Finance for a fast food franchise
Want to open a fast food franchise? Find out how they work and compare your finance options.
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If you're looking to start a fast food business but don't have much experience in the industry, a franchise can give you the support you need. Buying a fast food franchise can be expensive, so it pays to understand the potential costs as well as the finance options available to you.
Find out what to look for and compare business loans for your fast food franchise below.
What is a fast food franchise?
A fast food franchise is an outlet or restaurant that is operated by a franchisee, as opposed to the parent company. Franchisees pay a fee to the franchisor to use the company's branding and operational model as well as receive ongoing training and marketing support from the franchisor.
Many of the major fast food businesses in Australia operate on a franchise model, but the costs and application process will vary depending on the specific franchise. More than half of Australians visit a fast food outlet at least once a month, and they remain a popular choice for franchisees looking to open a business.
Fast food franchises in Australia include the following:
- Hungry Jack's
- Gloria Jean's
- Red Rooster
- Pizza Hut
- Mad Mex
Costs and profitability
How much does a fast food franchise cost in Australia?
As with any type of franchise business, the initial startup costs vary greatly depending on the type of fast food franchise, the location and the demographics of the area, such as its size and local competition. For example, a Salsa's franchise may cost as little as $50,000 in startup franchise fees, while a Nando's could reach $1 million in initial fees.
The following are some examples of capital investments for well-known fast food franchises in Australia:
- Gloria Jean's. Franchises typically cost between $350,000 and $450,000, with a franchise fee of $32,500.
- Nando's. Expect to pay between $950,000 and $1.2 million. The initial franchise fee will be approximately $48,500.
- Domino's. These popular pizza franchises require an initial capital investment of between $450,000 and $600,000 plus an initial franchise fee of $60,000.
- Subway. The initial capital investment is generally between $195,000 and $360,000 depending on its location. A one-off franchise fee of $16,500 will also apply.
- SumoSalad. SumoSalad franchises require between $300,000 and $380,000 in initial capital investment plus a franchise fee of $45,000.
- Red Rooster. Red Rooster franchises tend to be between $370,000 and $900,000 plus a franchise fee of $50,000.
What other costs do I need to consider?
While operating a franchise business can be similar to starting your own business, one of the primary differences is that you will need to pay ongoing fees to the franchise. Depending on the franchise, this can include fixed fees and/or a percentage of your franchise's revenue.
Every business has hidden costs and expenses, and a franchise is no different. The good news is that franchises are covered under the Franchising Code of Conduct, making it a legal requirement for the franchisor to provide you with a full breakdown of all fees and other operating costs you will be expected to pay.
The following are examples of additional costs for popular fast food franchises in Australia:
- Bakers Delight. Bakers Delight requires an initial working capital of between $10,000 and $15,000 with little to no debt attached to fund your fit-out costs, marketing, advertising and administration.
- Gloria Jean's. You will need to pay 6% of your gross weekly sales to Gloria Jean's as well as another 2% of your gross weekly sales to the advertising and marketing fund. In addition, you will need to fund your ongoing operational costs, including insurance and rent.
- Domino's. Domino's charges an ongoing franchise fee of 7% of weekly gross sales, plus an additional 6% of weekly gross sales as an advertising fee. In addition, expect to pay between $40,000 and $60,000 plus outgoings per year for rent.
- Subway. Expect to pay approximately 8% of your overall sales in royalties in addition to a 4.5% advertising fee.
- SumoSalad. SumoSalad requires 6% of gross sales as royalty fees, with an additional 3% of gross sales going towards advertising and marketing.
- Red Rooster. Red Rooster's royalty fee is generally 5% of your gross weekly sales, with an additional 6% of gross weekly sales going towards an advertising and marketing fund. In addition, Red Rooster requires a minimum of $30,000 in debt-free savings or accessible equity to cover operating costs.
How profitable are fast food franchises?
