Are you keen to open up a restaurant, but cannot quite make up your mind whether to do a straightforward start-up or so-called ‘green field business’, or do it via a franchise operator? This is not an easy choice to make. As a former master franchisee of a successful casual dining pizza restaurant brand, one can probably give the new hospitality entrepreneur an idea of how it works.
A franchise restaurant is like any other business. There are some very good ones, and others that are not as good. Top brands can be very costly and most difficult to obtain, easily exceeding the half-million mark – or double. And bear in mind no success is guaranteed. In our particular case it was a horse of a different colour. We always wanted to have our own restaurant. Since the age of eighteen I was very fond of this London chain of pizza and Italian food restaurants. It was casual dining, not fast food. During the early part of the new century we wanted to make a move from property development which had been our core business. The idea was quite simple. The London chain was, and still is, without a doubt the best pizza chain in existence, offering home-baked pizza of high standards as good, if not better, than those you may find in Naples or Palermo. The Englishman that started all this was a fascinating man. A Cambridge University graduate in history he travelled to Italy in the 60s aged twenty and got this pizza idea to bring back to London. It was a great success.
The fact is the chain was only just starting in Spain and had no outlets in Costa del Sol. We met the directors in Madrid and concluded a deal. We became the master franchisees of Costa del Sol with a first restaurant in Malaga. The idea was to open up half a dozen along the coast and then takeover all the rest in Spain which belonged to them. The head company owned some 12 restaurants, making a reasonable profit. In the right hands, things could improve considerably. Plans were worked out. Then, in 2008, Spain was hit by what some people called a recession. The crisis was so immense that it was more like a depression, and it took its toll on most businesses. The pizza chain included. The company started closing down restaurants. What did we do? Closed it down and took all our equipment and started our own concept in Marbella’s Golden Mile: a French bistro offering casual Mediterranean and French cuisine. We ran it successfully for several years until we moved on to a new project. We did not make much out of it but made a decent profit, and more importantly we kept afloat during the economic crisis, paid school fees for our children, and supported our families. And we ate beautifully – it all came out of the restaurant.
The crisis was so immense that it was more like a depression.
I am trying to give you an example of how a franchise, even if it was a winner as a brand, and reasonably priced and run by extremely capable and professional people, did not quite work out. Let us go into detail about how it normally works.
The first thing is to have a clear mind of the type of franchise you are looking for. We had pizza and Italian casual dining in mind. You may have burgers and fast food in mind. Or ice cream or doughnuts. Do good research is the answer, and pick up what your instinct tells you to do. Talk to other franchisees in the close and not-so-close areas. Don’t be afraid to fire away the most direct questions about the franchisor, his sources of supply etc, which can make the difference between success and failure.
Once you decide to go ahead and secure a contract with the franchisor make sure you know the following points:
1 Initial fee. The big companies may ask outrageous sums of money. From €30,000 upwards seem an average figure. A top brand in fast food business could ask a lot more than that. If things go wrong, you will never see this money again. Is this initial fee negotiable? Yes, it most certainly is, particularly if you are not dealing with the largest brands. In our case for example we only paid half the fee.
2 Decoration and works to be carried out. Most of the franchise companies use their own contractors and suppliers and make very handsome profits out of you. This chapter will run into the thousands however small the franchisor is. The better known the more money they will demand.
3 Food and beverages supply. 98% of the franchisors will supply you their own products. And if we are talking about fast food, we are talking 100% their own supplies – mostly frozen. They make a vast profit out of this. If you are dealing with a casual dining brand there is a certain flexibility with regards to supply. Initially we used to get supplied by a central warehouse in Madrid, but with the recession they went bankrupt and we got our freedom as where to get supplied provided the official recipe book was followed meticulously. In this particular case, the head company made some money via small commissions or rappel yearly fees, but nothing much, and the fact you purchased as a group gave you better prices. From day one we worked very closely with the franchisor, and we built a solid relationship based on mutual trust and honesty, later becoming a great friendship. This is not so usual, and it has lasted until today.
4 Royalty fees. Voilà le bonbon. This is where most make their cut. Regardless of whether you make a profit or a loss the franchisor will get his royalty fees, levied on weekly or monthly sales. We paid 5%. In some cases, it can go as high as 10%. The average is between 4% and 6%. Is this negotiable? Not really. In our case we negotiated an agreement with the president of the franchise company: If our restaurant was not making a profit it would not pay any royalty fees. It was a verbal agreement between the president, their managing director, our lawyer and I. The president left the company to start his own brand. And our restaurant started making a loss. They honoured the agreement. Very unusual in today’s world.
5 Advertising and marketing. Most franchisors will demand a small percentage for marketing and advertising. This could be a few percentage points. Not really negotiable.
6 Follow up and training. This was professionally done in our case. All the staff got trained by top instructors; cooks, helpers and waiters. This was included in the initial fee but not transport or accommodation. This is the norm with most brands.
7 Advice with locations. They do make sure you are properly placed and that there is enough flow of customers to get the right amount of business. But they get it wrong now and then. The main reason we closed was because the flow of customers was much less than what the shopping centre had guaranteed. Shopping centers make the most money out of you in the form of high rent. Never forget that.
So, all this said, shall I start a franchise, or go for my own concept? If you are new to the business and have plenty of resources, a quarter of a million upwards and set up without bank finance, and wish to have a top brand in your hands, then go for it.
But if on the other hand you are a real entrepreneur, young, with a passion for the food and hospitality business I would most certainly recommend you invest in your own project. Copy a successful idea. Pick up what you think is best and do it yourself. Headhunt a top-class manager and cook. You will need to pay a premium to take them away from their present jobs. That is after all what they do in football and rugby; bring in the best players. It certainly costs, but far less that the initial fee and all the ‘extras’ that come in the package. And if you succeed, you may even start franchising yourself. One can never tell with new start-up businesses. This is the long and the short of it.