Segreto also stresses the importance of exemplary customer satisfaction levels” at the corporate unit prior to attempting to replicate the concept. Profitability can be a function of strong management at the corporate level. Exemplary customer satisfaction, proves not only those systems and processes are working, but are working to the finest of details.” Among the clearest evidence that a restaurant concept is delivering this level of service is a “stellar position on review sites,” says Segreto.
Successful franchisors have selected technology that support their systems across the franchise – including POS system, loyalty programs, and more. Before launching a franchise, the technology needs to be tested from all angles in the corporate stores.
Systems also require standardization of equipment and process flow. Franchising is where the restaurant business becomes as much science as art.
Last but most certainly not least, any company wishing to franchise must have solid ownership of trademarks and trade dress. In fact, securing this intellectual property is probably the prospective franchisor’s first step.
Of course, each of these aspects of creating a foundation for a successful franchise is a webinar – if not a book – in itself. The wrong way to franchise is simpler, says Segreto: ‘We’re making money, let’s franchise. We’ll make improvements and perfect things after we sell a few franchises…’
Segreto believes there is a lot of misunderstanding among restaurant operators when it comes to franchising. Franchising is regulated under federal, and in some cases state, disclosure laws, and ignorance [or these laws and regulations] is not a defense, – he warns. Franchisees are not employees and shouldn’t be treated as such. Franchisees are every bit the mom-and-pop operator with life savings invested in many cases. Consumers have confidence in a franchise brand, feeling a larger entity behind the local franchise unit. Expectations are higher than with independent operations. Conversely, consumers lose sight of it being locally owned and operated.
Prospective franchisors also need to identify the segment in which they will be competing. Franchised restaurants are currently divided into common segment categories, such as quick-service, full-service, family dining, etc. It doesn’t end there, says Segreto. Then there’s ethnicity: American, Korean, Mexican, Latin American, Asian, and many more – and top those off with fusion.
Your mission, as an operator who dreams of franchising your concept, is simpler, says Segreto. Do what you do best and focus on that. Don’t try to be everything to everyone. A ‘proven’ system is when the efficiencies can offset the royalty percentage and still churn out acceptable profit margins.”
Restaurateurs must also realize that franchise success is dependent on both franchisor and franchisee. Think marriage, Segreto says, because it is a marriage of sorts. It requires open, honest, transparent communications in both directions.
Don’t forget that you, as franchisor, are not the only party that wants to make money. Many times, an operator decides to franchise because he is pumping away at 15% to 20% profit, and with them at the restaurant 60 hours a week. For a franchisee, you must add back royalty percentage – let’s say 6% – and 2% to 3% for required brand funds. (Brand funds are payments required by the franchisor to be used in promoting the brand). So right away, if nothing changed to make operations highly efficient, the franchisee process fit is down to 8% to 12%.
The franchisor must resist the temptation to treat franchisees like employees. Franchisors must understand franchisees have also made a significant investment in the business, and in the founder’s vision. We hear so much about positively memorable experiences for customers, but that should be the case for franchisees in their relationship with the franchisor.
One of the keys to a strong interdependent relationship is for both parties to fully understand each other’s responsibilities, as well as their own. It’s all lined out in the franchise disclosure document, says Segreto. Unfortunately, it’s often overlooked, cast off as boilerplate.
Please check back tomorrow as the article continues with timing, initial steps, and myths.
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