Creating a restaurant franchise network: 9 mistakes to avoid

 

A restaurant is doing well, revenue is increasing, and the concept is finding its audience. At this stage, many operators wonder if their establishment is ready to become a franchise restaurant.

It is often at this point that the idea of ​​developing the restaurant as a franchise emerges.

But a successful restaurant is not necessarily a franchiseable concept.

Creating a franchise network in the restaurant industry involves transforming an entrepreneurial success into a legally protected, economically viable, operationally reproducible model that is structured enough to be passed on to independent entrepreneurs.

This transformation cannot be improvised. Certain mistakes made even before the opening of the first franchise can permanently weaken the future network.

Here are nine of the most important ones.

1. Developing your network without having sufficiently protected your brand

Imagine several restaurants already open under your brand and then discover that a third party has prior rights to your name.

The problem is no longer just one restaurant: the entire network is exposed.

The brand is one of a franchisor's main assets. Before any development, it is therefore necessary to check the availability of the trademarks used and arrange for their protection: the brand name, logo and, where applicable, certain variations of the concept.

But the protection of intangible assets does not stop at the brand.

The know-how, the operating manual, certain recipes or methods, digital tools and confidential network information must also be protected, in particular by confidentiality agreements and precise rules of access and use.

The larger the network grows, the more difficult and costly it becomes to correct the initial weakness in the protection of its assets.

2. To confuse a successful restaurant with a truly franchiseable concept

This is probably the most important mistake.

Before launching a franchised restaurant, it is necessary to verify that the model is actually reproducible.

A restaurant can be extremely profitable because its founder is present every day, because its chef is exceptional, because it benefits from a rare location, or because a multitude of decisions are made intuitively by a long-standing team.

What happens when the restaurant is operated 500 kilometers away by an entrepreneur who was not involved in the creation or development of the concept?

It is precisely this question that know-how.

Recipes, kitchen organization, sourcing, customer journey, sales methods, flow management, HR policy, quality control: the future franchisor must identify what truly makes their concept unique and effective.

This know-how must be sufficiently consistent, experienced, and transmissible.

The right question, therefore, is not simply:

"Is my restaurant doing well?"

But :

"Can someone else replicate its function without me?"

If the answer is uncertain, franchise development is probably premature.

3. Not knowing precisely the economics of one's concept

Developing a franchised restaurant also requires a precise understanding of the economics of the concept.

A franchisee is not simply buying a brand and a concept. They are investing in a business which they legitimately expect to have a coherent economic model.

In the restaurant industry, food cost is obviously a determining factor. But it's not enough.

Payroll, rent, energy, delivery platform commissions, losses and unsold items, maintenance, communication, network fees: it is the entire economics of the restaurant that must be modeled.

Before developing a franchised restaurant, the future franchisor must therefore carry out this work.

An exceptionally profitable pilot establishment does not necessarily demonstrate that a franchised restaurant will be profitable in another city, with a different rent and a different turnover.

This analysis is all the more important as it then feeds into the economic information communicated to the candidates.

The franchisor does not guarantee a specific turnover or profitability to its franchisees. However, when it provides forecasts or economic data, these must be based on sound and realistic assumptions.

Therefore, it is important to distinguish between two things:

Demonstrating the observed economy of the concept and promising its reproduction are not the same thing.

This distinction must be understood even before starting to recruit the first franchisees.

4. Consider the operating manual as a simple document to be given to the franchisee

The operating manual is often presented as "the network bible".

The expression is correct, provided that it actually contains something.

A document compiling general recommendations on customer service, hygiene or restaurant management is not enough to materialize a know-how specific to the network.

The manual must explain how to reproduce this concept : product preparation, kitchen organization, stock management, service standards, quality control, IT tools, local communication, complaint handling, etc.

Its drafting also forces the future franchisor to formalize what he sometimes did intuitively until then.

This is what makes it an essential tool: it serves to transmit know-how, to preserve the homogeneity of the network and to materialize the consistency of what is actually transmitted to the franchisee.

It must finally evolve with the concept. An operating manual is not a document that is written once and for all before the first opening.

5. Underestimating the cost of opening a franchised restaurant — and especially the importance of the location

How much does it really take to open a restaurant under that brand?

The answer cannot be limited to the entry fee and the cost of equipment.

Works, furniture, kitchen, signage, IT, security deposit, training, initial stock, launch costs and working capital requirements must be included in a realistic and regularly updated standard opening budget.

In the restaurant industry, another variable deserves special attention: the location-rent.

An exceptional location can become economically detrimental if the rent consumes an excessive portion of the profit margin. Conversely, a low rent won't necessarily save a location ill-suited to the concept.

The franchisor must therefore be particularly careful when participating in the selection or validation of a location.

An insufficiently capitalized franchisee, who has underestimated their work and is bearing too high a rent can find themselves in difficulty only a few months after opening, even if the concept is intrinsically successful.

The reproducibility of a concept is also an economic reproducibility.

