Understanding the Cost of Opening a Restaurant Franchise
A lot of people will stumble into opportunities in life. Being aware of this fact can help you make good decisions and remind you to perform good due diligence when an opportunity presents itself.
This is how I unexpectedly came into the restaurant business. My career has always been in real estate: selling homes as a broker, remodeling and reselling properties, and owning rentals and a property management company. One day, an old client stopped by my office and with much excitement proceeded to tell me about how he wanted to buy a restaurant franchise from a local, who was franchising out his small but successful operation.
I am curious by nature, and heard him out. He told me it could be opened with $75,000 (not true) and that you could get a loan for almost the entire amount (not entirely true). I paid for the franchise with promises of low investment and great returns. While everything has worked out, I will go over the steps I should have taken to know and understand what I was getting into and to protect myself and my investment.
Understanding What It Costs to Open a Restaurant
One of the hardest pieces of information to track down when opening a restaurant is an accurate cost of what it takes to open your doors. When I was first told about my opportunity, the cost I was quoted was almost 50% of what I would eventually need.
This wasn't malicious but simply because all the other venues were opened under different circumstances. Some owners had opened in spaces that had previously been restaurants, some had equipment from old stores, and some had unique locations that had a very small footprint.
Here are a few of the items that you need to budget for.
- Franchise fee
- LLC creation
- Lawyer review of the FDD (Franchise Disclosure Document)
- Lease and utilities deposit
- Architect costs
- FF&E (Furniture, Fixtures and Equipment)
- Contractor buildout
- Artwork and wall decor
- POS (Point of Sale) equipment)
- Training salaries
- Initial food order
Create an Excel spreadsheet, and use it to budget for projected expenses as they come to light during your research. Items will come up and later be forgotten, and the last thing you want to do is open your doors, only to run out of money!
The Franchise Disclosure Document
Know your Franchise Disclosure Document! It is basically what you are paying for! This is one of the most important, if not THE most important, document in the process!
Understanding and Reading the FDD (Franchise Disclosure Document)
I don't think I realized how important the FDD was when I initially began my poorly-performed research into my new restaurant career. The FDD is not only the road map to what your place of business will look like but also tells you about your financial responsibilities, litigation the franchise might be involved with, and their financial strength.
The FDD spells out your territory and what you are actually buying when you pay the franchise fee. Things to look for when reviewing are the renewal terms, royalties, and advertising fees. If you sign it, you are expected to agree to it. I will write a future article on reviewing the FDD in depth.
One of my mistakes was signing and paying for the FDD at this time. Once you do this, in most cases it starts the clock on a limited amount of time you have to open your franchise. That means location a suitable place and negotiating the lease. In one situation, we went back and forth with a problem landlord for six months!
My recommendation would be to locate a great space for your restaurant, negotiate the terms of the lease with an LOI (Letter of Intent) and know they are going to rent to you, and then sign and pay for your FDD.
I have found in my area that if it is your first restaurant, it can be very challenging to get a landlord in a nice development to sign a lease with you. Especially without good financial backing. Be prepared for them to inject themselves into your business! They will want financials to prove your net worth, and a resume to know your background and feel confident that your restaurant will be a success. This is especially true if they are giving you a build out allowance.
In my case, we negotiated six months free rent (90 days of it spent constructing the facility) and a little over thirty thousand dollars in build out for a space slightly under two thousand square feet. The developer doesn't give you this money as cash, but instead pays it out after your space is approved by the local government and you are in operation. You can ask your contractor to take it as a final payout once he is completed.
Talk to other people that have opened franchises like the one you are researching. Just know they are busy people, so be serious and do as much due diligence before meeting with them as possible. Most are happy to tell you about the specific problem they ran into. Learning from someone else's mistakes is much better than making your own. Especially when mistakes mean time and money!