For many large restaurant chains, franchising is a critical part of the business. If you go to a well-known brand, chances are you're eating at a shop owned by a franchisee, not the company whose name is on the sign outside. For McDonald's (MCD), 81% of its global system is owned by franchisees. At Burger King (BKW), it's 97%. Domino's (DPZ), 96%.
Corporate restaurant owners like the model: They get to spread their brand, put many of the expenses on the franchise owner and collect a predictable, recurring revenue stream based on the fees they charge.
To become a franchisee, costs vary widely depending on the restaurant, its location and the physical materials needed. They can be manageable, or they can be substantial. In some cases, it's nearly impossible to get started without access to a tremendous amount of capital. A McDonald's location, for instance, could theoretically set you back more than $2 million. In others, such as at newer or smaller chains, you might have a better chance. Opening a Wingstop may cost $350,000 to $400,000.
QSR Magazine, a publication that closely follows the chain restaurant industry, produces an annual list of the best franchises to own, this year releasing 12 names. Some are small, like the 11-store Tin Drum AsiaCafe, which delivers "bold flavor profiles, high-quality food, customization options, and convenience," while recording more than $1 million in sales per restaurant. Others are regularly found, such as Papa John's (PZZA), with 3,000-plus units. The pizza seller made the list owing to corporate support, "credibility with consumers" and its "proven, streamlined system" that produces average revenue above $800,000 for a shop.
On average, a fast-food restaurant had sales of $753,000 in 2010, according to data from theNational Restaurant Association. QSR says the top-performing chain that year was Chick-fil-A,with right under $2.7 million for a single restaurant. By comparison, Wingstop says it brings in around $900,000 per unit annually, while at McDonald's, revenue works out to about $2.5 million for a given store.
Regardless, it's important to remember that of the money that comes in, a huge percentage of it goes back out. Rent, utilities, payroll, royalties, maintenance and other costs have to be covered.
For the household names, the monetary bar can be high to get a franchise award. Why? The corporate office can charge whatever they feel like, and it can be a lot. Additionally, requiring significant funds provides some cushion in case a store underperforms for an extended period. Protecting the brand and seeing it succeed are crucial to the parent companies.
"The franchisee has to maintain the brand promise, and a large part of doing that is being able to fund the buying of equipment and intangible things, like going the extra mile to pick up smashed cups in the parking lot," Brian Sozzi, CEO and chief equities strategist for Belus Capital Advisors, says in an email. "Should they start bringing in lower quality franchisees, the risk heightens that the business is not run well, in turn hurting the franchisees doing things the correct way."
In order to offer a bit of perspective on the financials of launching and operating a franchise, we examined a few of the big names out there to create the following list. However, this only skims the surface of what they require: If you want all the details, you'll need the Franchise Disclosure Document for a restaurant. Just make sure you're serious before you tackle one. Burger King's FDD, for instance, runs 1,003 pages in a PDF file.
Corporate restaurant owners like the model: They get to spread their brand, put many of the expenses on the franchise owner and collect a predictable, recurring revenue stream based on the fees they charge.To become a franchisee, costs vary widely depending on the restaurant, its location and the physical materials needed. They can be manageable, or they can be substantial. In some cases, it's nearly impossible to get started without access to a tremendous amount of capital. A McDonald's location, for instance, could theoretically set you back more than $2 million. In others, such as at newer or smaller chains, you might have a better chance. Opening a Wingstop may cost $350,000 to $400,000.
QSR Magazine, a publication that closely follows the chain restaurant industry, produces an annual list of the best franchises to own, this year releasing 12 names. Some are small, like the 11-store Tin Drum AsiaCafe, which delivers "bold flavor profiles, high-quality food, customization options, and convenience," while recording more than $1 million in sales per restaurant. Others are regularly found, such as Papa John's (PZZA), with 3,000-plus units. The pizza seller made the list owing to corporate support, "credibility with consumers" and its "proven, streamlined system" that produces average revenue above $800,000 for a shop.
On average, a fast-food restaurant had sales of $753,000 in 2010, according to data from theNational Restaurant Association. QSR says the top-performing chain that year was Chick-fil-A,with right under $2.7 million for a single restaurant. By comparison, Wingstop says it brings in around $900,000 per unit annually, while at McDonald's, revenue works out to about $2.5 million for a given store.
Regardless, it's important to remember that of the money that comes in, a huge percentage of it goes back out. Rent, utilities, payroll, royalties, maintenance and other costs have to be covered.
For the household names, the monetary bar can be high to get a franchise award. Why? The corporate office can charge whatever they feel like, and it can be a lot. Additionally, requiring significant funds provides some cushion in case a store underperforms for an extended period. Protecting the brand and seeing it succeed are crucial to the parent companies.
"The franchisee has to maintain the brand promise, and a large part of doing that is being able to fund the buying of equipment and intangible things, like going the extra mile to pick up smashed cups in the parking lot," Brian Sozzi, CEO and chief equities strategist for Belus Capital Advisors, says in an email. "Should they start bringing in lower quality franchisees, the risk heightens that the business is not run well, in turn hurting the franchisees doing things the correct way."
In order to offer a bit of perspective on the financials of launching and operating a franchise, we examined a few of the big names out there to create the following list. However, this only skims the surface of what they require: If you want all the details, you'll need the Franchise Disclosure Document for a restaurant. Just make sure you're serious before you tackle one. Burger King's FDD, for instance, runs 1,003 pages in a PDF file.
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