Restaurants have rightly gained notoriety as high-risk business ventures. The industry is rife with tales of businesses that have come and gone, many of which have left their owners saddled with significant debt. So it’s no wonder that potential restaurant franchisees are often left wondering how much it would cost to start their own business. If you are considering to purchase a restaurant franchise, then you are in the right place. This comprehensive guide will give you detailed information on the cost of starting a restaurant franchise.
Cost To Start A Restaurant Franchise
Restaurant franchises are typically more expensive than other types of franchises. These are numerous but can be attributed to the higher overhead costs of running a restaurant. For example, restaurants must pay for rent or mortgage payments, utilities, insurance, and required permits and licenses. In addition, restaurants must also purchase kitchen equipment and supplies, which can be pretty costly. The average cost of starting a restaurant franchise is between $200,000 and $1 million. However, some franchises have an initial investment of less than $100,000.
In addition to the initial investment, you will also be responsible for paying a franchise fee. The franchise fee is a one-time payment that allows you to use the franchisor’s name and business model. The franchise fee for a restaurant franchise can range from $10,000 to $50,000.
In addition to the franchise fee, you will also be responsible for paying ongoing royalty fees. Royalty fees are typically a percentage of your monthly sales and are paid to the franchisor for continued use of their name and business model. The average royalty fee for a restaurant franchise is between 3% and 6%.
Another ongoing cost associated with owning a restaurant franchise is marketing fees. Marketing fees are used to fund marketing and advertising campaigns that promote the franchise. The franchisor will typically dictate how the marketing fees are spent and will often provide guidance or even create the ads themselves. The average marketing fee for a restaurant franchise is between 1% and 3% of monthly sales.
Do Franchisors Have Some Financial Requirements For The Ideal Candidate?
Absolutely. Franchisors want to see that they have the financial resources necessary to sustain a successful business. They also want to know that you’re committed to the franchise’s long-term success and are not just looking for a quick return on your investment. Some key things franchisors look for include:
- A strong credit history: Franchisors want to see you have a strong track record of paying your bills on time. They’ll also look at your debt-to-income ratio to ensure you’re not overextended financially.
- Financial Statements: Franchisors will want to see your personal and business financial statements. They’ll use these to understand your overall financial health and whether you have the resources necessary to sustain a successful franchise.
- The ability to raise capital: Franchisors want to see that you have the ability to raise the necessary capital to start and grow a successful franchise. They’ll look at your investment history and business plan to gauge your feasibility of raising capital.
To give you an idea of what franchisors are looking for financially, here are some of the most common financial requirements for franchisees:
- A minimum net worth: Most franchisors require a minimum net worth of $250,000–$1,000,000. This requirement ensures that you have the financial resources necessary to sustain a successful franchise.
- A minimum liquid asset requirement: Franchisors also require a minimum of liquid assets, typically $100,000-$500,000. This requirement ensures that you have the cash to cover the initial investment and sustain yourself during the early months of operation when revenue may fall below.
Are There Any Other Costs Associated With Starting A Restaurant Franchise?
Yes, there are a few other costs you should be aware of when starting a restaurant franchise. These include:
- Franchise disclosure document fee: The franchise disclosure document (FDD) is a legal document that contains information about the franchisor and the franchise opportunity. The FDD must be provided to potential franchisees before they can invest in a franchise. The fee for the FDD is typically between $500 and $5,000.
- Legal Fees: You will also be responsible for paying legal fees associated with starting your franchise. These fees can range from a few hundred dollars to several thousand dollars, depending on the complexity of your franchise agreement.
- Insurance: Most franchisors require that you purchase certain types of insurance, such as property and liability insurance. The cost of insurance will vary depending on the type of coverage you purchase and the size of your franchise.
- Training fees: Franchisees are typically required to attend initial training provided by the franchisor. Training fees can range from a few hundred dollars to several thousand dollars, depending on the length and complexity of the training program.
- Technology fees: Some franchisors charge technology fees to cover the cost of maintaining a central website or other online platforms. Technology fees can range from a few hundred dollars to several thousand per year.