While chains seek multi-unit franchisees, small operators have room to grow in 2023

From Jack in the Box to California Pizza Kitchen, major restaurant brands have spent the last two years pushing for growth via franchising and signing multi-unit deals. It’s not just legacy chains that are accelerating franchise expansion. Many midsize chains, such as Modern Market Eatery and Dog Haus, have struck deals with operators big and small to create robust pipelines. 

New and existing franchisees will face challenges due to high costs that are squeezing margins and pressure to deploy technology that caters to modern consumer needs, experts said. But the prospect of operating a restaurant still holds a lot of excitement for those entering the field. 

“Franchising is growing as fast as it’s ever grown right now,” said Mark Siebert, CEO and founder of consultancy iFranchise Group. “We’re just seeing a lot of people getting into business for themselves.”

While new business applications remained steady in the past decade in accommodation and foodservice with about 20,000 monthly new business applications, that number has been elevated since mid-2020. The segment reported roughly 30,000 new business applications per month by mid-2020 and have since remained above 20,000 monthly applications, according to U.S. Census Bureau Business Formation Statistics.

Although experienced restaurant business owners and operators understand how difficult it is to run a restaurant, some new entrants view these businesses as a fun way to score guaranteed cash flow from day one, Siebert said — a goal that is far from guaranteed. 

“There’s excitement to the restaurant business that there isn’t to mowing people’s lawns or being a janitorial service person,” Siebert said. 

In some ways, that excitement is warranted. Consumer demand to eat out remains high. In the middle of the week, when business tends to be slow, desirable restaurants are still really busy, said Greensfelder franchising attorney Lenny Vines. 

If a recession occurs in 2023, experts predict an economic downturn will slow inflation and wage growth. These possibilities are driving people to enter franchise deals now, in advance of a potentially more hospitable market in the next few years, Siebert said. 

But despite these possibilities, new franchisees and longtime operators will face a host of challenges this year. Fierce competition for real estate and high technology costs, for example, will threaten franchisees’ profitability, experts said. 

“This is a very, very, very difficult business,” Vines said. “Don’t think that this is going to be a cakewalk. Be prepared to really work hard.” 

An image of a Jack in the Box restaurant.

Justin Sullivan via Getty Images


Big chains seek multi-unit franchisees

It’s already harder for aspiring single-unit operators to break into restaurant franchising, at least with the big players. In the last five years, well-capitalized groups — often backed by private equity — have bought large blocks of restaurants, said John Ramsay, vice president of franchise sales at Noodles & Company.

Legacy brands are capitalizing on this shift. It’s easier for franchisors to help a large operator group expand from 50 to 60 units versus finding and training 10 individual franchisees, Ramsay said. Many restaurant chains with complex operations don’t want to sell locations to mom-and-pop franchisees anyway, Siebert said, because they prefer the experience of multi-unit foodservice operators.

Subway, which has a long history of working with single-unit franchisees, said last year that it would target more multi-unit operators. In August, Jack in the Box began offering operators discounted royalty rates for their first five years if they agreed to develop at least three units. 

Noodles & Company isn’t seeking first-time franchisees, either. Ramsay said the chain feels larger, long-term franchisees are better equipped to deal with current challenges in the industry, such as the increasing cost of real estate and construction. In 2021, Noodles & Company focused on attracting multi-unit franchisees to expand in the South and Southwest.