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Is franchising in your future?

Do your research before jumping into franchising.

Over the past few years, I’ve had the opportunity to analyze and review the operating manuals of several national chains, cover to cover. This was necessary to determine the proper accounting and tax treatment of financial transactions, consider the franchisor recommendations and compare them to my client’s operating results. 

While researching, I discovered one operating manual that was broken down into 18 chapters. The first chapter made perfect sense–it advised the operator to identify the location of the potential restaurant. As most know, in real estate, and in any restaurant business, half the battle is location, location, location. 

Surprisingly, the second chapter was titled “Hire an Accountant!” Some of you may ask, “Why, after spending millions of dollars on compiling an operating manual, is an accountant important?” But you have to remember, the restaurant business is math. Sure, the product quality, service and brand are all important, but when you’re answering to a financial partner or spouse who has helped fund your idea to open a restaurant, your math had better be accurate.

Document Your System

How well your system is documented will create value in your restaurant and support the math. For example, food costing is critical in your math computations. Knowing the exact ingredients, including proper measurements, for each menu item; movement of each menu item by hour; and the profitability of each menu item provides the owner the ability to predict future operating results and react to changing foods costs. 

Usually, this system is documented in a franchise system when you become a franchisee. If you’re an independent owner, this system must be created from scratch. A great place to start: Develop a relationship with a supplier that will start you down the path of food costing and finding a computerized method of keeping track when your system is created. 

Food costs in a restaurant chain normally run 18% to 30% of net sales. Contrast this with an independent restaurant that doesn’t have a system to control food costs—I’ve seen that number go as high as 70%! Controlling your food costs can be as simple as exposing all management and waitstaff to a new program to determine and document the profitability of each menu item, and establishing rewards for selling and promoting these items. 

Your system should address food costs and ingredients; labor costs, including scheduling; and financial reporting of daily activity. These three chapters of your restaurant manual need to be identified to create consistency in your operations. The customer is looking for a consistent experience when visiting your restaurant, and in a chain environment that is usually achieved. However, in an independent scenario, the experience will change if there’s no system that employees can follow to deliver a consistent product.

Start-Up Assistance

After an owner has signed franchise agreements, some franchisors will help franchisees to develop or revise business plans. Others will arrange for financing of the franchisee’s initial investment, ongoing inventory purchases, customer purchases or other items. 

The start-up phase is critical in any business. Most franchisors provide resources that independent business owners would be unable to assemble or pay for, such as “start-up assistance” through initial training programs, training manuals and operations manuals. They often have members of their staff available for consultation on virtually any of the start-up issues that the franchisee is likely to encounter. 

Most small business owners do not hire business consultants; they usually cannot afford them. Franchisees, on the other hand, as part of the franchise fee, normally acquire not only operations manuals that describe tested procedures for most of the critical aspects of the business operation, but also the right to call upon franchise support personnel from their franchisor. Whether the issue is related to operations, marketing, finance, purchasing, employee relations, pricing, training, merchandising or technical issues applicable to the business, most franchisors provide assistance on an ongoing basis to their franchisees. The assistance may come in the form of someone at the franchise headquarters or regional office that is available via telephone, email, fax or intranet to answer questions; or the franchisor may provide field representatives, regional or district managers, training programs, software, or programs developed by third-party vendors to help franchisees. 

The independent operator usually does not have access to these resources and must obtain them from the outside world. A word of advice: Find a math expert in the restaurant industry. Receive testimonials from satisfied customers and take the time to analyze the cost/benefit of adopting similar procedures in your restaurant operation. 

If you’re contemplating duplicating your restaurant in another location, remember, you can only be at 1.75 places at one time; the other .25 of the time is lost profit! Are you prepared to provide the start-up assistance that your franchisees will need to get their businesses off the ground?

Franchisee Restrictions

As someone who starts his own restaurant, a small business owner can do whatever he wants. His only reason may be that it “feels good” or “seems like the right thing to do.” 

The owner of a franchise business, on the other hand, must operate the business in a way that does not violate standard policies, procedures and requirements of the franchisor. Franchising requires a consistency in the nature and the quality of the products and services sold through the business. 

Certain reports must be filed by a certain date, and payments must be received by a prescribed time, regardless of whether the franchisee is making or losing money that week or month. Otherwise, the franchise is subject to termination. 

Truly independent entrepreneurs could feel overly restricted by the requirements of a franchise relationship. Be sure you interview potential franchisees to be certain they are aware of the restrictions involved in owning a franchise versus an independent restaurant.

Case in Point

I spoke with Patrick Farley of Flippin’ Pizza (www.flippinpizza.com), who currently runs fi ve established pizzerias in California. He has considered creating a system that would warrant franchising his concept. After hiring franchising consultants, his advice was: Have a clear picture of what the final product will look like when it’s finished, decide how the product will be delivered, and measure your progress on a regular basis. “Each day we ask ourselves how we did; we discover the difference between where we were and where we’re committed to be,” says Farley. “The next day, we set out to make up for the difference.” 

Remember, find a math partner and start documenting your system; an independent restaurant owner is a potential “chain in the making,” so find the tools to create that experience for your customers.

Visit www.rasmussentaxgroup.com for additional insight into restaurant-specific tax strategies, and accounting and technology programs.
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