The Ultimate Guide to Franchise Restaurants

If you’re new to the restaurant industry, starting from scratch can be a challenge. Buying a franchise restaurant could be a great option for you, as you’d be buying a market-proven, pre-made concept with brand recognition and support from a corporate office. 

If you’re already running a successful, profitable business and you want to expand, franchising your tried-and-true restaurant concept could be a great way to grow your brand faster and in multiple markets. As with any business endeavor, there are pros and cons on both sides of the fence. Keep reading to learn:

• What franchise restaurants are
• Franchisor vs franchisee
• The pros and cons of investing in a franchise restaurant
• How much it costs to buy one
• The pros and cons of franchising your restaurant
• How to franchise a restaurant

What is a franchise restaurant?

Franchise restaurants are turnkey restaurant concepts that you can purchase from an existing brand. In exchange for an initial investment and ongoing royalty payments, buying a franchise gives you access to the established business’s proprietary processes, software and hardware—like a restaurant POS, training, recipes, supplier relationships, equipment, real estate expertise, marketing and more.

Whether you’re looking for a large or small restaurant for sale, there are plenty of franchises to choose from. Many popular quick service chain restaurants, like McDonald’s, Subway and Tim Hortons operate as franchises. Full service restaurants, like Pizza Hut and Denny’s, are also available for franchise.

Franchisor vs franchisee

A franchisor creates the brand and establishes the systems to run the business. They sell the right to use its brand and proprietary knowledge to an entrepreneur who will open another branch and operate under that brand name in exchange for royalty fees. 

A franchisee buys the right to use the franchisor’s brand, trademark and proprietary knowledge. Franchisees pay ongoing royalty fees to operate using the brand name and business system of the franchisor. 

Pros and cons of investing in a franchise restaurant

Franchising can offer entrepreneurs an established brand and business model to help them get their new restaurant off the ground. But as with any business, there are pros, cons and risks to consider before taking the plunge. 

Pros of investing in a franchise restaurant

There are many great reasons to purchase a franchise restaurant.

• Buying a franchise is easier than starting from scratch. You don’t have to come up with the concept, recipes or branding, so you can just focus on operations.
• Franchises come with resources. As a franchisee you’ll have access to software, systems, recipes, suppliers, marketing and much more from corporate.
• Franchise restaurants come with a built-in customer base thanks to brand recognition. Customers are already familiar with the concept and dishes that most chains serve. For example, the food at a Subway near you will be the same as, or very similar to, the food at a Subway in a city across the country or across the globe. 
• As a franchise owner, you’ll have access to a support network. You’ll have help from the corporate office and other franchisees who you can network with.
• Franchisees have access to marketing resources. Franchisors provide advertising and promotional help in exchange for royalties and/or marketing fees.
• Quality control is built into the franchise model. You’ll have access to processes, recipes, suppliers and equipment that ensures consistent quality from franchise to franchise.
• With franchise restaurants, you’re buying a turnkey concept, so you’ll likely break even faster than if you had opened up your own restaurant.
• Location is critical to a restaurant’s success. Many franchisors provide connections to real estate expertise. 
• While many franchises require you to have a certain amount of unborrowed assets available to become a franchisee, it’s easier to secure loans for a proven business concept when you do need cash, than for a new restaurant.
• Thanks to collective buying power from other franchisees, you’ll be able to access cheaper supplies than if you had opened an independently-run restaurant.

Cons of investing in a franchise restaurant

Here are some of the downsides of owning a franchise you should be aware of before investing in one.

• Most franchises require you to invest a lot up front. While buying a franchise can cost anywhere from $50,000 to $6 million, most startup investments for franchise restaurants start in the $200,000 to $300,000 range.
• You might not be allowed to borrow funds to cover these startup costs. Some franchisors require unborrowed funds and a minimum net worth for approval.
• After paying startup costs, you’ll have to pay royalties to legally license the restaurant’s brand and proprietary systems, which means you’ll be giving away a portion of your profits forever.
• Buying a franchise means giving up creative control. You have to serve the food the corporate office tells you to serve and run your restaurant according to their rules.
• Even though you technically own your own business, you’ll always be held accountable to the franchisor and will need to ensure you meet their standards, or else face consequences. 

