What are the Best Restaurant Franchises to Start?
August 10, 2021
August 10, 2021
Fast food restaurant franchises are one of the most popular avenues for small business owners to break into the restaurant industry. Franchise owners don’t have to worry about coming up with dishes, building a brand and customer following, or even designing the restaurant. Outside of investing capital and managing the business (though even this can be offloaded to a qualified employee), many of the difficult aspects of opening an entirely new restaurant concept are removed. Your restaurant will have instant brand recognition and most likely a loyal customer base to begin with (though you will still want to work hard to keep growing this customer base). Indeed, the business model is already clearly outlined by the franchisor, and they’ll provide most of the information regarding tried-and-proven operation methods and techniques. Plus, the American fast food industry is massive.
That said, choosing a fast food franchise to move forward with can be difficult. Unsurprisingly, different franchise opportunities have different costs associated with them based on the franchisor. As a result, some franchisors tend to stand out from the pack in terms of the initial investment required and fees. Plus, the sheer volume of fast food franchises available to choose from can make it hard to sort through and understand the variety of opportunities. Fast food franchise opportunities include McDonald’s, Taco Bell, Kentucky Fried Chicken (KFC), Subway, Dunkin’ Donuts (now called just Dunkin’), Baskin-Robbins (usually combined with a Dunkin’), Papa John’s, Dominos, Pizza Hut, Culver’s, Wendy’s, Wingstop, Jersey Mike’s Subs, Jimmy John’s, Dairy Queen, and more! The list goes on and on.
In this article, we’ll try to sort through some of the top franchises and determine the best franchises for burgeoning small business owners. Before we begin, please note we’ll be focused on fast-casual and fast food chains as opposed to full-service restaurants.¬†
You might be wondering what the difference between all of these restaurant categories actually is. Here is a quick rundown.
Most people know what a fast food restaurant is, but just for the sake of comparison here, fast food restaurants are quick-service restaurants with little to no wait time and low-cost food. They typically have drive-ins where customers can pull up and order from their car. Examples are McDonald’s, Chick-Fil-A, Taco Bell, Wendy’s, and Burger King.
Fast-casual restaurants are just like fast food restaurants. They are restaurants that do not offer full-service dining (i.e. sitting down and having a server wait on you). However, they advertise higher quality food than their fast food counterparts. Panera Bread, Potbelly, Jimmy John’s, Chipotle, and Shake Shack are all examples of restaurants that claim to be “fast-casual” dining instead of fast food.
Full-service restaurants are simply restaurants where you sit down at a table with a server. Unlike fast food and fast-casual restaurants, these dining experiences typically take an hour or more.¬†
We’ll start with a quick overview of restaurant franchises and how they work. Fast food restaurant franchises -like any franchise – are a type of business model. Under this business model, a company called the franchisor allows a third party called a franchisee to use their brand, business plan, product designs (in this case food recipes), and more. Using these assets of the franchisor, the franchisee is able to operate their own branch of the franchise, which is supported by a network of other third-party individuals and groups running branches of the franchise.¬†
Obviously, the franchisor has to make money off all of this somehow. So, in return, the franchisor changes the franchisee fees known as royalties. These royalties (typically charged as a percentage of revenue) cover the various expenses incurred by the franchisor as it supports the brand and its various franchisors. For example, consider the national brand of McDonald’s. While there are franchises all across the country that do their own individual marketing, the McDonald’s corporate team works to support these franchise locations as well. They do this by developing new products, running marketing campaigns with online and television advertisements, maintaining a website and app, operating a cross-branch loyalty program, and more. All of these efforts enable the franchises to operate cohesively as if one large company rather than thousands of individual restaurants.¬†
It would be difficult to establish a “best” franchise since different franchises perform better in different markets and have different fees and initial investment costs associated with them. However, that said, we’ll cover what we view as some of the top fast food restaurant chains across the nation and what you can expect in terms of startup costs and fees to get started.¬†
No fast food franchise in the world is as iconic and well-known as McDonald’s. Since opening in 1955, McDonald’s has expanded to over 37,000 franchise units across the world (you can basically get McDonald’s on any continent). It’s such a well-run business that it is frequently part of case studies at the top business schools, including Harvard Business School and Stanford’s Graduate School of Business, and is even the subject of multiple movies and documentaries.¬†
Opening a McDonald’s also isn’t overly cost-prohibitive, however, it is still relatively expensive compared to many fast food franchises. Candidates typically have to have at least $500,000 on non-borrowed personal resources, and McDonald’s requires that owners pay a minimum of 25% cash as a down payment on the purchase of a restaurant. The rest can be financed, but not for a period of greater than seven years.
