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Guide to Buying a Franchise Restaurant

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Franchise eateries are one of the most ubiquitous types of businesses in the United States. Go to almost any town in the country and you’re likely to find a McDonald’s, Dunkin’, Domino’s, or some other familiar establishment. Of the nearly 661,000 restaurants in the United States, roughly 308,000 of them are considered franchises (46%), according to research by Statista.

In other words, buying a franchise restaurant is one of the most popular paths to business ownership.

However, the process of buying a franchise restaurant is anything but easy. That’s why we created this guide—to show you all the steps you’ll need to take to buy a franchise restaurant. We’ll explain the pros and cons, how much it could cost you, and the steps you’ll need to take to become a franchise restaurant owner.

But first, let’s start with an explanation of how franchise restaurants work.

How does a franchise restaurant work?

Franchises are highly replicable businesses that have a proven business model and widespread brand recognition and popularity. To buy into a restaurant franchise means you (the franchisee) purchase the rights from a franchisor (the company) to open your own branch of the restaurant using the franchisor’s trademarks and brand materials. The franchisor will share everything from their menu to operations manual in return for royalties from your franchise’s revenues, as well as other franchise fees.

The franchisor will assist you with designing your restaurant space, training staff, marketing the business, and developing protocols and procedures needed to run your restaurant. As the franchisee, you must agree to comply with all of the franchisor’s protocols.

While some franchisors will be more flexible and allow their franchisees to exercise their own creative freedom, the whole point of a franchise is to duplicate an already existing business. To ensure the brand’s success, each location should more or less look and feel the same, as well as offer the same products.

Pros and cons of buying a franchise restaurant

Pros

Here are the reasons you should consider buying a franchise restaurant.

  • Established customer base: Compared to independent restaurants, which can open and close without anyone ever knowing they were there, consumers already know and trust franchise restaurants, so you don’t need to spend nearly as much time or money trying to attract new clients—depending on the franchise you choose and the location you’re in, you could have a line out the door on opening day.

  • Easier to get financing: Since franchise restaurants already have tried-and-true business models, a lender will likely be more open to providing you with the financing you need to purchase a franchise restaurant.

  • No need to worry about logistics: Setting the menu? Writing an employee handbook? Marketing your restaurant? These are things your franchisor does for you, giving you more time to focus on big-picture endeavors.

  • Proven track record of success: You don’t have to look far to find restaurant franchises with staying power and consistent business. For the risk-averse restaurateur, a franchise can provide the assurance you need to get into the restaurant business.

Cons

Buying a restaurant franchise does come with some significant hurdles. Here are the disadvantages you need to understand before jumping into this endeavor:

  • High up-front cost: While acquiring funding to buy a franchise is typically easier than acquiring funding for an independent restaurant, the initial investment is typically higher. That’s because you need to invest in a location, equipment, and meet expensive zoning and code compliance standards. While this is true of any restaurant, with a franchise, you’ll also need to pay hefty franchise fees—typically tens of thousands of dollars.

  • Less autonomy: Consistency is key with franchise restaurants, so don’t expect opportunities to tinker with the menu or give the dining room a makeover. When you become a franchisee, you agree to represent the brand, which means complying with your franchisor’s requirements. If you enjoy the freedom to make your own calls, a restaurant franchise might not be for you.

  • High turnover: Restaurant franchises, particularly fast-food establishments, typically have high turnover rates, making it more challenging to recruit and retain a workforce that will function at a high level.

  • Risk of losing your franchise: Most franchisors require a certain level of performance from their franchisees to continue operating. If your franchise is struggling, you’re late with your royalty payments, or you breach protocol, your franchisor could terminate your contract. What’s more, at the end of your franchise agreement, your franchisor will review your performance and decide whether or not to offer you a new contract.

How much does it cost to buy a restaurant franchise?

The next big question most prospective restaurant franchisees have is how much it will cost. As previously mentioned, the upfront investment is quite steep. For context, the initial investment needed to start a McDonald’s franchise starts at $1 million and can go all the way up to $2.2 million. Fortunately, not all franchises are so costly to buy into. Here are the costs you’re looking at to get started:

Initial franchise fee

This is the fee you’ll pay directly to the franchisor for the rights to operate a franchise under their trademark. This cost varies from franchise to franchise. The initial franchise fee for a Kentucky Fried Chicken franchise is $45,000, whereas the franchise fee to open a Dunkin’ location (formerly Dunkin’ Donuts) starts at $40,000 but can go all the way up to $90,000 depending on the state you operate in.

