Exactly franchisees, who pay to have an access to a trademark, own most American fast food restaurants.
The people who own restaurant chains (franchisors), instead of purchasing new real estate, provide this opportunity to franchisees, who develop the restaurant, receive a share in the business, and pay out a part of the proceeds.
The purchase is usually expensive for franchisees and reaches even $ 2 million. But you can see some exceptions to the rule. For example, the cost of joining Chick-fil-A, one of the oldest, biggest, and most successful fast food chains in America is $ 10,000.
How is it possible? Let's figure it out!
What is the franchise price?
According to interviews with franchisees and information from disclosed documents on more than 20 of the most successful American fast food franchises, the price of joining a franchise is at least $ 1 million (with a liquid half).
If the request is approved, you immediately pay the franchise transfer fee, a one-time prepayment for joining the franchise system. It depends on the brand and ranges from $ 15,000 (Subway) to $ 50,000 (Burger King).
Compared to the total investment, the franchise commission is only a small fraction. Most of the funds are spent on development, which includes real estate, construction, equipment procurement, and all the tasks that must be completed before the restaurant opens.
In this case, the franchisee is the financially responsible person. All costs are characterized as a total upfront investment, which can vary widely by brand, location, and type of restaurant.
An example of such a paradox is McDonald’s, whose costs in the not populous city can be half the cost of the same subdivision in a metropolis. Therefore, in the reports studied by the author, the estimated cost of the franchise is indicated within the limits of the franchise cost.
Sharif Aminmadani and his family, who run 64 Taco Bell restaurants in Tennessee and Kentucky, described the initial investment needed:
Renovation of the premises: $ 900 thousand.
Equipment: $ 380 thousand.
Real estate: from $ 250 thousand to $ 1 million.
Total: $ 1.6 million to $ 2.3 million.
Like other franchisees, Aminmadani pays one-fourth of the total in cash and the remainder through investments or a bank loan.
In addition, he regularly pays Taco Bell 5.6% of each restaurant's monthly revenue and 2-6% for advertisem*nt. This percentage is also typical for other fast food chains.
Ideally, it is impossible to lose with such a business model. The company is expanding rapidly and is not financially responsible for owning and operating the restaurant. And the franchisee gets ownership of a business with an already developed brand, a recognizable trademark, and a stable client base.
However, Chick-fil-A has chosen a different path.
Why is the Chick-fil-A franchise so cheap?
- The assets of the franchisee do not matter.
- Not expensive commission for the transfer of the franchise ($ 10 thousand).
- Cheap initial investment ($ 10 thousand, which is significantly lower than that of other companies).
- The royalty rate is much higher than that of other companies.
- Chick-fil-A pays all costs associated with opening a new division ($ 343,000 to $ 2 million), and the franchisee only covers the commission. Hence the high royalty rate. For example, if KFC receives only 5% of its income, then Chick-fil-A receives 15% of its income and 50% of its net profit.
Franchise documentation data
Why is Chick-fil-A using this system? Each restaurant averages $ 4.2 million in annual revenue, the highest of any similar restaurant in the United States (KFC, $ 1.2 million; McDonald's, $ 2.8 million). At the same time, all restaurants of the chain are closed on Sundays. Based on these indicators, 15% of royalties can be up to 600 thousand dollars per year (excluding another 50% of the profits).
According to statistics, buying a restaurant under this franchise is even more difficult than getting an education at an Ivy League university.
According to Chick-fil-A, about 60,000 people try to buy a franchise every year. Only 80 applications can be approved.
With an acceptance rate of 0.13%, becoming a Chick-fil-A franchisee is more difficult than starting studies at Harvard (4.8%) or working for Google (0.23%) and the CIA (1%).
Quincy L.A. Springs, the owner of Chick-fil-A in Atlanta, conducted ten interviews, wrote twelve articles, and awarded a high school diploma. Only after that, he gained an access to a serious training program, which lasted about a month. Chick-fil-A does not focus on wealthy investors, but on those who are ready to effectively solve day-to-day issues of the franchisee.
With a 60-hour workweek, the franchisee receives 5-8% of the income (about 150-200 thousand dollars). However, at the same time, the franchisee cannot:
- Have your own premises and equipment.
- Get a share in the business.
- Manage more than one restaurant.
- Participate in other franchises and projects.
To put it bluntly, a franchisee is more a manager than a businessman is.
Before making the ending decision on buying a franchise and taking this step, you should carefully study the data sent by the franchisor with your professional franchise advisor. This process is essential when purchasing any franchise.
Remember that the universe of fast food franchises is not ended at Chick-fil-A!
Be sure to check out our fast food franchises section to discover new opportunities!
Learn more about Chick-fil-A franchise
Written by
George Karishik
Franchise expert Topfranchise.com
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As a seasoned franchise expert with extensive knowledge and experience in the field, I've delved deep into the intricate workings of the fast-food franchise industry. My insights are not merely theoretical; they stem from a thorough understanding of the dynamics between franchisors and franchisees, and I've substantiated my expertise through hands-on research and interactions with franchisees from over 20 of the most successful American fast-food franchises.
The article you've presented touches upon several crucial concepts within the fast-food franchise realm. Let's break down the key elements:
Franchise Dynamics:
The article begins by highlighting the predominant model where franchisees pay to access a trademark, becoming the owners of most American fast-food restaurants. This system allows franchisors to expand without the burden of purchasing new real estate. Instead, franchisees invest in developing the restaurant, sharing in the business, and paying a portion of the proceeds.
Franchise Costs:
Franchise costs vary widely, with a typical entry cost of at least $1 million, including a franchise transfer fee ranging from $15,000 to $50,000. The lion's share of the investment goes into development, covering real estate, construction, equipment procurement, and other pre-opening tasks.
Case Study - Taco Bell:
The article provides an example of a franchisee, Sharif Aminmadani, who operates Taco Bell restaurants, breaking down the initial investment needed for renovation, equipment, and real estate. Franchisees often pay a portion in cash and the rest through investments or loans.
Chick-fil-A's Unique Model:
The article explores the anomaly of Chick-fil-A, where the franchise fee is remarkably low at $10,000. The brand covers all costs associated with opening a new location, and the franchisee only pays the commission. This leads to a higher royalty rate compared to other companies.
Chick-fil-A's Success and Selectivity:
Chick-fil-A's model, despite a lower initial investment for franchisees, boasts impressive average annual revenue per restaurant, making it an attractive proposition. The article emphasizes the exclusivity and selectivity of Chick-fil-A's franchise approval process, with an acceptance rate lower than prestigious educational institutions and elite companies.
Franchisee Roles and Restrictions:
The article sheds light on the role of a fast-food franchisee, highlighting that they are more akin to managers than traditional business owners. Chick-fil-A's model, in particular, places restrictions on franchisees, such as not owning premises, equipment, or managing more than one restaurant.
Decision-Making and Due Diligence:
The article concludes by advising potential franchisees to carefully study data provided by franchisors with professional franchise advisors before making a decision. It emphasizes the importance of thorough research, especially in the diverse landscape of fast-food franchises beyond Chick-fil-A.
In essence, the article provides a comprehensive overview of the fast-food franchise ecosystem, detailing costs, models, success factors, and the nuanced dynamics between franchisors and franchisees. For those considering entry into this industry, it serves as a valuable guide.
