What It Takes to Start a Fast-Food Franchise

Yahoo Finance

For many large restaurant chains, franchising is a critical part of the business. If you go to a well-known brand, chances are you're eating at a shop owned by a franchisee, not the company whose name is on the sign outside. For McDonald's (MCD), 81% of its global system is owned by franchisees. At Burger King (BKW), it's 97%. Domino's (DPZ), 96%.

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Corporate restaurant owners like the model: They get to spread their brand, put many of the expenses on the franchise owner and collect a predictable, recurring revenue stream based on the fees they charge.

To become a franchisee, costs vary widely depending on the restaurant, its location and the physical materials needed. They can be manageable, or they can be substantial. In some cases, it's nearly impossible to get started without access to a tremendous amount of capital. A McDonald's location, for instance, could theoretically set you back more than $2 million. In others, such as at newer or smaller chains, you might have a better chance. Opening a Wingstop may cost $350,000 to $400,000.

QSR Magazine, a publication that closely follows the chain restaurant industry, produces an annual list of the best franchises to own, this year releasing 12 names. Some are small, like the 11-store Tin Drum AsiaCafe, which delivers "bold flavor profiles, high-quality food, customization options, and convenience," while recording more than $1 million in sales per restaurant. Others are regularly found, such as Papa John's (PZZA), with 3,000-plus units. The pizza seller made the list owing to corporate support, "credibility with consumers" and its "proven, streamlined system" that produces average revenue above $800,000 for a shop.

On average, a fast-food restaurant had sales of $753,000 in 2010, according to data from the National Restaurant Association. QSR says the top-performing chain that year was Chick-fil-A,with right under $2.7 million for a single restaurant. By comparison, Wingstop says it brings in around $900,000 per unit annually, while at McDonald's, revenue works out to about $2.5 million for a given store.

Regardless, it's important to remember that of the money that comes in, a huge percentage of it goes back out. Rent, utilities, payroll, royalties, maintenance and other costs have to be covered.

For the household names, the monetary bar can be high to get a franchise award. Why? The corporate office can charge whatever they feel like, and it can be a lot. Additionally, requiring significant funds provides some cushion in case a store underperforms for an extended period. Protecting the brand and seeing it succeed are crucial to the parent companies.

"The franchisee has to maintain the brand promise, and a large part of doing that is being able to fund the buying of equipment and intangible things, like going the extra mile to pick up smashed cups in the parking lot," Brian Sozzi, CEO and chief equities strategist for Belus Capital Advisors, says in an email. "Should they start bringing in lower quality franchisees, the risk heightens that the business is not run well, in turn hurting the franchisees doing things the correct way."

In order to offer a bit of perspective on the financials of launching and operating a franchise, we examined a few of the big names out there to create the following list. However, this only skims the surface of what they require: If you want all the details, you'll need the Franchise Disclosure Document for a restaurant. Just make sure you're serious before you tackle one. Burger King's FDD, for instance, runs 1,003 pages in a PDF file.

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SUBWAY (Private company, owned by Doctor's Associates Inc.)


  • The initial franchise fee for a Subway store is $15,000.
  • You need minimum net worth of $80,000 and available cash of at least $30,000, but those amounts can go higher, according to Entrepreneur.com.
  • Start-up costs, including the franchise fee, will probably total $116,200 to $262,850 for a store.
  • A Subway franchisee owes 12.5% of what the store brings in every week (gross sales excluding sales tax) to the corporate office. About two-thirds of that amount covers the franchise royalty, and the rest is put toward ads.
  • U.S. restaurants: 26,029
  • U.S. sales per store, 2010: $452,000 (Source: QSR. Includes estimates from industry researcher Technomic.)

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MCDONALD'S


  • To be considered for a franchise, a minimum of $750,000 of personal funds is normally required. This amount has to be yours – it can't be borrowed, such as by way of a credit line.
  • A prospective franchisee must put at least 25% cash as a down payment toward the total cost of purchasing an existing restaurant. The remainder can be financed, but for a maximum of seven years. For a new restaurant, McDonald's requires 40% of the entire cost of the store be paid in cash at the outset.
  • Equipment and pre-opening costs for a new store generally run from $959,450 to $2.11 million.
  • Franchisees pay a service fee based on the restaurant’s sales. Currently, that's set at 4% of monthly sales, along with rent that's due.
  • In order to open a new restaurant, a $45,000 initial franchise fee is paid to McDonald's.
  • U.S. restaurants: 14,157
  • U.S. sales per store, 2012: $2.5 million (Source: 10-K.)