Keep in mind that franchise fees are typically non-refundable.

Startup fees

Along with the cost you pay to the franchisor is the cost you’ll have to pay to simply get your restaurant up and running. This includes leasing or buying a location that complies with your franchisor’s requirements, buying equipment to outfit your restaurant, and purchasing licenses and permits required by your municipality. There’s no telling how expensive this can get, but we recommend setting aside at least a few hundred thousand.

Royalty fees

Royalty fees are the ongoing fees you’ll pay to your franchisor out of your revenues to remain affiliated with the brand and continue to receive services and support. The normal royalty fee is somewhere between 4% and 6% of your monthly revenues.

Additional costs

There are some additional costs you’ll have to pay to keep your franchise up and running. This includes payroll and subscriptions to business tools like point of sale and scheduling software. Some franchisors also ask franchisees to contribute to an advertising fund that is used to promote national campaigns and attract new investors.

Personal finances

Lastly, franchisors have some pretty strict requirements for who they will go into business with. There are typically requirements for how much the franchisee has in liquid assets, and how much their net worth is. For example, Panera Bread requires investors to have a net worth of at least $7.5 million and $3 million in liquid assets. Pizza Hut wants to see $700,000 in net worth and $300,000 in liquid assets. Understand your franchisor’s financial requirements before applying. There are plenty of food franchise opportunities out there, but you may have to do a little digging to find the ones that work best for your financial situation.

How to buy a restaurant franchise: A step-by-step guide

If you’ve read this far and still want to start a restaurant franchise, now it’s time to get into the steps you’ll need to take.

Step 1: Evaluate your market

Before picking a franchise to apply to, evaluate your market to see what kind of franchise restaurant would best fit. This means looking at the competition in your area as well as the local economy. For example, if the market is saturated with Mexican restaurants, maybe a Taco Bell isn’t the best franchise for your area. If other franchises have gone out of business in your market, you should also find out why. Do your due diligence to better understand your market, who your target customers are, and what they truly want.

Another consideration is location. You’re going to want to place your franchise in an area that gets a lot of traffic so people know it’s there. Take some time to evaluate potential locations, make note of rental prices, and more.

Step 2: Evaluate and select a franchise 

As you know by now, buying a franchise restaurant isn’t cheap. That’s why it’s important to find a franchise that falls within your budget and meets a need in your market. When evaluating franchises to consider working with, there are a variety of considerations you should weigh, including:

  • Does this franchise align with my skills and interests?

  • Does this franchise have a proven track record of success?

  • Does this franchise offer opportunities in my market?

  • How are franchisee applicants screened?

  • Can I meet the franchisor’s terms and conditions?

  • What fees does the franchisor charge?

  • In what capacity will the franchisor assist in setting up my business?

  • What do other franchisees have to say about this franchisor?

To help you in your evaluation, we recommend reaching out to the franchisor directly and asking for more information.

Step 3: Review and sign the franchise disclosure document

When you find a franchise you’re ready to proceed with, request a franchise disclosure document (FDD). The FDD contains essential information a potential franchisee will want to know before making an investment. The franchisor also needs to provide you with the FDD at least 14 days before it needs to be signed or the franchisee needs to hand over any money.

Information included in the FDD includes an outline of the fees the franchisor charges; how much the franchisee may need to invest to get started; the franchisee’s obligations to the franchisor; franchisor assistance when it comes to training, advertising, and business tools; information on patents and copyrights; the financial statements you’ll need to provide; and a copy of the franchise agreement that you’ll need to sign.

We recommend taking the complete franchise agreement, including the FDD, to a business attorney for review before signing.

Step 4: Attend a discovery day 

Along with receiving an FDD, you may also be invited to attend a “Discovery Day,” during which you’ll spend time at the franchise’s corporate headquarters or at a franchise location. The day is designed to give you a sense of day-to-day operations, the corporate culture, and the requirements you’ll need to comply with.

