Every would-be restaurant franchisee dreams of owning the next McDonald’s, but the likelihood that that will happen is low. Here are three rules that ensure you get the best deal on a restaurant franchise for sale.What are the odds of building a successful restaurant from the ground up and lasting three years? According to a hospitality management professor who studied restaurant failures, it’s less than 40%. A professor at Ohio State University authored a study that found 57% of all newly opened franchises didn’t last beyond the three year mark. That’s only slightly better than independent restaurants that experienced a failure rate of 61%. Does this mean you should avoid buying a franchise for sale altogether? No. A franchise for sale can represent a great value if you know when to buy and how much to pay. That’s what this article will teach you with our three rules for franchise for sale buyers.
The books and records of an established business tell the true picture of its earnings. If you want a restaurant that’s beaten the odds of surviving the three year mark, then you should consider buying a restaurant that’s three years old with repeated years of earnings. If a franchise for sale interests you because of the training or the brand, by all means pursue your dream but do it with our three rules if you want to make money.
The first three years of a franchise for sale often look like this. A new owner learns of a concept and is instantly excited about the potential and ready to build from scratch. This can easily cost the new franchisee $350,000 or more. Eager to experience his own restaurant success, he’s sure he’s on the way to making millions. A simple review of the math, however, shows he’s paying royalty fees of more than 8%, marketing fees of 2%, and rent of 15% all before he buys the food and serves his first chicken wing and beer at an average check price of $8.00. After that first tough year or so he calls a restaurant broker to ask how much he can list the franchise for sale for. He’s not too happy to learn that with a business that is losing money, the most he can expect is about 25% of what he’s invested, or about $125,000. That’s if he has a good concept and a strong site of his franchise for sale.
A smart franchise for sale buyer picks up the pieces of the operation and becomes owner number too. He’s still losing money but he only paid around $100,000, so his cost to acquire is much lower. It’s now year two so his sales are beginning to catch up with his fixed costs. By working hard at the business and operating it himself, he can probably go from losing money to making money. By the way, both owners have paid the franchisor 10% of sales this entire time even while they lost money. Another year into the business, this smart franchise for sale buyer realizes he didn’t get such a great deal after all. He’s in the black but when he adds up the time in the business against his return, he’s making less than the federal minimum wage. He calls to list the franchise for sale. Sales have developed to the point that all fixed costs are covered and he’s in the black. With add backs, he’s earning $35,000 or so a year. Priced at three times earnings, it goes on the market for $115,000 and he nets $99,000.
This is when the franchise for sale buyer hits his stride and gets the deal. The business is now valued on earnings, not hype. The sales cycle has matured and all costs are covered. Franchise for sale buyer number three has a real opportunity in his hands. He owns a good product in the brands. Sales are still growing and its operating in the black. Since he didn’t overpay, the cost of repayment is minimal and the business can easily service the debt. While the first two buyers are telling their friends why they would never buy a franchise for sale, the new owner has never been happier. This business cycle of the restaurant ownership demonstrates why franchise for sale buyers follow our Rules in Buying Franchise Restaurants.
#1 franchise for sale buyers never want to be first or second to own. Number three’s the lucky winner.
#2 Buy a franchise for sale close to the start of year three for the best opportunity. Sales are still trending up and it’s making money. Best of all, there’s still opportunity.
#3 Never, ever pay more than three times earnings no matter how great a pitch you get from the franchise for sale owner. Opportunity is a lottery ticket but none of us like the odds.
Do you dream of owning a franchise for sale? Or perhaps you have a franchise for sale you are ready to list with the restaurant brokers? The restaurant brokers can help you buy or sell a franchise for sale! Click here for a free valuation of your business, or to view franchise for sale listings click the photo above!