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PIZZA HUT (Owned by Yum! Brands)
  • To open a U.S. franchise you need a minimum net worth of $700,000 and $350,000 in liquid assets (cash or things that can be turned into cash fast).
  • A commitment to open at least two stores is required.
  • If you want to open a store, expect a total outlay of $295,000 to $422,000, including franchise and development fees. The initial franchise fee is $25,000.
  • Equipment costs for the restaurant (part of store-opening expenses) will probably run $100,000 to $125,000.
  • Franchisees pay monthly royalties equal to 6% of gross sales. To help cover national advertising, another 2.5% to 3% of gross sales get sent to corporate.
  • U.S. restaurants: 7,756
  • U.S. sales per store, 2010: $855,000 (Source: QSR.)

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BURGER KING
  • The total investment needed to begin operating a restaurant will range from around $316,100 to $2.66 million.
  • Starting costs include a $50,000 initial franchise fee (it can be less when the term of the franchise agreement is under 20 years).
  • To qualify as a franchisee, you need net worth of $1.5 million and $500,000 in liquid assets.
  • Royalties are currently a monthly fee of 4.5% of gross sales.A monthly advertising contribution of 4% of gross sales is also collected by the corporate parent.
  • U.S. restaurants: 7,183
  • Average restaurant sales, 2012: $1.27 million (Source:10-K.)

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WENDY'S
  • Getting in on Wendy's (WEN), which is selling more of its company-owned stores to franchisees, is extremely difficult. Currently, it's only accepting applications for prospective franchisees who want and can afford to open or buy multiple stores. Applications aren't being taken for single new restaurant owners. (Large operators aren't uncommon in the restaurant industry. One of the biggest, NPC International, owns more than 1,000 restaurants, including Wendy's stores.)
  • You must have net worth of at least $5 million. This could include liquid assets, retirement accounts or real estate, among other holdings.
  • Liquid assets of at least $2 million are required.
  • Wendy’s multi-unit development focus "is a great way for corporate to earn fees, quickly," Sozzi points out.
  • U.S. restaurants: 5,817
  • Average restaurant sales, 2012: $1.48 million (Source:10-K. Reflects company-owned stores.)

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KFC (Owned by Yum! Brands)
  • To open a KFC or a combined KFC/Taco Bell store in the U.S., you'll need to have a net worth of $1.5 million and $750,000 in liquid assets.
  • For a KFC location, expect to spend $1.31 million to $2.47 million.A combination store will likely run $1.52 million to $2.59 million to get off the ground.
  • The initial franchise fee for a KFC is $45,000. For a KFC/Taco Bell, it's $75,000.
  • Monthly royalties are 5% of gross sales, and advertising is another 5%.
  • U.S. restaurants (KFC): 4,618
  • U.S. restaurants (Taco Bell): 5,695
  • U.S. sales per store, 2010 (KFC): $933,000 (Source: QSR.)

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KRISPY KREME DOUGHNUTS
  • Like Wendy's, Krispy Kreme (KKD) is looking for multi-store developers, but in a handful of specific markets: Chicago; Buffalo/Rochester, N.Y.; Harrisburg/Lancaster/York, Pa.; and Houston.
  • The initial investment to start operating a factory store ranges from $928,000 to $1.88 million.
  • The net worth minimum you'll need is $2 million, with liquid assets of at least $1 million.
  • Competitor Dunkin' Brands (DNKN) wants you to have at least $250,000 of liquid assets and $500,000 net worth, per store.
  • U.S. stores: 239
  • U.S. sales per franchised store, 2012: $1.98 million (Source: 10-K, based on domestic franchise store sales of $281.3 million. Includes 99 factory stores and 43 satellite stores. Sales to wholesale customers are included in the average.)

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