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7 Most cost-effective Restaurant Franchises – Biz2Credit


If you love food, you might be interested in buying a restaurant franchise. Franchise opportunities for food these days are vast, covering a span of fast food restaurants, restaurant chains, and ice cream parlors. Franchise opportunities are attractive, too, as they do a lot of the advertising, marketing, and logistics work for you. You might have had experience in the restaurant industry before or are simply interested in a franchise of a quick-service restaurant. In any case, the options you have to franchise are growing.

Yet, buying some franchises can become expensive. From the upfront costs to the royalties and advertising fees, some franchises can be just too expensive to justify. If you are interested in opening up a franchise business and have limited capital to do so, you might consider your options for opening up the cheapest restaurant franchises. We’ll cover the following in this article:

This article details:

Understanding Restaurant Franchise Fees

Acquiring an understanding of how fast food franchises charge their fees is key to evaluating what your cheapest restaurant franchise option is. This is because the fees you pay to the franchisor are not just upfront fees, but the fees also continue past the establishment of the franchise location. Therefore, your restaurant franchise can be thought of as cheap now, cheap relative to expected royalties and fees, or cheap overall. You should understand a franchise fee structure before entering an agreement. It is also important so that you can get the cheapest franchise that you are looking for.

Upfront Fee

The upfront fee is perhaps the largest part of the initial fee you will have to pay when starting your franchise. If you are considering a franchise, you are not paying this initial fee when your restaurant opens for its first day. As the franchise owner, you pay this upfront fee at the signing of your franchise contract. This fee can be quite hefty and is something you should prepare for ahead of time.

Of course, this initial franchise fee for a new restaurant is a major source of revenue for franchising corporations when franchisees first sign on. However, it is not all just profit for the parent corporation. There are many services that the parent franchisor provides for the franchisee. Examples of this include marketing materials or training. While these might be especially expensive compared to startup costs for a non-franchise business, you would likely not get the same amount of upside or business without using the franchise name and marketing.

This type of upfront fee can also appear in other types of transactions. If you buy a franchise from another franchise owner, you may have to pay a transfer fee. Other types of contracts may have a renewal fee, where you will have to pay a fee to a franchisor every year.

It is important to accurately assess the contract which you are offered so that you can be sure you can handle the potential costs of the franchise.

One further thing to note about the upfront fee is the discounting which is involved in paying the upfront fee. Franchisors may know that a high upfront fee disincentivizes certain investors from purchasing a franchise. Franchisors may purposely set an upfront fee high to attract investors who are willing to commit a large amount of their capital and time to run the franchise. Other franchises are interested in increasing their revenue this way.

Yet, the low-cost strategy of franchises offering a smaller initial fee can be used to attract a wider pool of investors and franchisees. It makes their franchises more accessible and attractive to start toward a larger audience. This is a great way franchises can grow quickly.

Royalties

While you will pay the initial franchise fee when starting your franchise, you will also have to juggle ongoing costs, including the royalties that your business will owe. A franchise will often have to pay royalties monthly, often measured as a percentage of its gross profit.

You get to gross sales, or gross profit, by subtracting the direct costs of your food production and delivery in your restaurant from net sales. Your royalty will be a percentage of that gross sales. This can be low, from 4% of your gross sales, to even as high as 12% of your gross sales.

Some of the royalties you pay to a franchisor will not be based on gross profit, however. Some of the percentages might be based on revenue, pre-tax profit, etc. It will depend on the exact nature of the agreement with the franchisor, and this agreement will vary by the company you choose to franchise with.

Franchisors explain this fee as something to support the corporate structure and the symbiotic relationship between a franchisor and a franchisee. This fee goes, in part, to support the marketing and advertising efforts of the franchisor and to the maintenance of the company brand.

Advertising Charges

Another percentage-based and ongoing charge will be the advertising fee. This is meant to be used for advertising your franchise through the franchisor’s network, website, and advertising efforts. This charge will usually be a lot lower than the royalty fee, but it may not be negligible when trying to calculate your future expenses.

Additional Set Up Costs

While you may have paid the initial fee for joining the franchise agreement, your franchise agreement will likely also lay out the obligations you have in starting and managing your franchise location.

If you remember walking into several restaurants of a particular chain, such as McDonald’s, you might notice how it looks very similar to its other locations on the inside. The restaurant’s decorations, layout, and style are very similar to other McDonald’s locations.

From this explanation, you might be able to see how chains require their franchisees to have similar layouts, decorations, and styles. When starting up your business, you may have to implement these procedures. That can greatly contribute to the overall startup costs of your franchise, making it much more expensive.

Other costs are contained in getting the required supplies, materials, and inventory for your franchise restaurant. The extent to which you have to buy company-approved supplies will depend on the extent to which you are required to comply with the franchise agreement.