This process is as much for you and is it is for the franchisor. You both need to see if this partnership is the right fit. Be prepared to ask lots of questions and speak to as many employees as possible.

Step 5: Draft a business plan

The business plan isn’t required for your franchisor—it’s required for lenders. Chances are you’re going to need to obtain some financing to pay that franchise fee and get your restaurant off the ground. That means jotting down an executive summary, company overview, market analysis, organization structure, your products and services, your marketing and sales plan, and your financial projections. Keep in mind that some of this information can be pulled directly from the FDD.

Step 6: Obtain financing

The last major hurdle is to acquire the financing you need to get your business up and running. While some franchisors offer financing, it’s more common for a prospective franchisee to go through an independent lender. As we mentioned previously, it’s typically easier for franchisees to acquire financing because they are working with a known commodity.

Once you understand just how much money you’ll need to get started, here are some franchise loan options to consider:

  • Equipment financing: You’ll need to purchase a lot of kitchen equipment when opening a franchise restaurant, and equipment financing helps you get the financing you need to do that. What’s more, equipment financing loans are self-securing, meaning the equipment itself serves as collateral for the loan.

  • Term loan: A term loan is a traditional loan that you repay over the course of several years, plus interest. This is a better option for receiving a larger amount of cash to start your restaurant with.

  • Business line of credit: A business line of credit is a bit like a credit card with a higher credit limit. You can draw from it as needed, and as long as you pay back what you owe, you’ll have access to the full amount of capital again once it’s repaid. Business lines of credit can serve as extra capital you can use to cover unforeseen expenses as you build out your franchise restaurant.

  • SBA loan: The holy grail of business loans is the SBA loan. This type of loan will give you the highest loan amount at the lowest possible rates. Keep in mind that these loans are very competitive, so you’re going to want to have your financials in order before you apply.

Step 7: Open for business

With financing in your pocket, your franchise agreement signed, and your restaurant in good working order, you’re ready to open for business. Your franchisor may arrange a grand opening for your business to drum up some excitement. You’ll also probably have to go through some corporate training to better equip you to operate your franchise. Then it’s about getting into the day-to-day of operating a business.

Your franchisor will lay out the basics of how the business should operate, but it still requires grit, determination, and attention to detail to run a successful restaurant.

The bottom line

If you’re ready to run your own restaurant, a restaurant franchise is a great way to get started. The roadmap is already laid out for you, and you can attract customers by being a familiar, welcoming face in a sea of options. What’s more, if you have greater aspirations, starting with a restaurant franchise will teach you the ropes from organizations that have already had lots of success in the restaurant game. There’s no better way to learn.

If you’re looking for inspiration on what type of franchise to open, these 10 restaurant franchise opportunities are a good place to start.

This article originally appeared on JustBusiness, a subsidiary of NerdWallet.

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How to Start a Niche Foam Party Business: Kid’s Party

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Foam parties have become popular and are great fun. If you didn’t know what a foam party is, it is a party or event where participants have fun dancing amidst foam created by a machine. The machine creates bubbles of foams that envelop the place, creating a fun environment at the party. If you are a business person, then a foam party business is a great idea.

You can get a foam machine and use it to throw foam parties and make money from it – relatively affordably.

photo credit: Roaring Foam

Can you make money through foam parties?

Yes, you can make money if you have a foam machine. Parties are common, and party-goers get bored with the usual stuff. A foam party is an innovative way of partying. It allows participants to let go, dancing in joy amidst the foam. This kind of party would be popular, and you can make money by offering a different experience to participants.

Creating a niche market

When you want to make money from a business, you will find that there are many others with the same idea. You need to do something different so you can succeed. This is where finding a niche market helps. A niche market is a specific category to which you can cater. Kids Foam Party is such a niche market. While there are many businesses catering to foam parties in general, foam parties for kids is a niche idea. This is a business idea that can help you succeed and make money.

Planning your business

Now that you have found your niche, it is important to plan your business before you get started. The first thing is to be clear with what you are offering. You are offering a foam party, which is an event where there is a dance floor filled with suds. When this party is offered for kids, they will enjoy it the most. They would not only dance but play in the foam and have a great time in general.

Taking proper safety precautions like setting the depth of the foam and insisting on face coverings ensure there are no problems.

What do you need?

