The franchise route is a proven and risk-free method for starting in the restaurant business. Or, if you already run a successful restaurant and plan to expand your business but lack the time and resources to grow the brand, going the franchise route is a viable option. 

What is a restaurant franchise?

A franchise restaurant is one where you buy the right to use a restaurant’s brand against the payment of a royalty fee. The company that sells you the right to use its brand name is the ‘franchisor.’ You, who acquired the rights to use the restaurant’s brand name, are called the ‘franchisee.’ Typically, such rights to use the brand name are given to the franchisee for a specified location. The restaurant itself is known as the ‘franchise.’

What are the pros and cons of opening a restaurant franchise?

When you run a restaurant franchise, you are operating someone else’s brand. You do not have the autonomy to take operational decisions. Operational processes are pre-defined, and you are contractually bound to adhere to the brand rules. 

Tight control over operational processes is a key characteristic of a franchise restaurant. However, franchise restaurants receive guidance and help from the franchisor regarding employee training, supplies, etc. Nevertheless, operating a franchise restaurant still requires effort, commitment, and management skills. You are required, by the brand, to deliver consistently good results. The brand owner also conducts regular audits to ensure that all stipulated standards are adhered to and that the brand’s image is maintained. 

The pros and cons of opening a restaurant franchise may be summarised below.

How is a franchise better than an independent restaurant?

An independent restaurant differs from a franchise in that it is not owned by a franchise chain but by an independent owner(s). The restaurant owner enjoys full decision-making autonomy over every aspect of restaurant operations and has full ownership over business profits. 

The restaurant owner has the freedom to choose the restaurant's location, menu, and all other aspects of its operations. 

However, running a franchise restaurant still scores over an independent restaurant mainly because of the lower risk of failure. The independent restaurant has an unproven business model and has no brand value when starting. Consequently, running and overseeing routine business operations requires considerable investments in time and effort. An independent restaurant’s unproven business model also means that it is saddled with significant operational inefficiencies due to the lack of tested operating processes.

What are the steps required to start a restaurant franchise in India?

The first step in opening a restaurant franchise in India requires you to decide on the franchise model that is most suitable for your restaurant. The kinds of restaurant models include:

• Master Franchising. In this arrangement, the restaurant owner (the master franchisor) hands control of franchising activities for a specific region to a master franchisee. The franchisee then becomes the franchisor for that region. 
• Single-Unit Franchising (Direct Franchising). This is the owner-operator model, wherein, in addition to being the owner, you are also responsible for managing the restaurant’s operations. This is the most common franchising model in India. 
• Multi-Unit Franchising. In this franchising model, the franchisee buys multiple franchises from the franchisor. The franchisee manages operations and ensures business growth for all these units. 
• Company-Owned Franchising. Here, the parent brand establishes a representative office in the country. It then works with the franchisee to build the brand, acquire customers, and establish the business. 
• Area Development Franchising. This franchising model is similar to multi-unit franchising. The principal difference is that it involves a larger number of units spread over a large region, and the franchisee has the opportunity to raise brand awareness quickly. 

After deciding on the franchising model, the next step in setting up a restaurant franchise is to understand your budget, the RoI, and the time required to break even and become profitable. The various budgetary provisions that you need to make include:

• Startup fees. To be paid to the franchisor to start operations; includes the cost of lease/purchase of property meeting the franchisor’s specifications, procuring equipment, and fees for licenses and permits.
• Initial franchise fee. This is the fee to be paid to the franchisor to be able to operate a franchise using its brand. 

• Royalty fees. This recurring fee is paid to the franchisor out of the business’s profits. Typically, this fee varies between 4 to 6 percent of monthly revenue. 

• Additional costs. These include operational costs, payroll, contribution to an advertising fund, etc. 

• Personal finances. Most franchisors also stipulate that franchisees must meet specific liquid assets and net worth criteria. 

The final step to setting up a restaurant franchise is evaluating the market and selecting the model that best meets your needs. Assess the local competition, the local economy, the location, and the local food preferences. Other factors to be considered include alignment of your vision and values with those of the franchisor and the level of involvement of the franchisor. 

The Eligibility & Permissions Needed to Open a Restaurant Franchise in India

After deciding on the franchise brand, determining your budget, and working out the plan, you must obtain the necessary licenses to operate a restaurant in India. The licenses and permissions that you need to get to open a restaurant include:

• Business Registration. Your business must be registered as a partnership or private limited company. You need to file annual returns, perform financial audits, etc. 

• FSSAI Licence. Establishing and operating any food business in India requires a license from the Food Safety and Standards Authority of India (FSSAI). The fee for the permit varies depending on the size of the business. 

• Trade Licence. This license is required to be obtained from the local municipal corporation. This license is valid for a year and needs to be renewed annually. 

• Professional Tax Licence. For a business to employ people requires a professional tax license. All employees earning over Rs 10,000 per month must pay professional tax every month.

• GST Registration. Restaurants need to register with GST and obtain a GSTIN number. This registration is state-specific, and you will need to register in each state separately if you have restaurants in different states. 

• Liquor Licence. You must get a liquor license if your restaurant plans to sell alcohol.  

In addition, you will need other licenses and clearances, such as a pollution control license and a fire safety certificate. 

Is Franchising A Restaurant Profitable?

There is no way to determine the exact profits of restaurant franchises. It depends on the location, cost versus profit, and many other variables. According to a Franchise Business report, top brands can earn in the range of $200,000 to $250,000 but the net profit for an average fast food franchise is around $82,000 annually. This assumes the franchise has everything going well for itself - good location, good products, and good customer service.

Which Restaurant Franchises Are The Best In India?

1. Burger King

A Burger Kind franchise requires a total investment of about Rs. 2 Crs. Burger King has been franchising since 1967 and currently charges a service fee of 4.5% royalty fee to all its franchises. 

2. Domino’s Pizza

A Domino’s franchise requires a total investment of about Rs. 85 lakhs. Domino’s has been franchising since 1967 and currently charges a service fee of 5.5% to all its franchises. 

3. McDonald’s

A McDonald's franchise requires a total investment of ~Rs 6.6 Cr-Rs 14 Cr, with liquid capital available of Rs 5 Cr. The franchise fee is Rs 30 lakhs. As a franchise, you will be charged a service fee of 4% of total sales.

Conclusion

Being a successful restaurant owner is an aspirational goal for many entrepreneurs. Giving shape to your entrepreneurial dreams in the restaurant business via a restaurant franchise is a wise and safe bet. Once you learn the ropes of running a restaurant, you can dream bigger and go on to running a restaurant chain and become a franchisor.

As you grow your business, you will look for tech tools to better manage your operations. Restaurant management tools from UrbanPiper can help! UrbanPiper’s end-to-end web-based POS eases restaurant management - online and in-store.

You can request a free demo or contact us with your queries here. 

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