Cheapest Restaurant Franchises

Now that you understand the typical cost structure of restaurant franchise agreements, it is time to review the cheapest restaurant franchises currently available. Remember to keep in mind that the low-cost nature of these agreements might be contained in either the upfront cost, ongoing fees, or both.

Baskin Robbins

Everyone loves ice cream! While not a traditional restaurant, Baskin Robbins is a great ice cream parlor, able to turn a profit with a lot lower costs. If you are considering purchasing a restaurant franchise, a Baskin Robbins could be a perfect option to franchise cheaply.

Another benefit to considering Baskin Robbins as a good franchise option is to be confident that Baskin Robbins caters to your concerns of being an affordable franchise choice. They have net worth requirements between $100,000-$200,000 for their franchisees. Their liquid asset requirement is only $100,000. This is quite an affordable option if you have not accumulated a lot of capital or cannot move several hundred thousand dollars around quickly.

Baskin Robbin’s franchise fee is only $25,000. The overall estimated investment for the restaurant opening is in the range of approximately $90,000 to $625,000. Opening Inventory costs approximately $5,000-$8,000 and technology can range from $1,440 to $15,000. Together, these contribute to the initial investment of opening up a Baskin Robbins ice cream shop being very inexpensive. This is potentially a great option.

The ongoing fees for Baskin Robbins are a 5.9% royalty fee and a 5% advertising fee. While these fees are not the smallest, they are also not extremely high. Baskin Robbins could be a very great affordable restaurant franchise. Especially if you do not have a large amount of capital to set up a small business, Baskin Robbins might be the option for you.

Baskin Robbins Franchise Summation:

Franchise Fee: $25,000

Initial Investment: $90,000 to $625,000

Net worth Requirement: $100,000 to $200,000

Liquid Asset Requirement: $100,000

Royalty Fee: 5.9% of Gross Monthly Sales

Advertising Fee: 5% of Gross Monthly Sales

Chick-Fil-A

Chick-Fil-A is famous for its delicious fried chicken, chicken sandwiches, dipping sauces, and long drive-thru lines. Americans love Chick-Fil-A. Chick-Fil-A is almost certain to be a great investment, as its business model has been proven time and again with great sales.

To get a Chick-Fil-A franchise, potential franchisees need to apply to a selective recruitment process. Prospective business owners then have to commit only $10,000 as a total initial investment to Chick-Fil-A. Chick-Fil-A then pays for the construction and equipment going into the business, turning around, and renting it back to the business owner. The charge for this is a 15% royalty, and the remaining pre-tax profit margin is subject to a 50/50 split between the franchisor and the franchisee.

While the Chick-Fil-A franchise seems like one of the most profitable franchise options, it may be expensive in the long run. The restaurant is certainly a cheap franchise option in the short run if that is what you are prioritizing. Considering your costs in the short and long term is an important first step to evaluating the cheapest, and ultimately best, option for you.

Chick-Fil-A Franchise Summation:

Franchise Fee: $10,000

Initial Investment: $343,000 to $2,000,000

Net worth Requirement: $10,000

Liquid Asset Requirement: $10,000

Royalty Fee: 15% of Gross Monthly Sales + Possible 50/50 split of remaining pre-tax profit

Advertising Fee: N/A

Taco Bell

If you love Mexican food, especially in a fast-casual setting, Taco Bell might be for you. While you have probably eaten at a Taco Bell before, you may not have considered it as a franchise option. Taco Bell is a great restaurant with a low franchise cost.

Taco Bell’s upfront fee for starting a franchise is only $45,000, which is comparatively low to other brands and franchises. Their ongoing fee structure is also reasonable. The royalty fees and advertising fees are done off of a percentage of gross sales, rather than revenue. The royalty fee is 5.5% of gross sales and the advertising fee is 4.25% of gross sales. As a whole, this is pretty reasonable.

However, it is also important to note that you will have to have a net worth of approximately $1.5 million or more. The startup costs for Taco Bell can be quite significant, as building the restaurant construction and inventory stocking expenses can be quite high. However, among fast food chains, Taco Bell is certainly a good and cheap option to consider.

Taco Bell Franchise Summation:

Franchise Fee: $45,000

Initial Investment: $530,000 to $3,000,000

Net worth Requirement: $1,500,000

Liquid Asset Requirement: $750,000

Royalty Fee: 5.5% of Gross Monthly Sales

Advertising Fee: 4.25% of Gross Monthly Sales

Papa John’s

You might love pizza. You might love Papa John’s. Compared to other chains, like McDonald’s and Taco Bell, which have startup costs ranging into the millions, Papa John’s has relatively lower startup costs. Papa John’s might be a great restaurant franchise for you if you are interested in a fast pizza delivery restaurant.

