Benefits and Pitfalls of Franchising

What are key benefits and pitfalls to franchising a restaurant chain?

Franchising can reduce the need to raise funds by issuing bonds, borrowing from a bank or selling shares in the company. An entrepreneur who wants to open a location may pay $50,000 or $500,000 for the right to do so, depending on the chain.

Why do some restaurant chains choose to stop franchising?

One downside is that franchisors don't have direct control over franchisees in the same way that the general manager of a corporate-owned restaurant reports to his or her regional manager . . .

Rubio's, a Mexican-themed "fast casual" restaurant based in Carlsbad, began to dabble in franchising about five years ago but now has just two franchise locations, and its 2007 annual report hinted that it had become less aggressive in pursuing franchisees.

Franchisees can grow to a point that they compete with other franchise owners and with the franchisor.

Big Boy restaurants, founded by Bob Wian in Glendale in the 1930s, spread to every corner of the United States, largely thanks to franchises. But the various franchisees' interests diverged widely from one another and from Wian's. In the southeast, for example, a franchisee operated several hundred of the restaurants as "Shoney's Big Boy," but was obliged to drop the Big Boy brand in the early 1980s when it expanded into territories held by other Big Boy franchisees.

Consistency of product and service among franchisees is a problem as well. One expert cites how Michigan and Ohio franchise owners are serving Big Boy's classic double cheeseburger with different sauces so that it isn't consistent with the rest of the country.

. . . A restaurant chain shouldn't take on new franchisees more quickly than it can add regional corporate staff to support them and ensure consistency and quality, said Dick Rennick, a Palm Springs restaurant consultant.

Read full details at NC Times