All together, opening a McDonald’s franchise requires an initial investment of around $1 million to $2 million, and the royalty fees are fairly low compared to many other fast-food franchises.
Initial Investment:¬†$1,000,000 to $2,500,000+
Initial Franchise Fee:¬†$45,000
Royalty Fee:¬†4% (of monthly sales)
Burger King is probably McDonald’s best-known competitor, and the franchise is actually a year older than McDonald’s, having opened in 1954. That said, Burger King is considerably smaller than McDonald’s, with a little over 16,000 units operating worldwide.
Burger King’s requirements for being eligible to open a franchise are actually similar to McDonald’s, though the actual cost of opening a Burger King can be less. They require prospective franchisees to have a net worth of $1,500,000 with $500,000 available in liquid assets (essentially the same as McDonald’s).
Burger King franchise owners are also required to attend training to operate their franchise that includes in-restaurant experience requirements.
Initial Investment:¬†$400,000 to $2,500,000+
Initial Franchise Fee:¬†$50,000
Royalty Fee:¬†4.5% (of monthly sales)
Founded in 1984, Culver’s is a small franchise compared to McDonald’s and Burger King (they did $3.2 billion in 2020 revenue compared to $21 billion for McDonald’s in 2019), operating mostly in the Midwest in Wisconsin, Illinois, and surrounding states. However, this simply means there is more opportunity for potential franchise owners to make a splash since the brand is growing quickly and there are still many prime markets available to operate a Culver’s in. Plus, each location is typically given 3 miles in territorial protection (this is usually less in densely populated areas).
Culver’s requirements are actually less stringent than many competitors as well. You will need at least $350,000 in liquid assets to be eligible to open a restaurant. Culver’s owners are required to be very active in their business, as Culver’s expects them to be involved full-time in the day-to-day operations of the location. Additionally, franchise owners have to complete a development program in which they learn how to cover each position in the restaurant. In terms of opening the restaurant, owners work closely with Culver’s corporate team as they make decisions.
Initial Investment:¬†$2,000,000 to $4,600,000+
Initial Franchise Fee:¬†$55,000
Royalty Fee:¬†4% (of monthly sales)
As the saying goes, America runs on Dunkin’. Pretty much everywhere you go you can find a Dunkin’ Donuts franchise. Offering assorted beverages and pastries, like coffee, tea, and donuts, as well as breakfast sandwiches, bagels, and more, Dunkin’ Donuts is a popular morning stop for millions of Americans. Indeed, there are more than 9,000 Dunkin’ Donuts worldwide.
Dunkin’ Donuts is actually one of the cheaper franchises to open. This is because they aren’t serving any items that require a great deal of preparation (donuts are much simpler than burgers and fries), and many of their customers go to Dunkin’ for the beverages, like a morning coffee.¬†
Dunkin’ Donuts also has much more relaxed financial requirements for its owners compared to most franchises. While the requirements vary by the market you are looking to operate it, the minimum requirements are $250,000 in liquid assets and a net worth of $500,000. This means franchising with Dunkin’ Donuts is a realistic opportunity for individuals with more limited financial resources as compared to, for example, McDonald’s.
Initial Investment:¬†$100,000 to $1,700,000+
Initial Franchise Fee:¬†$40,000 to $90,000 (depends on location/market)
Royalty Fee:¬†5.9% (of monthly sales)
Taco Bell has been operating since 1962 and franchising since 1964. In that time, they have opened over 6,300 franchises worldwide, and they continue to grow. Offering Tex-Mex cuisine, they are a popular fast food destination for millions of Americans across the country. Menu items include tacos, nachos, burritos, quesadillas, specialty beverages, and more.
Taco Bell’s net worth and liquidity requirements are a little more stringent than either McDonald’s and Burger King, and the startup costs are on par with both competitors. This can put the franchise somewhat out of reach for the average American. The overhead at Taco Bells is higher than most other franchises as well since Taco Bell recommends 25 employees per franchise. This means you will be paying out quite a bit in wages. Additionally, they have a 4.25% marketing fee in addition to their royalty fee of 5.5%.
Initial Investment:¬†$1,200,000 to $2,500,000+
Initial Franchise Fee:¬†$25,000 to $45,000 (depends on location/market)
Royalty Fee:¬†5.5% (of monthly sales)
We have now reached what would be considered by most the first “fast-casual” restaurant on our list. Panera Bread is one of the most popular restaurant chains in the United States and does the 10th most revenue of all fast food chains, behind the likes of McDonald’s, Burger King, Chick-Fil-A, Dunkin’ Donuts, and a few others.