How much does it cost to invest in a franchise restaurant?

Buying a franchise isn’t cheap, but it gives you the framework for a turnkey restaurant that has had proven success in the market. Here’s what you need to know about how to buy a restaurant from a franchisor, including a breakdown of the startup and ongoing costs associated with investing in a franchise restaurant.

Pro tip: Check out our starting a food business checklist for resources for opening your restaurant.

Franchise restaurant startup costs

There’s a lot that goes into the investment you’ll have to make up front to become a franchisee of your favorite restaurant. You’ll need to pay a startup investment that includes a franchise fee. 

While some startup investment quotes include real estate costs, many do not. Most franchises will also ask you to have a minimum net worth and liquid assets available to ensure you can cover unexpected expenses.

Estimated initial investment

What it costs: Total franchise restaurant startup costs range anywhere from $50,000 to $6,000,000. While you can find franchises on the lower end of the spectrum, most chains start in the $200,000 to $300,000 range.

These are the startup costs from well-known franchise restaurants:

• Denny’s: $1,400,000 to $2,300,000
• Dunkin’: $526,900 to $1,809,500
• McDonald’s: $1,000,000 to $2,200,00
• Pizza Hut: $300,000 to $2,100,000
• Subway: $100,000 to $340,000
• Taco Bell: $530,000 to $3,000,000
• Tim Hortons: $60,000 to $665,000

What it gets you: Total startup costs give you access to use the brand, management systems, training and support in marketing, equipment, inventory, marketing, staffing, support for your restaurant’s grand opening and more—basically everything you need to get the business off the ground.

Franchise fee

What it costs: A franchise fee is typically included in the total investment startup quote the franchisor provides. 

Here’s a look at the franchise fee that popular restaurants charge:

• Denny’s: $30,000
• Dunkin’: $40,000 to $90,000
• McDonald’s: $45,000
• Pizza Hut: $25,000
• Subway: $10,000 to 15,000
• Taco Bell: $25,000 to $50,000
• Tim Hortons: $25,000 to $50,000

What it gets you: The franchise fee is a one-time fee for access to the restaurant’s name, training, website, software access and startup inventory. 

Real estate costs

What it costs: Real estate costs vary greatly because of several factors. First, space in urban areas tends to be more expensive than space in rural areas. Second, it will depend on whether you’re building a new restaurant or buying a pre-existing location from another franchisee. Third, real estate prices will depend on whether you’re looking to invest in a large or small restaurant for sale.

What it gets you: Real estate costs can include anything from paying the lease for a turnkey commercial space to buying a commercial space and renovating it. 

Financing your franchise restaurant

Franchises have hefty startup costs. Many of them require you to have a certain net worth and a minimum in liquid assets to ensure you can sustain the business until profits kick in. Many franchisors require that these funds be unborrowed.

Here are some net worth and liquid asset requirements from popular franchisors.

Liquid assets: Cash that you can quickly access.

• Denny’s: $500,000
• Dunkin’: $250,000
• McDonald’s: $500,000
• Pizza Hut: $350,000
• Taco Bell: $750,000
• Tim Hortons: $500,000
• Subway: $30,000

Net worth: The total value of your personal wealth, including cash and assets, minus any debts.

• Denny’s: $1,000,000
• Dunkin’: $500,000
• Pizza Hut: $700,000
• Taco Bell: $1,500,000
• Tim Hortons: $1,500,000
• Subway: $80,000 to $310,000

Ongoing fees for franchise restaurants

After you pay startup costs, you’ll owe ongoing fees to the franchisor to be able to keep using their license and resources. All franchisors charge royalties, and some also charge a marketing fee on top of that.

Royalties 

What it costs: Franchise restaurants typically collect between 4% and 8% of your gross revenue each month. 

