Starting a Coffee Shop: to Franchise or Not?

So you are starting a coffee shop and working on your coffee shop business plan. You are thinking: ‘maybe buying a coffee shop franchise would work better because I am not sure how to go about this coffee shop start up.’ Or maybe you are thinking ‘I can get operational support after I open that I would not have without the franchise.’ Or, “if I buy a nationally known franchise, will that make potential customers more comfortable about coming into my store because they recognize my company name?” All are very good thoughts.

Franchises can give you an edge because they have some name recognition and support but think it through before getting the sales pitch and going the franchise route. Of course, make your own decision but as a franchisee, you are pretty much land-locked into the franchisor’s way of operating.

You are looking for name recognition and branding. In the coffee industry, franchising is still in its infancy. I say this because there aren’t many specialty coffee franchises even though there is plenty of interest in the concept. Well, at least not as many as there are food franchises but surely not many recognizable ones at that. Most coffee franchises are regional but you may recognize names like Seeker’s, PJ’s, Beaner’s, It’s A Grind Unwind, Arabica, Cuppy’s and Scooter’s. Contrary to popular belief, Starbucks is not a franchise.

Name recognition will not tremendously help a franchisee succeed however, with such limited recognizable names, but that can be debated and best left for another day! What you most likely have here is the potential to succeed more so from an operational and experience standpoint. Hopefully your prospective franchisor’s management has a lot of practical experience to assist you.

You will usually get better pricing on supply products because of the franchisor’s buying volume. You also will normally get better pricing on equipment because of the franchisor’s volume and usage of such.

The commitment of the franchisor’s support in planning stages like site selection, lease negotiation and build out is a plus to franchisees. Also, the ongoing support in marketing and operations after you open. Of course, this is usually not free! (see below)

As a franchisee, you will most likely be mandated to use proprietary supplies and ingredients, coffee, equipment, etc. You have less leeway for freedom to use products that you want to use, and maybe even something you feel is better tasting. If your franchisor uses bad or cheap coffee, you are not going to do well in the long run. I know of three franchises that have absolutely awful tasting coffee, of course names withheld! This is not a good thing though.

You will also have an upfront franchise fee, sometimes as high as $100,000 before you actually start anything. This is just to use the name! You will also have ongoing royalties that have to be paid monthly, usually 3-7% of your GROSS sales. Suppose you do $30,000 per month; that is $900-2100 per month just to use someone else’s name! That is a lot of YOUR salary! Before when I said that ongoing support is not free, this is what I meant.

Also, the franchise agreement is usually for a set period of time, like from 5-10 years. When it is over, it is usually renewable or you can go your own way but you normally have to drop the use of their name so now you would have to start marketing your name change.

You also will most likely have ongoing marketing fees of about 3-7% per month. That is taken from your monthly GROSS as well! That is a lot more of YOUR salary! Though this is comforting to know someone has your back for marketing, marketing is not this expensive for a specialty coffee retailer. In fact, if you are spending 3-7% or your gross sales per month for marketing you are spending too much! But that’s a whole other article.

After you add up all the ongoing fees every month, that is somewhere between $1800-4200. EVERY MONTH just to use someone else’s name! Your volume has to be very high to support this. Can you achieve it without using someone else’s name? With the right location you bet you can!

Another thing to consider is the fairly high personal net worth that is usually needed of all owners. Again, this is not something that is a bad thing to have when going into business. However, the franchisor usually looks for a personal net worth in the neighborhood of $100,000-500,000, with anywhere between $50,000 -300,000 of that to be liquid assets, depending on the franchisor.

Those are high numbers to achieve for the average new entrepreneur. However, just because you have money or a high ‘paper’ net worth does not mean you know how to or have what it takes to run a business. You definitely need passion, commitment and will.

Quite honestly, I do not know of one specialty coffee franchise that I can justify making the initial investment in for the name and branding that you’d be paying for. In other words, if you were looking for a food franchise you are virtually guaranteed success with McDonald’s or Subway provided you follow the franchisor’s lead because of the name and image. That I would recommend. But it IS the name and the company’s image you are essentially paying a lot of money for so keep that in mind.

One last thing to be sure of is your right and ability to sell or close your business for whatever reason. It is actually a multi faceted question: Can you sell your remaining time on the franchise? Can you break your agreement at all? If so, is there a penalty and how much is it? Does the buyer have to buy the franchise? Does selling or closing nullify your agreement? You will need answers to all of these questions before you sign anything and write out any checks!

So if you can stomach the large outlay of cash and justify the ongoing fees for buying a franchise maybe that method will work for you. There is nothing wrong with that. However if you take the time to network, do great research on this industry, learn how to run a business and craft an awesome coffee shop business plan you will be on the road to success as an independent specialty coffee shop, on your own for a lot less money and may be better off for it. Whatever you choose to do, good luck to you!