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3 reasons not to invest in a restaurant franchise

Buying a franchise can be a good investment in the long run, but RB’s The Bottom Line says buyers should step back and think before diving in.
Restaurant franchising
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The Bottom Line

A lot of people appear to be shopping for a restaurant franchise right now, which is what always happens in the aftermath of a recession. People lose jobs. They get sick of not having control over their own destiny, and they take some savings and invest in a hot growth concept.

Franchising has made millionaires out of plenty of people. Get into the right concept with the right attitude and a corporate refugee can make a good living and have an asset they can potentially pass onto the next generation. Restaurants are also not going away and the next couple of years could be good for the industry.

But restaurant franchise investors can also lose everything. Many concepts that emerge coming out of recessions end up with equally strong declines, leaving franchisees with nothing for their investment and hard work.  

So, while some publications are giving you reasons to invest in a restaurant franchise, I’m here to give you a few reasons why you shouldn’t.

You’re taking on much of the risk

In a franchise, it’s the franchisee that takes on the risk. They put up the cash, usually with a heavy amount of debt, to build and open the restaurant. If that restaurant fails, that investment is gone. Worse, if they took out a government-backed loan, they likely had to put their home up as collateral. Many franchisees end up losing their homes.

The Quiznos collapse was a perfect example of what can happen. Thousands of people invested their life savings into that brand only to end up closing their restaurants and walking away. Something similar is happening at Subway, where 1,800 locations closed up shop last year.

Restaurant franchising is also a lot riskier than many people would have you believe. While the business can be a safe bet if you can get into one of the very top franchises, like a McDonald’s or a Taco Bell or a Panera Bread, good luck getting into one of those. You can sign up for a Chick-fil-A, which is a great business, but you’re more likely to get into Harvard.

Upstart franchises are no less of a risk than simply starting up your own restaurant. Many people forget that when they buy a franchise.

You don’t have as much control as you think

A lot of franchise pitches proclaim that an operator can “be their own boss” by operating a franchise and in many respects that is true. Franchisees do have control over a lot of their business. But franchisees are often subject to the demands of the franchisor.

Franchisors may demand value offers that may not be that profitable. They can demand remodels, citing the franchise agreement, even when the franchise can’t necessarily afford it. They exert considerable control over the sale process, sometimes deciding who can and cannot buy a location. Franchisors have been known to terminate franchisees over small issues because they prefer stores be diverted into the hands of different operators—or because the franchisee spoke out or was part of a lawsuit.

Or, the franchisor could decide to shift marketing in a way that devastates your restaurant, either locally or as a whole. Many Applebee’s restaurants closed years ago after that chains’ fateful decision to start marketing hand-cut steaks.

In simple terms, you may be your own boss, but you are limited in what you can do and are at the mercy of the franchisor in many instances.

It’s a lot of work

If you buy a single franchise restaurant you are buying a job. It’s a hard job with long hours, many weekends and a lot of stress.

Running your own business is always a lot of work. It’s especially true in a restaurant that is usually open seven days a week and all day at that. So restaurant franchisees end up working long hours, often covering for a lack of staff—especially these days when it’s difficult getting enough workers. Keep in mind that working in a restaurant can be grueling and difficult, which is a big reason it’s difficult to find employees.

So, in summary: Go ahead and buy that restaurant franchise. They can be great businesses for people who make a careful decision and who tap experts who know what to look for.

But understand what you are getting into: By buying a restaurant franchise you are buying a tough job with long hours that could cost you everything if it fails—which can often happen if the franchisor makes a bad decision.

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