It is obvious that you need a foam machine if you plan to run foam parties. A foam machine is not too expensive. However, you need not buy one immediately. Since you are starting off with a new business, you can get a foam machine for rent. This is a cheaper option allowing you to rent a machine and use it whenever you need it. This will allow you to do a pilot run of your party business.

If the response is good and you start getting many events, then you can consider buying your own foam machine. This would work out better for you.

Kid having fun in foam
photo credit: Roaring Foam

Planning and executing foam parties for kids

With these basic concepts in mind, it is time you start planning your parties. Since you have chosen the niche of foam parties for kids, you need to explore different options. You can have foam parties to celebrate birthdays. There can even be parties for no reason but just to allow kids to have fun. Explore different themes for foam parties and plan the events.

Here are a few considerations to keep in mind while planning and executing foam parties for kids:

  • You need to find a venue to host the foam party. The ideal location is outdoors, so the foam does not create a mess inside. When the weather does not permit, you need to find indoor venues with a fairly big hall to organize the event.
  • Apart from the machine, you need the foam solution to create foam. You need to have sufficient foam machine solution to last the entire party.
  • Safety is a very important issue in foam parties. This is all the more important when you are dealing with kids. You need to have a clear plan for ensuring safety in your foam party. Communicate the plan with your clients so they are assured of the safety arrangements.
  • If you are doing the party indoors, you need a tarp to cover the floor and walls. It is important to cover up all the electric and other outlets to avoid them being damaged.
  • Placing plastic furniture is better since it won’t get damaged due to bubbles.
  • Safety arrangements for the kids are very important. Wearing shoes is a must. You can insist on goggles or face coverings to prevent allergies from the suds. You need to take adequate precautions to prevent kids from skidding and falling during the party. There is always a risk of accidents at a foam party, and you need to do everything to prevent it.
  • Preferably, get a waiver from guests to protect against liabilities.

With all this planning, you are now ready to execute foam parties and make neat profits from them.

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What open source-based startups can learn from Confluent’s success story

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It’s common these days to launch an enterprise startup based on an open source project, often where one the founders was deeply involved in creating it. The beauty of this approach is that if the project begins to gain traction, you have the top of the sales funnel ready and waiting with potential customers when you move to commercialize your business.

In the past, this often meant providing help desk-style services for companies who appreciated what the open source software could do but wanted to have the so-called “throat to choke” if something went wrong. Another way that these companies have made money has been creating an on-prem version with certain enterprise features, particularly around scale or security, the kind of thing that large operations need as table stakes before using a particular product. Today, customers typically can install on-prem or in their cloud of choice.

“A key aspect of these kinds of technology-developer data products is they have to have a combination of bottom-up adoption and top-down SaaS, and you actually have to get both of those things working well to succeed.” Jay Kreps

In recent years, the model has shifted to building a SaaS product, where the startup builds a solution that handles all the back-end management and creates something that most companies can adopt without all of the fuss associated with installing yourself or trying to figure out how to use the raw open source.

One company that has flirted with these monetization approaches is Confluent, the streaming data company built on top of the open source Apache Kafka project. The founding team had helped build Kafka inside LinkedIn to move massive amounts of user data in real time. They open sourced the tool in 2011, and CEO and co-founder Jay Kreps helped launch the company in 2014.

It’s worth noting that Confluent raised $450 million as a private company with a final private valuation in April of $4.5 billion before going public in June. Today, it has a market cap of over $22 billion, not bad for less than six months as a public company.

Last month at TC Sessions: SaaS, I spoke to Kreps about how he built his open source business and the steps he took along the way to monetize his ideas. There’s certainly a lot of takeaways for open source-based startups launching today.

Going upmarket

Kreps said that when they launched the company in 2014, there were a bunch of enterprise-size companies already using the open source product, and they needed to figure out how to take the interest they had been seeing in Kafka and convert that into something that the fledgling startup could begin to make money on.

“There have been different paths for different companies in this space, and I think it’s actually very dependent on the type of product [as to] what makes sense. For us, one of the things we understood early on was that we would have to be wherever our customers had data,” Kreps said.

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5 Hobbies That Make Money and How To Get Started

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Money-making hobbies range from walking dogs to blogging to creating and selling homemade goods.

Read about these profitable hobbies, as well as what you can expect to make.

