It pays to franchise.

Franchise Businesses Boast 90 Percent Success Rate

HAL W. SMITH KNOWS what it means to develop a new restaurant concept. That's why he decided to purchase an Outback Steakhouse franchise.

After presiding over corporations that owned Steak and Ale Restaurants, Bennigan's and Chili's Grill & Bar, Smith did not want to start a new restaurant from scratch.

"I've been there too many times with large companies trying to invent new concepts," says Smith, who plans to open Outback Steakhouse locations soon in Little Rock and North Little Rock. "I could go out and try to reinvent the wheel, but chances of success on a large scale are very minimal."

Success with a franchise is 90 percent guaranteed, according to the American Franchisee Association in Chicago.

Thousands of individuals have chosen to purchase restaurant franchises because, as Smith says, "Someone else has already made most of the mistakes and survived."

While restaurants are one of the more popular franchise opportunities, there are 60 different industries producing 7.2 million jobs in franchise businesses.

"I would rather pay someone a percentage of my gross sales and know that my odds for success are great because the formula has worked," Smith says.

According to a recent Gallup poll commissioned by the International Franchise Association in Washington, D.C., 75 percent of franchise owners would go into the business again. Only 39 percent of Americans would choose to go into their jobs or businesses again, the poll found.

Investment Costs 

Fast-food chains are where most of the restaurant franchising opportunities are.

Investment prices range from $50,000 for a small ice cream or yogurt store to more than $1 million for a full-service restaurant.

Full-service restaurants such as Kentucky Fried Chicken, Wendy's and McDonald's start near $500,000 and can cost as much as $1 million.

A TCBY location requires an initial $20,000 cash investment. Additional costs can run $120,000-$500,000, depending upon whether the location is free standing or not.

Primarily drive-through restaurants such as Rally's Hamburgers and Back Yard Burgers require an average investment of $350,000.

The recent Gallup poll, which surveyed 994 franchisees who own a variety of businesses, found that the average gross income of a franchisee is $124,290.

That, of course, varies greatly according to numerous factors, including the size of the business.

Regardless of actual sales, Smith says there is one strong reason to become a franchisee. That, he says, boils down to "the chances of success."

Usually, franchises are available because a company wants to expand and does not have enough capital to do so. After a franchisee helps grow a concept, however, the franchisor often buys back the franchise because it wants control.

Susan Kezios, AFA president, says potential franchisees should expect to pay $1,000-$1,500 on business and legal reviews before purchasing a franchise.

Franchisors are required by law to present an offering circular, which includes names of current and past franchisees.

"This is the important part of the investigation process," Kezios says.

The AFA and other firms help potential franchisees review offering circulars, but Kezios still recommends legal help.

The franchising market continues to change.

Larger, full-service chain restaurants do not regularly offer franchises anymore unless they are to minorities.

Some restaurants are beginning to offer joint ventures for minorities who have less money to invest. For instance, McDonald's Corp. is starting a joint-venture program for Indian tribes to invest in the chain.