The Easiest Method for Choosing a Restaurant Franchise

By Jim SowersPublished On: March 20, 2023

V = ROI

It is easy to understand the allure of restaurant franchising. As a large and growing segment of the overall restaurant industry, restaurant franchising is attractive for its consistent, proven track record of returning cashflow. Restaurant owners can benefit from expanding their concept at a rapid pace, and entrepreneurs can enjoy the opportunity to own and operate their own businesses with the support and resources of an established brand. While the restaurant franchise industry can be highly lucrative for both franchisors and franchisees, it is also highly competitive with a wide assortment of potential concepts. Prospective franchisees should carefully research their options and consider their budget, skills, and interests before investing in a franchise. Successful franchisees typically have a combination of business acumen, operational experience, and a passion for the industry.

I live in a state where franchisors are required to register their franchise offering documents, and there are currently more than 450 registered restaurant franchises. If you are interested in opening a franchised restaurant, how do you pick one out of 450? First, pick a food category where you have the greatest passion – coffee, pizza, ice cream, hot fried chicken, poke bowls, etc. My next suggestion is to pick one of the franchises in that category with the highest average sales. The reasoning is simple – higher sales typically means higher profit. Hence the equation V = ROI which of course stands for: Volume = high Return on Investment.

ROI consists of two components: Investment and Return. Investment is important but the return is the secret sauce. If your concept can generate substantial cash flow (i.e., return), the ROI is likely very high, and the key to generating high cash flow is volume. Here’s an example of a typical restaurant:

$1 million total investment,
$1 million average annual sales,
65% variable costs (food, royalties, team labor),
20% fixed costs (rent, managers salary, utilities, etc.), and
15% profit.

In my example above, sales are $1 million a year with a 15% profit so you generate $150,000 a year in cash flow. With a $1 million investment, that’s a 15% return on your investment. The key is what happens as sales increase. You earn another 15% profit – right? No, it’s much better than that. You have 65% variable costs so for every additional dollar in sales, 35 cents go to the bottom line. For example, if sales increase to $1.2 million, the profit increases by $70,000 and the ROI jumps from 15% to 22%. That’s a 47% increase in your cash flow on 20% higher sales. Have a really hot chain with $2.0 million in average sales? The profits jump to $500,000, an ROI of 50%.

Of course, achieving a high average sales volume isn’t easy. It takes a good concept, a great location, a well-trained staff in a difficult hiring environment, and executing day after day. But if you choose the right concept, the cash flow should come.

Jim Sowers, a FOCUS Managing Director located in Richmond, Virginia, has over 30 years of experience in investment banking and corporate finance. He specializes in the Food & Beverage, Government & Defense, and Business Services industries. Prior to joining FOCUS, Mr. Sowers was a managing director with Transact Capital Partners, a boutique M&A firm, where he successfully represented dozens of business owners selling their companies in a variety of industries, including government services, consumer products, business services, staffing, and industrial manufacturing. Before that he was a vice president at BB&T Capital Markets, where he worked on numerous IPOs, sell side transactions, fairness opinions, and capital raises, mainly for consumer products companies and restaurants. Mr. Sowers began his career as an engineer in the defense industry. After receiving his MBA, he worked in the treasury departments of IBM and PepsiCo on corporate acquisitions and debt financing. After moving to operating companies, he worked in both financial planning and analysis, corporate development, and as a regional CFO. Mr. Sowers found his corporate development roles at PepsiCo particularly valuable, as each division had a strategic acquisition plan coupled with a disciplined valuation process. Mr. Sowers also previously worked in corporate finance and corporate development at General Electric and LandAmerica. Mr. Sowers received a B.S. in systems engineering from the University of Virginia and his MBA from the Darden School of Business at UVA. He is a long-standing member of the Henrico County Grand Jury, treasurer of his church, a member of the Association for Corporate Growth, and the advisory council of Virginia State University’s Reginald F. Lewis College of Business. Mr. Sowers holds FINRA 7, 24, 28, 63 & 79 licenses.