Panera’s offerings come at a significantly higher price point than those of most of its fast food peers, and the company has worked hard to distinguish itself from the pack by striving hard to offer healthy food options that are free of preservatives and other unhealthy additives.
Indeed, Panera has jumped headfirst into the health and wellness trend that has been spreading across the United States, capitalizing on the fact that millions of Americans are now willing to pay more money for healthier food options (think about Whole Foods – which similarly offers healthier food options but at a significantly higher price). However, these higher prices mean that the markets Panera can operate successfully in are far more limited than, for example, the markets that McDonald’s can operate in.
Rather than selling individual stores, Panera sells marketing regions to franchise owners and then works alongside them to open multiple locations in the area – typically around 15 – in a period of around 6 years. This makes starting a Panera franchise a much larger commitment than many other franchise opportunities. Panera also has stringent financial requirements for its owners – no doubt on account of how much they expect of them in just a short period of time. These include a liquidity requirement of $3,000,000 and a net worth requirement of at least $7,500,000 – no small sum. As a result, a Panera franchise is well out of the reach of most Americans (even many comparably well-to-do Americans). However, that doesn’t mean it’s not a great opportunity if you have the financial means.
Initial Investment:¬†$1,000,000 to $3,500,000+
Initial Franchise Fee:¬†$35,000 (annual renewal fee equal to 50% of the current initial franchise fee).
Royalty Fee:¬†5% (of monthly sales)
Over the past few years, Dairy Queen has worked hard to become a player in the realm of food with its slogan “It’s not fast food, it’s fan food.” However, it remains largely an ice cream shop. When Americans think of Dairy Queen, they still think of Blizzards, ice cream cones, and milkshakes, not burgers, hotdogs, and fries. And that is not likely to change anytime soon. However, that doesn’t mean Dairy Queen isn’t still a viable franchise option.
In fact, Dairy Queen is a very large franchise, with more than 6,800 locations worldwide. And the company has been operating since 1940 and franchising since 1944 – longer than McDonald’s and Burger King!
Further, the requirements DQ holds for owners are not nearly as prohibiting as many other fast food franchises. If you are looking to open a single unit Dairy Queen franchise, you will need liquid assets of at least $400,000 and a net worth of at least $750,000 (these requirements are higher if you want to open multiple units at once). This makes a DQ franchise fairly accessible in comparison to its peers – something that can certainly make it an appealing opportunity for someone looking to break into the fast food industry. Dairy Queen’s royalty fees are also lower than average, though their marketing fee is a little above industry average at 5 to 6%.
Initial Investment:¬†$1,200,000 to $2,000,000
Initial Franchise Fee:¬†$45,000
Royalty Fee:¬†5% (of monthly sales)
Started by Colonel Sanders back in 1952, Kentucky Fried Chicken, also known as KFC, is one of America’s oldest and most popular fast food franchises. In fact, the KFC fried chicken recipe is famous for being a trade secret – similar to the recipe for Coca-Cola. It’s debatable whether or not the secret formula really gives KFC a taste advantage, but there’s no doubt that it has become part of popular folklore. In an effort to build up its aura of mystery, KFC keeps a copy of the recipe – signed by Colonel Sanders himself – inside a vault in their Louisville headquarters. Today, KFC has over 23,000 franchise units, giving it one of the larger franchise networks.
KFC’s requirements for its owners are fairly standard. Owners have to have a total net worth of $1,500,000 and $750,000 in liquid assets. The new franchise fee and initial investment are also fairly standard for the industry. As such, while KFC franchises aren’t nearly as cost-prohibitive as, for example, Panera Bread, they are still quite expensive with a substantial barrier to entry. Individuals who qualify for a KFC franchise, however, should also qualify for quite a few other franchises as well, giving them a range of options to choose from.
Initial Investment:¬†$1,500,000 to $2,800,000
Initial Franchise Fee:¬†$45,000 (annual renewal fee equal to 50% of the current initial franchise fee).
Royalty Fee:¬†5% (of monthly sales)
Subway is one of the largest franchises in the United States. Their offerings mainly consist of submarine sandwiches and salads, though they have begun to branch out and experiment with new menu items over the last few years. With over 42,000 franchise units, Subway is everywhere you go, and they continue to expand aggressively.