1. Driving

Enjoy cruising around town? Give others a ride and make money by becoming an Uber or Lyft driver. Uber drivers make an estimated $5 to $20 an hour, and Lyft drivers earn about $5 to $25 an hour, according to SideHusl.com, a review site for money-making platforms. Note that earnings depend in part on when, where and how often you drive.

To become an Uber or Lyft driver, you must be the minimum age to drive in your area. You must also meet specific requirements related to your driver’s license, insurance and vehicle. Learn about these exact requirements in our guide to becoming an Uber or Lyft driver.

If you enjoy driving but don’t want people in your car, look into becoming a full-service Instacart shopper, which involves shopping for and delivering groceries. Uber Eats and Amazon Flex also offer opportunities to deliver food and other products to homes. Each of these gigs has its own set of requirements, though, so do your research before signing up.

2. Caring for dogs

If your favorite hobbies involve belly rubs, smooches and long walks in the neighborhood, try Wag or Rover. These apps enable you to walk, dog-sit or board pups overnight for money.

Rover and Wag work in similar ways. They both require you to be at least 18 years old, pass a background check and meet other requirements. For both, you create a profile, set your own rates, and use the app to choose which gigs to take. (See our Rover vs. Wag comparison for more specific sign-up and payment information, as well as how the apps vary in the services they allow.)

On both apps, the amount you earn depends on what you charge, how much you receive in tips, and which types of services you provide. As you would guess, boarding typically pays more than walking a dog, for example. But both companies take a bite from your earnings. Rover charges a 20% service fee per booking, and Wag takes 40%.

3. Blogging

If you have a blog that gets decent traffic, try making money from it. Blogging for money can take a few forms. One way is to host ads on your blog through a service like Google AdSense, which is free. Here’s the gist, according to Google: If your website is approved, then you choose where on it you would like ads to appear. Then advertisers bid to place ads where you designated, with the winner’s ads appearing in that spot. (People make money on YouTube through the same service.)

You earn some money when a reader clicks on one of these ads — but determining exactly how much you’ll make is tricky. Explore our guide to Google AdSense to learn more about it.

You could also try writing sponsored content, meaning companies pay you to write about their products. Or, become an affiliate through the Amazon Associates program. That involves linking to an Amazon product from your content and earning a commission when one of your readers clicks through and buys that item. Learn more about how to make money on Amazon through your blog.

4. Posting to social media

Love posting to social media and building a following? On Instagram and TikTok, many users earn money through sponsored photos and videos. Say you regularly post about your at-home exercise regimen. You may agree to post about a retailer’s resistance bands or sweatpants in exchange for cash or free products. (Sponsorships and affiliate marketing are also ways to make money from podcasts, in case that’s one of your hobbies.)

Sponsors may reach out to you to set up this kind of arrangement; you could contact them; or, in some cases, you may consider working through a third-party agency.

The type of content you post, as well as your number of followers and their engagement, will likely impact sponsorship opportunities. Learn more about how to make money on Instagram or on TikTok.

5. Selling your wares

There’s a marketplace for just about everything. So if you’re skilled in a hobby, consider trying to profit from it. For example, if you create jewelry or have an eye for thrifting quality clothes, try selling those items at a local flea market or yard sale, or on a neighborhood website such as Nextdoor or Facebook Marketplace.

Or look into an online market that could attract a wider range of buyers. Consider Etsy for crafts or Poshmark if you want to sell clothes online.

These websites charge fees that will cut into your profits. This guide to selling stuff online will help you think through the math and determine if your hobby can become a viable business.

What to consider before making money from your hobbies

Before taking any of the routes listed above, keep in mind that this work will likely affect your taxes. See our guide to self-employment taxes, which includes expenses you can deduct, and how to avoid penalties.

And as you aim to profit from your hobbies, consider whether you will continue to enjoy them through this new business lens. Let’s say knitting helps you relax. Will it continue to do so if you’re pricing, promoting and shipping your homemade wares through an online marketplace? And that blogging hobby: Will writing still be fun or cathartic if you’re occasionally throwing in a sponsored post?

It may be hard to answer these questions until you give the money-making approach a shot. But it’s worth reflecting on the potential trade-offs as you think about turning your hobby into a job.

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