Have you ever seen a great location in your town and thought that it would be perfect for a coffee shop or restaurant? Some people dream about opening up a little Mom and Pop restaurant and running their own business for a living. Unfortunately, the failure rate is very high for these businesses. An alternative to starting from scratch, is to open a franchise from an already established brand. The top franchises have already built a winning formula and they provide their franchisees with the tools and training they need to be successful.
Photo by MJ/TR via Flickr
I’ve researched some of the most popular franchises and what type of investment is required to get started. The numbers might surprise you. If you’ve ever looked at the long drive-thru line-up at a McDonald’s or Dunkin’ Donuts location and thought these franchises are just a license to print money, think again.
Franchise Start-up Costs
McDonald’s serves more than 56 million customers a day with over 30,000 locations in 118 countries. More than 70 percent of McDonald’s restaurants are owned and operated by local business people. 20-40 employees are needed to run a franchised unit. 82 percent of franchisees own more than one unit. Absentee ownership is not allowed. The start-up cost is between $950,200 to $1,800,000.
At the end of 2010, there were 9,760 Dunkin’ Donuts stores worldwide, including 6,772 franchised restaurants in the United States and 2,988 international shops in 30 countries. 25-30 employees are needed to run a franchised unit. 58 percent of all franchisees own more than one unit. Absentee ownership is not allowed. The start-up cost is between $255,700 to $1,100,000.
Operating 33,538 restaurants in 92 countries, Subway is the world’s largest restaurant chain. 6-10 employees are needed to run a franchised unit. 65 percent of all franchisees own more than one unit. Absentee ownership is not allowed. The start-up cost is between $78,600 to $238,300.
Five Guys Burgers and Fries
With over 750 restaurants in 40 states and 4 Canadian provinces, Five Guys is one of the fastest growing restaurant franchises in North America. 20-40 employees are needed to run a franchised unit. Absentee ownership is not allowed. The start-up cost is between $152,600 to $360,300.
Papa Murphy’s has established itself as the largest Take ‘N’ Bake pizza company in the world – and is now the fifth-largest pizza company in the United States with over 1,200 stores in 37 states. 11-12 employees are needed to run a franchised unit. 52 percent of all franchisees own more than one unit. Absentee ownership is not allowed. The start-up cost is between $209,330 to $396,710.
The following is a summary of key information about the 5 franchises mentioned above.
|McDonald’s||Dunkin’ Donuts||Subway||Five Guys Burgers and Fries||Papa Murphy’s|
|Total Investment||$950,200 to $1,800,000||$255,700 to $1,100,000||$78,600 to $238,300||$152,600 to $360,300||$209,330 to $396,710|
|Initial Franchise Fee||$45,000||$40,000 to $80,000||$15,000||$25,000||$15,000 to $25,000|
|Term of Agreement||20 years||10 years||20 years||20 years||10 years|
|Minimum Financial Requirements||New owner must pay 40 percent (cash) of total investment.||$500k liquid assets, $1.3M net worth, ability to purchase rights to open 5 or more locations, and must have food & beverage experience.||$80k liquid assets and $250k net worth.|
Most franchises have a strict selection process in place for accepting new franchisees. That’s not surprising, considering that the top franchises in North America want to ensure their franchisees are committed to the keeping the integrity of their brand at the highest level.
What was surprising to me was how much cash was needed to fund the initial investment. I had a pretty good idea of how much franchise fees and royalty fees would run, but a fair amount of liquid capital is also required before getting started.
Choosing a Franchise
From this list, I view Subway as the best value for someone looking to start a franchise today in the fast food or restaurant sector. For a minimum of $78,000 plus the $15,000 franchise fee, you can have one of the most recognized restaurant brands in the world. Subway didn’t have any outrageous personal financial requirements, as you could access traditional methods of financing to fund the investment without having to pay a large portion out of your own pocket.
One problem I noticed with some of the top franchises is they require a high net worth individual who is willing to commit to multiple locations. Chances are, if you’re already a millionaire you most likely don’t want to deal with the hassle of running a franchise, especially when you reach retirement age.
McDonald’s may be a license to print money, but I’m not buying it.
Would you ever consider starting a franchise?