Is a Fast Food Franchise a Good Investment?

Ask any person to name a single franchise business, and the first response will probably be a single name: McDonald’s. Thanks to Ray Kroc’s ingenuity and business savvy, the terms “fast food” and “franchising” are practically synonymous. There’s a reason that 13 of the top 20 franchises in the world are fast-food restaurants. The upside is huge.  

But it’s a crowded industry with no shortage of investment opportunities. There are about 196,000 quick-service restaurants in the U.S. alone. The number of fast-food businesses in the U.S. fast-food has grown 1.1% per year on average over the five years between 2016 and 2021, and that includes a year of quarantines and restaurant lockdowns. 

The Lower the Risk, The Higher the Investment

On average, franchise owners in the restaurant industry take home about $82,000 a year. However, the start-up cost can be anywhere between $100,000 and a million dollars.

Additionally, there is risk in fast food franchise investment, and that risk is usually inverse to the investment cost. The lower the risk, the higher your buy-in. The startup costs for a McDonald’s, for example, are anywhere between $1.3 and $2.3 million. However, for that startup investment, you don’t just get another brand, but perhaps the most iconic brand ever, meaning there’s virtually no person on the planet who doesn’t know your brand. The money-making potential is huge.

A Chick-Fil-A franchise — another safe bet for the industry — generates $4.1 million on average annually with an initial investment of $10,000. The catch: Chick-fil-A charges a 15% royalty and takes 50% of all profits from franchisees, by far the steepest structure of any quick-service brand. Wendy’s, on the other hand, requires franchisees to have a minimum net worth of $5 million with $2 million in liquid assets but charges them just a 4% royalty. 

Read the Franchise Disclosure Document

Even if you have the money and expertise to open a franchise with one of the big players, it’s hard to predict whether you’re investing in the next big thing. There are ways you can mitigate the risk, though. Read the Franchise Disclosure Document carefully. Pay close attention to Item 19, which is the closest thing to a bottom-line return on investment you will find.

However, it’s not a guarantee. Other factors like labor costs, availability of good territories and real estate costs will impact the return on investment for a fast-food franchise.  

See 1851 Franchise’s list of the best fast food franchises to buy in 2021.