Trends in Restaurant Franchise Opportunities

Avoiding the Pitfalls in the Restaurant Business

When it comes to restaurants, not all publicity is good publicity. What stories involving restaurants stand out in your mind? Most likely they involve someone getting sick at a restaurant. "The hottest issues involving restaurants are associated with foodborne illness. Restaurants are moving away from handling raw meats and are outsourcing," Hein said. The less control you have over your operations, the higher your risk of food contamination. Think about it: if you're purchasing pre-packaged food from suppliers and don't know its origin, how can you guarantee your guests' safety? Hein suggests developing a strong working relationship with your suppliers and follow training protocol. When you are part of a restaurant franchise there are systems in place, which have been developed out of experience and because they work. "Don't try to reinvent the wheel," Hein said.

The more experience you have in the industry, the better chance you have of avoiding common pitfalls. If you're considering buying a restaurant franchise begin by assessing your level of restaurant industry experience - if you don't have any, you may want to rethink the type of franchise business to pursue or bring in a partner who has several years of restaurant management experience. Owning a restaurant is appealing on many levels, including their perceived profitability plus the persona that goes along with owning a restaurant. However "cool" it may seem, you don't want to be stuck with a property lease, disgruntled employees and a hefty loan to repay when customers don't catch on to your concept.

"We like to see three years or greater of restaurant experience for principals with more than 20% ownership." said Heard. "Some concepts want to bring in operators with no restaurant experience and mold them. Others like operators to have management experience and then customize then to their business model. We like the latter model." With that said, even without significant restaurant experience, you have a better success ratio if you go with a well established franchisor. "We look at the franchise system first and the underlying franchisee next," Heard said.

What Do Small Business Lenders Expect?

From a lender's perspective, buying a restaurant franchise puts you in a better position than if you were attempting to buy a non-franchise restaurant, according to Heard. Generally, franchise restaurants stand a better chance at survival than solo operations. "An average franchise unit has an 85% success rate over an independent of having a 15-20% success rate," Treliving said. However, pursuing a franchise does not guarantee loan approval. When considering a restaurant franchise, be mindful of the franchisor's history, i.e., exit rate and litigation issues and brand recognition. The more recognized and established a franchise company, the more confident lenders are to lend you money for your business. Most lenders will want to see some capital before approving your loan. "We like to see a 20% equity injection," said Heard. "We can finance about 85% of the total project cost." Depending on the size of the concept there are several financing options. "Franchisees with the financial where-with-all tap into their home equity or 401ks." Recently, the SBA raised its loan guarantee amount from $1 million to $1.5 million, which increases the latitude for large restaurant transactions.

As a lender, Heard is more concerned with cash flow than capital in the first phase of the business. During your first year of operation, you should have enough cash flow to support your business and debt, according to Heard. "We know there will be some negative cash flow at first, but we build that into the loan." The variables are too great to speculate exactly how much you can expect to make during the first few years but if you've done your homework and bought into a strong franchise system, secured a premium location, and have a demand for your product and practice sound business principals, you should see a return on investment and enjoy a prosperous career as a restaurant owner, hopefully so successful you can open second and third units. "In the first years you can expect to see a return if you stay within budget and maintain the standards you set out with," Treliving said.

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Related: Top 10 Restaurant Franchises