Papa John’s has certain requirements for franchisees. As a franchisee, you have to have liquid assets totaling $250,000 and a minimum net worth of $750,000 to be considered. In addition, they prefer that you have multi-unit management or retail experience before applying. Specifically, they write that Papa John’s is interested in people willing to open and manage five locations or more. Certainly, this is not a small ask.

For each new restaurant, Papa John’s charges a $25,000 franchise fee. The good news is that currently, Papa John’s is waving that fee for franchises opened domestically. They are also providing franchisees with a set of ovens for their new unit. In addition, they are reducing royalties for the first four years of the unit’s operation.

For the first year and a half, no royalty is charged. For the next year and a half, the royalty is 1% of net sales. Each year thereafter, the royalty increases by one percent until it reaches a total of 5% of net sales, the standard royalty fee. There is also an expensive advertising charge, amounting to 8% of net sales.

So, you might be able to see that Papa John’s is certainly cheaper to open than in the later years of its operation. Papa John’s is indeed making the option to open one of their restaurants much more accessible. If your priority is to start a franchise cheaply at the start, you might consider Papa John’s. Just be sure to understand that the costs will rise as you continue your business.

Papa John’s Franchise Summation:

Franchise Fee: $25,000

Initial Investment: $200,000 to $750,000

Net worth Requirement: $750,000

Liquid Asset Requirement: $250,000

Royalty Fee: 5% of Gross Monthly Sales (after 5 years)

Advertising Fee: 8% of Gross Monthly Sales

SONIC Drive-In

A classic American restaurant in the minds of many people is SONIC Drive-In. Many people have been to SONIC’s drive-thru or drive-up restaurant and have fond memories of spending evenings there getting drinks or snacks with their friends. It is also relatively cheap to start.

Before you can sign a contract to get your franchise of SONIC Drive-In, you will need to have $500,000 in liquid assets. You will also need to have a net worth of one million dollars. These are the basic requirements to open between one to two SONIC locations. These conditions are somewhat high.

Yet, the franchise fee is only $45,000, which is quite low. The royalty fee ranges from a 0-5% rate and the advertising fee is 3.25%. All things considered, these franchise fees and royalty fees are quite low. If you are looking for a quick-service restaurant, a new franchise of Sonic might be for you.

It is important to note, however, that the total cost of opening a SONIC can be over a million dollars. Everything combined from the fees you pay to the corporate SONIC structure to the cost of building and starting a SONIC with inventory, property, and investors can be expensive. Yet, if your concern is about the expense of paying the corporate office, SONIC can be a much cheaper restaurant choice.

SONIC Drive-In Franchise Summation:

Franchise Fee: $45,000

Initial Investment: $860,000 to $3,000,000

Net worth Requirement: $1,000,000

Liquid Asset Requirement: $500,000

Royalty Fee: 0% to 5% of Gross Monthly Sales

Advertising Fee: 3.25% of Gross Monthly Sales

Dunkin’ Donuts

You have probably heard of Dunkin’ Donuts before. They have widespread popularity for their coffee and donut franchises around the world. Their great reputation has allowed them to expand to many franchise locations. This is assisted by the fact that this is a relatively cheap restaurant to franchise.

If you are considering a more breakfast-oriented or cafe-style restaurant franchise, Dunkin’ Donuts may be for you. If you are intending on opening one of their franchises, you should have $250,000 in liquid assets at your disposal for the business. In addition, your net worth should be at least $500,000 per restaurant. Keep in mind that these are the minimum requirements, so more may be required to successfully qualify for a franchise agreement.

Dunkin’ Donuts has a cheap startup cost as well. Their initial franchise fee or upfront cost is between approximately $40,000-$90,000. While this startup cost is slightly larger than the others in this article, their longer-term costs are also cheap. The royalty fee for an ongoing branch of Dunkin’ Donuts is between 2-6%. The advertising fee is 5%. Combined, this is a relatively cheap option for a restaurant franchise.

The overall investment size for a Dunkin’ Donuts restaurant franchise will be more expensive than just the fees paid to corporate. Corporate’s overall estimation of your costs is well past $500,000, and they estimate that this investment cost can range up to $1,787,000.

Dunkin’ Donuts Franchise Summation:

Franchise Fee: $40,000 to $90,000

Initial Investment: $400,000 to $1,800,000

Net worth Requirement: $250,000

Liquid Asset Requirement: $125,000

Royalty Fee: 2% to 6% of Gross Monthly Sales

Advertising Fee: 5% of Gross Monthly Sales

KFC

If you love fried chicken, you have probably been to Kentucky Fried Chicken. KFC is a fast food chain focused on serving customers unique and innovative fried chicken dishes. If you are interested in a restaurant franchise serving fried chicken, KFC might be for you.

