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Fast food franchises can be lucrative business opportunity

Is there gold under those McDonald’s arches?

Buying a well-known food franchise is expensive. But while success is never guaranteed, just the sheer numbers of fast food outlets that dot the landscape of cities small and large across the country indicate that the franchises are often a good bet.

“Generally speaking a franchise will be more successful than going it on your own with a restaurant,” says Michael Vanderlip, director of the University of Mississippi Small Business Development Center.

Successful food franchises have worked out the bugs. Quality vendors have been selected, equipment has been tried and tested, food preparation and quality are standardized, and the franchise has benefited from the experience of thousands of operations in what does and doesn’t work. Food franchises also have requirements for current assets, liquid assets and total assets.

“They want to make sure on the front end that you are financially strong which, of course, helps to increase the success rate substantially,” Vanderlip said. “If you want to go on your own, there is no one to stop you if you don’t have enough money. One of the things franchises do is lock those people out who don’t have sufficient capital to back up the opening of the store. That more than anything else is why you see an increased success rate for franchises.”

Franchises also have a lot of experience regarding site location. One of the major pitfalls of investing in a restaurant is picking a poor location. Another potential downside is picking a food franchise that is new and not necessarily proven in a particular market.

Generally speaking, it takes deep pockets to buy a national food franchise. Most franchises start with a minimum $250,000 requirement, and big names like Burger King and McDonald’s are much more. A McDonald’s franchise can be $1 million or more.

The reward, though, can be considerable. Vanderlip said fast food franchises are increasingly attracting high-end investors such as doctors and investment bankers because they are potentially such lucrative ventures.

“With franchises, you’re going to get what you pay for,” Vanderlip said. “If you put $1 million in McDonald’s, you have something that will make you a lot of money. If you put $70,000 into a coney dog stand, you have an entirely different kind of investment. When you purchase a franchise, it needs to be something of value that you are purchasing. Do they have a national advertising campaign? Do they have systems online to help run the business? Do they offer some training for you not just on how to prepare the products but on how to run the business day to day?”

Vanderlip said he has rarely seen people regret investing in the top fast food franchises. When you move down the scale, though, there are more cases when success has been elusive.

Another advantage of franchises is that they are required to disclose all of their successes and failures to a prospective franchisee.

“Disclosures will tell you whether you want to go forward and be involved in a franchise,” said John Deddens, director of the Small Business Development Center, Holmes Community College, Madison, and a former vice president for Kentucky Fried Chicken.

“Food businesses are extremely tough businesses. There are other types of franchises such as business offices franchises, equipment franchises and duplication franchises that aren’t physically as hard and as demanding of your time as is the food business. Fast food businesses are often open 24 hours per day seven days per week, and those that do the best have hands on involvement by the owners. That means working long hours, weekends and holidays.”

Some franchise owners think they can hire a staff, mostly young people at minimum wage, and walk away. But that doesn’t work. Franchises need the involvement of the owners. Deddens said the owner needs to be there and be visible, not just for the employees, but for the customers.

Does investing in a fast food franchise beat investing in something like the stock market? Deddens said it depends a lot on the time you want to commit.

“If I had $1 million to invest, I would purchase a fast food franchise before I would go into the stock market,” Deddens said. “But there are a lot of people who wouldn’t make the choice because of the nature of the beast. It is a demanding business. But it can be financially rewarding if you work hard at it.”

Contact MBJ staff writer Becky Gillette at mullein@datasync.com or (228) 872-3457.


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