What are the odds of building a successful restaurant franchise from the ground up and lasting three years? According to a hospitality management professor who studied restaurant failures, it is less than 40%. A professor at Ohio State University authored a study that found 57% of all newly opened franchises will not survive beyond the three year mark. That is only slightly better than independent restaurants that experience a failure rate of 61%. Does this mean you should avoid restaurants altogether? No. A franchise restaurant can represent a great value if you know when to buy and how much to pay. This article will teach you with our three rules for franchise restaurant buyers. asiate baden baden
The books and records of an established business tell the true picture of its earnings. If you want a restaurant that has beaten the odds of surviving three years, buy an established restaurant with repeated years of earnings. If a franchise interests you because of the training or the brand, than by all means pursue your dream but do it with our three rules if you want to make money.
The first three years of a franchise often look like this. A new owner learns of a concept and is instantly excited about the potential and ready to build from scratch. A new restaurant franchise can easily cost the new franchisee $350,000 or more. Eager to experience his own restaurant franchise success, the franchise restaurant owner is sure that he is on the way to making millions. A simple review of the math however shows that with franchise fees of 8%, marketing fees of 2%, and rent of 15% all kick in before he buys the food and serves his first chicken wing and beer at an average check price of $8.00. After a tough first year he calls a restaurant broker to sell the franchise restaurant. He is not too happy to learn that with a money losing operation, the most he can expect is about 25% of what he has invested or about $125,000. That pricing is only if he has a good franchise concept and a strong site.
A smart restaurant buyer picks up the pieces of the franchise and becomes owner number too. This owner may still be losing money but he only paid around $100,000 so his cost to acquire is much lower. By year two his sales are beginning to keep pace with his fixed costs. By working hard at the business and operating it himself, he can probably go from losing to making money. By the way, both owners have paid the franchise fees the entire time even while they lost money. Another year into the business, this smart buyer realizes he may not have such a great deal after all. He may be operating in the black but when he adds up the time in the business against his return, he is making less than the federal minimum wage. He calls a restaurant broker to sell the business. By this point, sales have developed to the point that all fixed costs are covered. With add backs, he is only earning $35,000 or so a year.