How to Finance a Wendy’s Franchise
More than 6,500 Wendy’s restaurants currently operate in the United States and across the globe, serving its signature square hamburgers and Frostys. Nearly 95% of its stores are franchised.
The 50-year-old American fast-food chain raked in nearly $1.6 billion in revenue in 2018, up almost 30% from 2017. Its net income was $460 million, more than double 2017 levels. Wendy’s franchisees opened 152 new restaurants last year but closed 77 underperforming ones for a net gain of 75 stores. The company plans a “significant” number of new stores, both company owned and franchised, in 2019. With the average franchised Wendy’s ringing up $1.62 million annually in sales, that spells opportunity for prospective franchisees who can meet the company’s requirements.
We’ll walk you through the costs and opportunities in addition to your financing options for those who aspire to open their own Wendy’s.
- Costs of buying a Wendy’s franchise
- Ongoing costs of owning a Wendy’s franchise
- Becoming a Wendy’s franchise
- Is a Wendy’s franchise right for you?
- How to finance a Wendy’s franchise
Costs of buying a Wendy’s franchise
- Application fee: $5,000
- Background check fee: $325 per person
- Franchise fee: $40,000 per restaurant (20-year term)
Buying a franchise allows entrepreneurs to open their own businesses without starting from scratch. Franchisees have the benefit of a recognizable name, training and a tested and proven operating system in exchange for fees and royalties. Those costs can be steep — Wendy’s estimates that the total initial investment for a new restaurant is between $2 and $3.5 million. That figure includes the cost of building supplies, labor, permitting and more.
Likewise, net worth requirements are high, too: To be able to buy a Wendy’s franchise, prospective franchisees must have a net worth of $5 million, $2 million of it in cash. The company also prefers franchisees to have significant restaurant experience.
Franchisees usually sign an agreement for a 20-year to a 25-year term with the option of 10- or 20-year renewals, respectively. Some franchisees own multiple Wendy’s restaurants, what’s known as multiunit franchising.
Ongoing costs of owning a Wendy’s franchise
Initial investment costs can vary depending on the cost of real estate and building size to design features and local labor. But every franchise owner will pay ongoing costs in the form of royalties and contributions to advertising funds based on a percentage of sales.
- Royalties: 4% of gross sales
- National advertising: 3.5% of gross sales
- Local advertising: 0.5% of gross sales
- Equipment and supplies: Apart from food, Wendy’s franchisees are required to purchase equipment and some supplies and services from Wendy’s suppliers.
Becoming a Wendy’s franchise
Now that you’ve learned the costs of opening a Wendy’s franchise, let’s take a look at the opportunities in investing in a Wendy’s franchised store.
First, the big picture: Between 2013 and 2016, about 37% of American customers purchased fast food on any given day, according to data published in 2018 by the National Center for Health Statistics. The fast-food industry is anticipated to expand at a compounded annual growth rate of 4.8% by 2022, according to Allied Market Research.
Wendy’s, as one of the most recognizable and most favored fast-food brands in the United States, offers support, assistance and growth opportunities to its franchisees.
Wendy’s provides managerial, technical and promotional assistance when franchisees first start. It also assists in site selection and construction. After the opening, Wendy’s continues to provide support in training new employees and managers, and purchasing products in bulk and marketing. There is no additional fee for training, although the franchisee may have to pay travel expenses or some minor fees for certain specific classes. Initial training is covered by the franchise fee and application fee, in addition to other assistance associated with the opening of the restaurant. Those fees do not include any development or startup costs for the restaurant.
A franchise can rely on Wendy’s suppliers for products and services. And Wendy’s quality assurance department makes sure that the store maintains consistency in quality and services. Wendy’s also offers digital services and mobile ordering and payment systems as well as assistance for the franchisee with ordering and reporting programs.
Is a Wendy’s franchise right for you?
Buying a Wendy’s franchise is a big investment but there is a potential for large returns as well, especially for business owners who have restaurant management experience and significant financial resources. Same-store sales is one metric for restaurant chains by which you can measure the company’s performance.
In 2018, Wendy’s restaurants worldwide generated a total sales revenue of $652 million, up 4.6% from 2017. Same-restaurant sales — sales after new restaurants have been open 15 continuous months — in North America increased 0.9%. This annual growth rate was not as great as the 2.0% growth rate in 2017 and the 1.6% figure in 2016.
Note that company-owned stores’ sales rose faster than franchised stores because they can buy equipment, inventory and other items at lower prices or they may own, rather than lease, their property.
You can learn more about the costs and expectations of franchisees in Wendy’s Franchise Disclosure Document, a legal document required by the Federal Trade Commission. You can do your own homework about Wendy’s corporate finances and goals by reading its annual reports or quarterly earnings reports. If the financial statements are difficult for you to understand, an accountant can help you.
How to finance a Wendy’s franchise
Owning a franchise gives small business owners flexibility and independence with the added support of a larger organization, but it also requires large upfront costs in addition to the continuing ones that we’ve already discussed.
Wendy’s requires you to have liquid assets upfront. If you have to borrow additional funds to purchase a franchised Wendy’s, there are a few options:
Franchise comparison and search tools
A few financial companies specialize in helping franchise businesses find funding, usually by matching franchisees with lenders. Consulting or working with one of these matchmaker advisors could save you headaches and frustration when you are trying to compare options for financing your Wendy’s. Companies that allow for comparison among lenders and connect potential franchisees to financing options include BoeFly, FranFund, Franchise Registry, ApplePie Capital and FranchiseFinancing.
Many banks provide funding to franchisees, so this should be a top-line option for those looking for a loan.
Each lender will have different eligibility requirements and loan products. But in general, banks will require financial statements, tax returns and proof of profitability. You will also need a good credit rating, a solid application package, a down payment and some form of collateral. If the franchiser, in this case, Wendy’s, is successful, it indicates that you, the franchisee, will be able to make payments of a profitable business. Franchise owners also have an easier time accessing business lines of credit because they are associated with an established company.
You will have a smoother process of financing a Wendy’s if you work with a lender that has experience funding franchises. A few major banks, including Bank of America, HSBC and PNC have specific programs targeting franchisees. Smaller institutions specialize in franchising in specific industries, such as Balboa Capital and restaurant franchise funding from Oak Street Capital.
The U.S. Small Business Administration (SBA) offers specific loans to finance franchises through SBA-approved banks — the SBA partially guarantees the loan if you default. These loans tend to have higher limits and lower rates than traditional bank loans, but also may be more difficult to obtain.
The 7(a) loan, the SBA’s primary loan for small business owners, allows you to borrow up to $5 million, with interest rates ranging from 7.75% to 13.50%. Loan terms are up to 25 years and 10% in collateral is required for loans over $350,000.
However, SBA loans come with strict requirements, including proving that you don’t have the ability to obtain a loan from traditional lenders. The application process with SBA’s partnering banks can also be extensive.
The bottom line
It’s a hefty investment to buy a Wendy’s franchise. Before you make the decision, assess whether you have the financial abilities and business skills to open and operate a fast-food restaurant. It’s also important to ask yourself what your goal is with buying a franchised Wendy’s.
You need to do your homework by researching Wendy’s finances, including sales, revenue, net income and costs for individual stores, and asking the right questions. When it comes to financing, if you need to borrow funds, you should compare and evaluate financing options to pick the best one with a reputable lender that offers the most competitive rates and terms.
The information in this article is accurate as of the date of publishing.