Here’s a look at what popular chains ask for:

• Denny’s: 4.5% to 7%
• Dunkin’: 5.9%
• McDonald’s: 4%
• Pizza Hut: 6%
• Taco Bell: 5.5%
• Tim Hortons: 4.5% to 6%
• Subway: 8%

What it gets you: These royalties allow you to keep licensing the restaurant’s brand and maintain access to corporate resources.

Marketing fee

What it costs: Some franchisors also collect a separate marketing fee of between 2% and 5%. 

This is what some franchises charge: 

• Denny’s: 3% to 3.25%
• Dunkin’: 5%
• McDonald’s: 4%
• Pizza Hut: 4.75%
• Taco Bell: 4.25%
• Tim Hortons: 4%
• Subway: 4.5%

What it gets you: This fee is an investment into ongoing marketing support in the form of anything from promotional materials and TV commercials to mailed coupons and social media ads.

Now let’s look at restaurant franchising from the other side of the coin—becoming a franchisor. 

The pros and cons of franchising your restaurant

So you’re already running a successful, profitable business and you’re interested in expanding. Ultimately, you have three different options for expanding your business:

• Self-funded growth (funding growth plans yourself)
• Investor-supported growth (expanding with outside funding)
• Franchising (licensing your brand and operations in exchange for a fee)

Let’s take a look at some of the pros and cons of franchising your restaurant. 

Pros of franchising your restaurant

There are many great reasons to franchise your restaurant. Here are just a few:

• Franchising allows you to expand your business and increase brand recognition in new markets.
• Franchising enables you to grow your brand with lower capital investment, as franchisees provide the necessary capital to open new locations.
• Franchise fees, royalties, and other revenue-sharing models provide a steady stream of income.
• Franchisees have a strong understanding of their local market, which can help you better adapt to regional tastes and preferences.
• Franchisees have skin in the game—and a vested interest in your brand’s success— reducing your exposure to failure.

Cons of franchising your restaurant

Here are some of the downsides of franchising your restaurant.

• Franchising requires relinquishing a degree of control over individual restaurant operations, which can lead to inconsistencies in quality and customer experience.
• Choosing the right franchisees is crucial, as poorly performing franchisees can harm your brand and reputation.
• Costs of developing your franchise systems, legal agreements and support infrastructure can be labor-intensive and expensive. 
• Franchising involves complex legal agreements and compliance with franchise laws and regulations.
• Providing consistent training and support to franchisees can be demanding.

How to franchise a restaurant

1. Decide if your business is ready and feasible for franchising

The very first step on your franchising journey should be to pause and evaluate your current business. Franchising isn’t a feasible growth model for every restaurant—it’s important to put in the time and effort required to figure out if your restaurant concept can be scaled.

Ask yourself:

• Do I have a well-defined concept? Brand identity?
• Would it work in multiple locations?
• Can it be easily replicated?
• Can I standardize my processes easily?
• Do I have a strong track record of profitability?

It’s important to remember that potential franchise buyers expect a franchise system that works and is proven. You need to have your finances in order and have a proven track record of success before you consider franchising your restaurant. 

2. Prepare your franchise disclosure document 

Now it’s time to do the legal work. In the US, this includes drafting your franchise disclosure document (FDD). An FDD is provided to prospective franchisees in the pre-sale disclosure process. It clearly specifies how the business relationship between the franchisee and franchisor will work.

There are 23 items you must disclose in an FDD, including background information about your business and any parent companies, estimated start-up costs, information about your executive team, litigation history and more. It must also contain your audited financial statements.

You’ll definitely want to hire a lawyer to review your FDD and help you issue it, as well as set up and register your business. 

In Canada, franchising is regulated at the provincial level in most provinces. The information required is very similar to the American FDD.

3. Set up your new franchise entity

Even if your existing restaurant is a corporate entity, you’ll probably need to set up a new franchise company. 