6. Treat the pre-contractual information document (DIP) and the franchise agreement as mere administrative formalities

The pre-contractual information document — the DIP — must, when the conditions provided for inArticle L. 330-3 of the Commercial Code are met, be given to the candidate at least twenty days before the signing of the contract or the payment of any sum required beforehand.

But the real issue lies elsewhere.

The DIP must enable the candidate to understand which network they are entering and under what economic and contractual conditions they are committing themselves.

The information must be truthful. And this requirement for caution does not only concern legally required information: when a franchisor chooses to communicate forecasts, economic data or elements intended to illustrate the profitability of its concept, it must be able to justify the seriousness of the assumptions used.

Not every irregularity in the pre-contractual information document automatically renders the contract void. However, when erroneous or concealed information influenced the franchisee's consent, the debate may shift to the grounds of mistake or fraud.

The franchise agreement must then be the legal translation of the actual operation of the network : brand, know-how, assistance, supply, concept standards, communication, controls, possible territorial exclusivity, royalties, duration, exit from the network, confidentiality…

A standard contract grafted onto a particular concept can be just as dangerous as an incomplete contract.

It is not the network that must adapt to the contract: it is the contract that must organize the network that has actually been built.

7. Organizing supplier procurement and referencing too late

In the restaurant industry, sourcing simultaneously affects product quality, concept identity, and franchisee profitability.

The franchisor must determine which products are truly essential for reproducing the concept, which suppliers should possibly be referenced, and on which supplies the franchisee can be given freedom.

But there is another issue: the price at which the network buys.

A very restrictive supply policy can preserve the homogeneity of the concept while degrading its profitability if the conditions obtained are not sufficiently competitive.

The obligations of exclusive or quasi-exclusive supply must therefore be justified by the needs of the concept, proportionate and examined in light of the applicable rules, in particular in competition law.

It is also necessary to organize transparently any commissions, rebates or year-end discounts received by the head office or a related company based on purchases made by franchisees.

As the network grows, its bargaining power with suppliers should normally become an asset.

The supply must not only protect the concept: it must contribute to preserving its economic balance.

8. To think that the franchisor's work ends when the franchisee's restaurant opens

Selling a franchise is a relatively one-off event. Maintaining a network is an ongoing business.

Initial training, opening assistance, animation, visits, reporting, evolution of the concept, continuing training, commercial support: the franchisor must have the human and organizational resources corresponding to the number of franchisees he wishes to support.

At the same time, an essential boundary must be preserved: the franchisee remains a legally independent entrepreneur, responsible for the management of his business.

A restaurateur perfectly capable of running three establishments of his own is therefore not necessarily immediately capable of managing thirty independent entrepreneurs.

The growth of the network requires a parallel growth of the network head.

Before asking ourselves:

"How many franchises can we sell this year?"

Sometimes it is more useful to ask oneself:

"How many franchisees are we actually able to properly support?"

Therefore, converting a restaurant into a franchise also requires structuring the head office of the network.

9. Neglecting brand and network governance

With social media, every restaurant potentially becomes a media outlet for the brand.

A clumsy promotion, an inappropriate publication, or poor management of a local crisis can affect the image of the entire network.

It is therefore necessary to organize national and local communication, the use of visual identity, social media accounts, advertising campaigns and crisis management procedures.

But governance goes further.

As the network develops, it is necessary to organize the flow of information, controls, the evolution of the concept, exchanges with franchisees and the handling of disagreements.

The founder must gradually change careers.

He is no longer just the creator of a successful restaurant: he is becoming a network leader.

Developing a franchised restaurant requires structuring the concept legally and economically.

And this transformation must also be prepared for.

Before franchising: three questions to ask yourself

These nine errors have one thing in common: they often appear when development is started too quickly after the success of the pilot restaurant.

The real question, however, is not whether the restaurant is working.

The question is whether it has become a model that can be reproduced by others.

Before recruiting their first franchisee, a restaurant owner should be able to answer three questions precisely:

1. What am I actually conveying?
2. How can I demonstrate that this model works?
3. Am I set up to allow an independent entrepreneur to reproduce it sustainably?

If any of these answers remain uncertain, it may be helpful not to start immediately with drafting a franchise agreement.

Perhaps we should start by determining if the concept is truly ready to be franchised.

Is your concept truly ready to become a franchise?

ARST Avocats assists restaurateurs and brands in this phase prior to the marketing of the first franchises : protection of the brand and know-how, analysis of the network structure, formalization of the concept, organization of relations with suppliers, preparation of the DIP and the franchise contract.

This intervention can take the form of a preliminary franchiseability audit, intended to identify the points that are already sufficiently structured and those that still need to be secured before the recruitment of the first franchisees.

Are you considering developing your restaurant as a franchise?

Before preparing the DIP and the contract, the commercial contract law department of Arst Avocats can examine with you whether your concept is legally and operationally ready to become a network.

Article written by Morgan Jamet, partner at Arst Avocats