One of the aspects of Subway franchises that make them so appealing is that they are fairly inexpensive to open when compared to almost every other franchise option with the exception of Dunkin’ Donuts. The franchise also places very limited requirements on their owners, which results in far more people being eligible to own a Subway franchise. While the franchise’s net worth requirements vary, they start as low as $80,000 with $30,000 in liquid assets. This is drastically lower than almost any other franchise in the United States. The initial investment required to get a subway up and running starts at only $150,000, a paltry sum compared to other franchises which start at around $1,500,000. As a result, Subway is a really great opportunity for individuals with limited financial resources who are eager to get into the restaurant industry sooner rather than later.
Initial Investment:¬†$150,000 to $350,000
Initial Franchise Fee:¬†$15,000 (annual renewal fee equal to 50% of the current initial franchise fee).
Royalty Fee:¬†8% (of monthly sales)
Whenever you are settling on a franchise to open, the first thing you have to do is understand your market. This means you’ll need to scope out the competition in the area and try to understand the eating habits, demographics, income level, and other attributes of people in the area. You’ll then need to assess whether or not the franchise you intend to open could actually succeed in the area given these factors.¬†
For example, while a Chipotle branch might do well in a suburban or metropolitan area, it probably would not do nearly as well in a low-income area, since their food tends to be a lot more expensive than other fast-casual and, in particular, fast food restaurants. Instead, a McDonald’s or Burger King would probably be more suited for the location based on the surrounding market.¬†
As such, whenever you are considering opening a restaurant franchise, or quite frankly a business of any kind, while it is important to consider things like franchise fees and terms, it is equally important to consider the market you are looking to operate in. In fact, the market you want to operate will have by far the biggest influence on the restaurant franchises you are able to open.¬†
This is especially the case since franchisors will only allow so many locations to be opened in a given area, which means only certain franchises may actually be available for you to choose from. Some franchises will actually sell areas as opposed to individual restaurant licenses, which gives franchisees the right (or even requires) to open a certain number of restaurants in a given area (i.e. odds are McDonald’s isn’t allowing new business owners to come in and open locations in New York City).¬†
Whenever you open a franchise business – including a restaurant franchise – you, as the franchisee, will have to sign a franchise agreement with the franchisor. A franchise agreement is a legally binding document that comes with a series of obligations that you, as the franchisee, must fulfill. These include both financial and operational obligations. As a result, it is imperative that, before you enter into a franchise agreement and sign the dotted line, you have a qualified lawyer review the documents. This will ensure that you are able to understand exactly what the document is saying and precisely what your obligations will be in the future.
We understand that starting your own business can be incredibly exciting, especially if you have been working towards it for many years. And we know that you want to hit the ground running and start making money! But don’t let this excitement get the best of you. You still have to do your due diligence and think through everything in a thorough and rational manner – even if you are planning on opening a reputable nationwide franchise. The devil is in the details, so don’t let them slip by you unnoticed.¬†
As part of opening a restaurant franchise, it is important you have some sort of financial know-how. Obviously, you don’t need five years of experience as an accountant or investment banker but being generally familiar with accounting and how it works will work wonders for you as you try to make sense of whether or not an investment is a good idea.
In order to be on the safe side, if you are considering opening a franchise, think about working with a CPA or otherwise qualified accountant to make sure the numbers make sense. They will be able to help you navigate the process and prepare the proper documentation regarding your own personal financial history and track record. This will be useful as you look to acquire financing for your franchise.
Additionally, consider taking an introductory course in financial accounting at your local community college. The more comfortable you are with financial statements and methods for analyzing your finances, the more comfortable you will be taking out loans and moving forward with a small business.¬†
There is no doubt that opening a fast food or fast-casual franchise is a viable and time-honored way of breaking into the restaurant industry. Every week, millions of Americans eat at fast food restaurants because of their convenience and low cost, so it’s no wonder that so many prospective small business owners are eager to get in on the action. That said, owning a restaurant – even a franchise restaurant – is not easy work. It often involves long hours and a great deal of personal and financial commitment. That said, if you are up to the task, owning a restaurant franchise can be incredibly rewarding and lucrative. As in everything, due diligence is key and making sure you fully understand what you are signing up for is critical. If you can handle that, then you might be well on your way to owning your own successful restaurant franchise in the near future!
Since our founding back in 2007, here at Biz2Credit, we have been working tirelessly to bring small businesses the latest news and information regarding financing and business opportunities. Whether it’s matching small businesses with lenders or sending out an email blast with the latest small business happenings, we are committed to constantly building and maintaining our strong relationship with America’s small businesses. As always, please be sure to keep checking back here at our¬†Biz2Credit Blog¬†for the latest news on everything small business!
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