This will enable you to keep your future franchises separate from your current restaurant business, which helps to protect the original (parent) in the event of legal or financial trouble. Be sure to consult a legal expert for all the fine print.

4. Register your franchise

When you franchise your restaurant, you give other entrepreneurs the right to use your brand’s logo and trademark. To protect yours and your franchisees’ interests, it’s important to protect your intellectual property. 

This includes registering your logo and acquiring a trademark. In the US, you need to register your business with the US Patent and Trademark Office. In Canada, the most common way to submit a trademark application is to file directly with the Canadian Intellectual Property Office.

5. Develop your franchise operations manual

Now it’s time to develop comprehensive operations manuals that document all aspects of running your restaurant. These manuals will be used to train franchisees and ensure consistency across all locations, so make sure they are detailed and complete. 

At a minimum, your franchise restaurant manual will include:

• Confidentiality and legal notice
• Brand identity, mission and vision
• Performance targets and milestones
• Recipes and preparation instructions
• Staff training and support materials
• Policies and procedures
• Operating systems and requirements

Whenever you make changes, make sure that every franchisee receives the latest version of the document.

6. Recruit and vet your franchisees

Once you’re ready to go, it’s time to start marketing your franchise opportunity to potential franchisees.

It’s important to remember that your franchisees are not your employees, they’re your business partners. And shared governance comes with risks—to your reputation and your brand. 

Consider developing a screening process to evaluate and select the right candidates. Among other things, look for candidates with strong managerial experience, preferably in the restaurant industry. 

7. Provide support to your franchisee network

To help get your franchisees up and running, you should be prepared to assist with things like hiring and training staff, marketing and training managers on the systems and technology you use, including your restaurant POS.

To make life easier, it’s a good idea to centralize and connect your tech stack, starting with an integrated POS platform. 

In an integrated system, all of the software and tools you’re using to run the business communicate with each other. In fragmented systems, software integrations and apps work independently of each other, which can create a lot of extra and unnecessary work.

“The Lightspeed team including the customer service specialist and developers have helped us build our business to what it is now with ease.” — Aubert Prévost, President of Koeppel Companies, Five Guys Canada

Learn why Five Guys Canada switched to Lightspeed.

The bottom line

Franchise restaurants can be a great business opportunity for both franchisors and franchisees. Lightspeed’s all-in-one cloud-based point of sale system can make running a franchise even easier. Talk to us to learn more.

FAQs

What is the most popular franchise restaurant?

McDonald’s is by far the most popular franchise restaurant, generating over $118 billion US in sales worldwide in 2023. Its global presence, standardized menu and focus on consistency have made it the world’s most recognizable and successful franchise restaurant.

Which food franchise is most profitable?

In the United States, Chick-fil-A may be even more profitable than McDonald’s on a per-unit basis; its average annual sales per unit significantly surpass those of other fast-food chains. It requires a lower initial investment from franchisees compared to other fast-food chains, but it maintains more control over operations. 

What food restaurants make the most money?

Franchise restaurants that generate the most revenue are those with strong brand recognition and a global presence. With its vast global network of restaurants, McDonald’s is usually at the top of the list in terms of sales, followed by brands like Subway, KFC, Domino’s, Burger King and Taco Bell. 

What is the biggest franchise right now?

With over 39,000 locations across more than 100 countries, McDonald’s remains the biggest franchise in the world in terms of global presence and brand value. Subway comes in second with over 37,000 locations internationally, however this number has been falling year-on-year since 2015.

What is the cheapest food franchise to start?

The investment required to start a franchise varies widely based on many factors, including franchise fees, net worth and liquid asset requirements and rent, so the TL;DR is that it depends. If you’re looking to invest in a national fast food franchise, Subway, Quizno’s, Domino’s and Chester’s chicken are all considered more affordable options compared to a behemoth like McDonald’s. Chick-fil-A requires a considerably lower start-up investment, but there’s a catch. Consider reaching out to current franchisees to learn about their experiences and the true cost of starting and operating the franchise.