Demand for fast food is as high as ever, particularly as clever fast food brands integrate healthier options into their existing product offerings.
Anyone who has ever watched customers pouring in and out of a big-name fast food franchise would be forgiven for thinking that the franchise owner must be making huge profits. Surprisingly, many franchise owners admit that fast food franchises are not always as profitable as they may seem.
The most common reasons cited by franchisees as to why their fast food franchises are not as profitable as they had expected are the significant, ongoing fees payable to the franchisor in addition to regular business costs. The same holds true in the United States, where around half of fast food franchisees claim they do not make a fair profit from their franchise.
On the other hand, many people who complain of a failing fast food franchise also admit that they did not do their due diligence before purchasing the franchise. With many franchisees admitting that they did not meet with an accountant and relied on little more than a "gut feeling" before investing in a franchise and with many having no business management education, there is little wonder that many franchises fail.
Only so much of a franchise's success can be put down to its brand name and location. A lot rides on you as the franchisee and your ability to run the franchise as a successful business.
Finding finance for a fast food franchise
What options do I have to finance a fast food franchise? The terms of a potential business loan to finance a fast food franchise can vary greatly from lender to lender and can depend on your chosen franchise.
Refinancing a residential property. If you have significant equity in residential property, refinancing and cashing out your equity can allow you to borrow up to 100% of the value of a new fast food franchise.
Unsecured business loan. Expect to be able to borrow no more than 70% of the value of the franchise if borrowing against the franchise itself. Some lenders will look more favourably upon particular franchises and will lend up to 70%, while 50% tends to be the lending limit for other non-approved franchises. Unsecured business loans are unlikely to have a term longer than the length of the franchise agreement itself.
Business loan secured by residential property. With an existing residential property as security, some lenders could lend up to 100% of the value of the franchise. With a residential property as security, standard loan terms of 25 to 30 years usually apply.
Low doc loans. Low doc loans rarely apply to the purchase of fast food franchises.
What should I consider when comparing my financing options?
Established or new franchise. The first decision to make when considering purchasing a fast food franchise is whether to buy an existing, established franchise or to create a new fast food business. There are advantages and disadvantages to each, and the decision may be made for you if you need your business to be in a particular location since there may not be a franchise available for purchase in the area.
Financial position. Your current financial position and your ability to finance a new business will be one of the driving factors when considering your financing options. If you are not in a strong financial position, it is unlikely you will be able to find financing for a fast food franchise business.
Equity. If you have equity in a residential property, you will be in a stronger position to refinance the property and access your equity than to apply for a new business loan.
How do I get approved for finance?
When applying to a bank or financial institution for a loan for a fast food franchise, remember that not only must you convince the lender that the franchise and location are a good choice, but that you also have the business skills and experience to make the business a success. Think of the application process as a combination of a normal finance application with a job interview, and you'll have the best chances of presenting the information that the lender wants to see.
Consider the following before applying for a loan:
- Credit. The lender will run a credit check to determine your credit history and current credit position.
- Financial position. Be prepared with your personal tax returns for the past two years if you are an employee and your business financial records if you run your own business.
- Relevant business experience. Update your resume to highlight your relevant business experience, particularly in the fast food or restaurant industry or in managing retail or food service businesses. Provide written references from employers or employees.
- Loan security. Substantial savings with no attached debt or sufficient equity in a residential property will put you in an excellent position to be approved for finance.
- Business plan. Have your accountant prepare a business plan including a profit forecast for your proposed franchise business.
- Financials on existing franchise. If you wish to purchase an existing franchise, provide full audited financial documents for the past two years, including profit and loss statements.
Fast food franchise finance options
- Fast food franchises are not the sure-fire business successes that they may appear to be.
- Like any business, a fast food franchise depends on the business skills of its owner and manager to succeed.
- Banks and other lenders are willing to provide credit for the purchase of a fast food franchise, but will be unlikely to provide more than 50-70% of the value of the business without sufficient residential property as equity.
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