Pros and Cons of a Franchised Restaurant System

Contact Neufeld Legal PC for corporate transactional and legal matters at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com

Venturing into the restaurant industry by opening a new restaurant franchise (or acquiring an existing restaurant franchise location) can be a strategically advantageous move, which provides a distinct alternative from an independently owned and operated restaurant. Nevertheless, as with most commercial pursuits, there are both advantages and disadvantages arising from pursuing the restaurant franchise route.

Potential Advantages of a Franchised Restaurant

• Established Brand Recognition: A major benefit of a franchise is that you are buying into an existing, well-known brand. Customers are already familiar with the name, menu, and concept, which reduces the effort and cost required to attract a customer base. This established trust can lead to a quicker start and more consistent business.

• Proven Business Model: Franchisors provide a tried-and-true system for operations. This includes everything from the menu and recipes to the layout of the restaurant, supply chain management, and technology. This can help new owners avoid common pitfalls and a lengthy trial-and-error period.

• Comprehensive Training and Support: Franchisors typically offer extensive training programs and ongoing support. This can be invaluable for individuals who are new to the restaurant industry. You get access to guidance on everything from daily operations and employee training to marketing strategies and point-of-sale systems.

• Reduced Risk: Franchises generally have a lower failure rate than independent startups. This is largely due to the proven business model, brand recognition, and the support provided by the franchisor.

• Easier Financing: Banks and lenders are often more willing to provide loans to a franchise because they see it as a less risky investment with a successful track record.

• Economies of Scale and Purchasing Power: As a franchisee, you benefit from the collective buying power of the entire franchise network. This can lead to lower prices on ingredients, supplies, and equipment, which can significantly reduce your operating costs.

• Marketing and Advertising Support: You contribute to a larger marketing fund that fuels national, regional, or local advertising campaigns. This gives you professional marketing exposure that would be prohibitively expensive for a single independent restaurant.

Potential Disadvantages of a Franchised Restaurant

• High Initial Investment and Ongoing Fees: Franchises come with substantial upfront costs, including an initial franchise fee. You will also be required to pay ongoing fees, such as royalty fees (a percentage of your sales) and marketing fees, which can cut into your profits.

• Limited Creative Control: As a franchisee, you must adhere to the franchisor's strict rules and guidelines. This means you have limited autonomy over key decisions like the menu, pricing, decor, and even the hours of operation. If you are an entrepreneur who values creative freedom and the ability to innovate, this can be a significant drawback.

• Shared Reputation and Risk: The actions of other franchisees or the franchisor itself can directly impact your business. If a different location in the same chain has a food safety issue or a public relations problem, your restaurant's reputation can suffer even if your operations are flawless.

• Restrictive Contracts: Franchise agreements are often long-term contracts with various requirements and restrictions. These can limit your ability to expand, sell the business, or make other decisions without the franchisor's approval.

• Dependence on the Franchisor's Success: Your business is tied to the success of the franchisor. If the parent company faces financial difficulties or goes out of business, your investment could be at risk.

• Potential for Disagreements: There can be conflicts and disputes with the franchisor over fees, support, or operational decisions, which can be challenging to navigate.

Nevertheless, this merely scratches the surface as to those matters that need to considered and scrutinizing when looking to either pursue one's restaurant business through an established franchise system or undertake one's restaurant business independently. And even though our primary focus is on the legal aspects of the restaurant business, our work in this particular business sector enables us to provide important and distinct insights that go beyond the purely legal aspects and delve into the potential viability and challenges emanating from acquiring / launching a restaurant business, be it a part of a franchise system or independently owned and operated.

When it comes to the legalities of restaurant business mergers & acquisitions, that is when the law firm of Neufeld Legal P.C. comes into play. Such that when your company is seeking knowledgeable and experienced legal representation in orchestrating and completing business mergers, acquisitions and divestitures, contact us at 403-400-4092 [Alberta], 905-616-8864 [Ontario] or Chris@NeufeldLegal.com.