KFC has some steep requirements before you can be relatively sure of a competitive background in your KFC franchising application. KFC requires that you have $1,500,000 in net worth. They also require that you have access to $750,000 in liquid cash. Between these two requirements, many people may be turned away from the KFC franchise application. However, in terms of the fees a franchisee would pay to the franchisor, KFC may be a competitive option.

KFC charges an upfront fee of $45,000 at the signing of the franchise agreement. They have a royalty fee to corporate of 5% and an advertising fee of 5% as well. In comparison, the fees paid toward KFC are quite low, while the overall investment might be high, reaching into the $1-2 million dollar range.

Kentucky Fried Chicken (KFC) Franchise Summation:

Franchise Fee: $45,000

Initial Investment: $1,200,000 to $2,500,000

Net worth Requirement: $1,500,000

Liquid Asset Requirement: $750,000

Royalty Fee: 5% of Gross Monthly Sales

Advertising Fee: 5% of Gross Monthly Sales

Financing a Restaurant Franchise

When searching for a cheap restaurant franchise, it is important to think about the different ways to purchase a franchise. While you may already consider a franchise with a high overall investment cost to be expensive, you may consider a franchise with a low investment cost but high costs paid to corporate to be expensive. You might value lower startup costs in the beginning versus more expensive startup costs later to be the inexpensive aspect of owning a restaurant franchise. In any case, the way you consider total costs to be expensive or inexpensive depends on the person.

This reflects a concept known as the time value of money. Since the same amount of money tomorrow is worth less than the same amount of money today, it may be more valuable to have an inexpensive franchise startup cost rather than an inexpensive ongoing cost. Additionally, it might be possible to make that startup cost lower as well. This is possible through financing.

Similar to financing a car or house, you can also have the possibility of financing a franchise. Financing a restaurant franchise may finally make your dream restaurant franchise much cheaper. Exploring ways to do this and reflecting on your financial situation would be a great first step to determining the best and cheapest restaurant franchise option available to you.

Financing Options for a Restaurant Franchise

If you are interested in financing a restaurant franchise, especially to make it cheaper for you in the present, you should consider having the first conversation with your franchisor.

In your franchising agreement, as well as in the franchising policies of the franchisor, much of the costs of a franchise may already be included in the agreement. Specifically, some of the equipment you will use in the operation of your franchise may already be included in the agreement to be leased or financed. While you might have to provide some sort of downpayment and payment on this equipment, it will usually make your upfront cost much cheaper and much more affordable.

There may be other financing options available to you, such as for the franchise fee or otherwise. It is best to check with your franchisor to see what is available to you. At the very least, you may be able to see what your options are in terms of the most efficient deployment of your capital when setting up your restaurant franchise.

Outside Financing for a Restaurant Franchise

Even if you are unsatisfied with the financing options offered to you through your franchisor, there are still potentially more options for you to make your restaurant franchise choice much cheaper. Your next stop for financing might be a bank loan or a small business loan to try and cover some of the more expensive costs. If you view this as an important part of the financing process to help you get your franchise, you may consider going to a financial institution to help you out. Even if you do not find help from a bank, there are also other forms and lenders willing to offer loans to help you cover the initial costs of a franchise.

In any case, you will need to be sure of whether the financing you are seeking is compliant with the franchising requirements in your agreement. If so, financing may be an option to make franchising a cheaper option in the present.

Takeaways

Opening and running a franchise is not cheap, either from an upfront cost perspective or in terms of the long-term royalties you will have to pay for the brand. Getting access to a business that leverages a well-known and high-quality brand is not cheap. Franchisors know the value of their brands and charge accordingly. However, that doesn’t mean that franchising cannot be a worthwhile endeavor or that there aren’t some franchises with more reasonable fees. Every franchise has its own structure that is slightly different from the rest – even if franchising as a whole follows a pretty standard business model.

As always, the key to understanding and comparing the costs you will face in both the short-term and the long-term as a franchisee is to ask plenty of questions and make sure you understand the terms before agreeing to anything. We recommend having a lawyer look over any franchise contract before you sign the dotted line in order to make sure you fully understand the terms.

In the end, with the right approach and the proper research, you can make sure you are getting a deal on your franchise that you think is appropriate. Comparing them by franchise fee, initial investment, royalty fees, and advertising fees will enable you to get a full picture of what the investment will look like. So, stay diligent and thoughtful and you could be on the way to owning your very own franchise in the near future.

Biz2Credit

Biz2Credit is a leading supporter of small businesses and their owners across the nation. We work hard every day to provide them with the support and tools they need to succeed. As part of this, we operate our Biz2Credit Blog, where we add new content and articles every weekday. So, please continue to check back here for all the latest information on news, trends, and events impacting small business communities.

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