A question we are often asked by entrepreneurs is, “Why do restaurant franchises require such a high investment?” While every restaurant or food franchise’s fees differ, some of the most popular food franchises require investments between $101,000 and $1,700,000.* How can a restaurant franchise cost so much? Aren’t they just selling burgers and fries?
The Franchise Fee:
Most franchises require franchisees to pay a one-time franchise fee at the start of the franchise agreement. This is, in essence, how most corporate franchise entities make money. It’s equatable to buying any good. If you want the right to own or to use something, you must pay for it first. In the case of a franchise, the franchise fee most often covers the “how-to” guide, which will instruct the franchisee on just about everything concerning his or her franchise.
The Royalty Fee
Not all but many franchises require franchisees to pay an ongoing royalty fee for use of trademarked items. After all, a franchise’s trademarks include more than its logo and slogans; you’re paying for brand recognition. The biggest difference between a double cheeseburger with special sauce and a Big Mac® is the name, not what’s between the buns.
Running a restaurant might seem fairly straightforward but there’s a reason why most independently owned restaurants fail. (The failure rate for restaurant and food franchises are lower.) The labor, food and operations costs are high when compared with the average 2-3 percent profit margins experienced by most restaurants and food franchises. You’ve got to charge enough to keep the lights on, to keep your servers and cooks paid— but not charge so much that your customers feel you’re unreasonable.
If you’re wondering why franchisees put up with so many expenses and risk of failure consider the propensity for success of restaurant franchises. The most popular kind of franchise to start is a food or restaurant franchise for one major reason: there’s huge global demand for fast-casual, quick-service and fine dining establishments with a successful track record.
*Some franchises, like Taco Bell, require franchisees to own more than one franchise.