How To Assess Restaurant Franchise Risks in the Current Market

The restaurant franchise industry is currently split between two dramatically different situations, with some franchises seeing considerable growth and others going out of business.

Whether you are opening, expanding, or closing a food franchise, it is crucial to assess the risks and protect against them. This includes securing the right insurance coverage. When you open your restaurant and invest in expansion, every dollar matters. But one lesson I share with clients is, “If you can’t afford the coverage, you surely can’t afford the claim.”

According to data compiled by Yelp, restaurant openings in 2023 topped the 2022 level by 10 percent. They surpassed pre-pandemic levels to set an all-time expansion record. It’s important to understand that many new franchise owners are also business veterans. They have had success in other areas and spotted market opportunities in franchise they want to either take to the next level, or redefine through a new category offering.  This is a different type of entrepreneur than Ray Kroc, who cooked a great hamburger and then built his dream restaurant.

Franchise owners today know more about business risks, but they still might miss something critical that impacts their financial health. Here is an example: A franchisee’s landlord says the franchise needs general liability insurance before it can occupy the space. At the same time, the franchisee’s bank says the franchise needs property coverage in order to obtain its financing. So, the franchise owner purchases both. Franchisees can, however, combine these two insurances into one business owner’s policy, saving them money.

Another common issue is that new franchise owners can underestimate the range of problems they might be held responsible for on their properties. So that pothole in the parking might be painfully obvious, and yet, if your customer steps in it and injures themselves, your franchise is potentially liable. The same is true for a customer who drinks too much alcohol at your restaurant and gets into an accident on the drive home. Even though they made a poor choice, it can come back on your business. In this case, liquor liability coverage can be a safeguard against what you might not know you need. We can debate this all we want, but we live in a litigious society.

As your portfolio expands and you have multiple franchises, you now have significant value across your operation. This is the time to consider umbrella coverage. You have assets where the damages incurred in one location could have a ripple effect on all of your financial resources. If you don’t have umbrella coverage, it could leave you open to someone seeking more monetary damages from your business than if you had a single location.

Finally, we must address restaurant closures, a topic no one wants to talk about. This year we have seen once successful national chains, such as Red Lobster, Chili’s, and Outback Steakhouse close locations to account for profit losses and business interruption claims that have negatively impacted their revenues. One reason for this is that tradition works, but it doesn’t always work forever in the franchise model. Many people can probably think of a restaurant from years ago whose concept is no longer relevant to diners and has closed.

Another reason franchise locations close is because they often don’t protect themselves against risks that could cause them to go under. A business owner has many items to worry about and should focus on the big dollars, not the little ones. I remember one competitive quote I put together for a long-standing bakery. My coverage was comprehensive, and it included off-premises issues. The bakery chose the other quote, which was cheaper, and its piecemeal approach did not include off-premises. One year later, the bakery experienced an off-premises utility issue that caused massive spoilage. Unfortunately, since its business interruption coverage did not protect off-premises issues, the bakery had to eat the entire claim. That led it to ultimately close.

It is impossible to say whether that bakery would still be in business today if it had more thoroughly protected itself. Maybe the best way to answer that question is to not have to address it at all.

John Cassetta is the Franchise Solutions Manager for Aon, overseeing all client services and insurance coverage consultation with franchises. Prior to his senior leadership role at Aon, John owned and operated his own insurance agency in Rochester, NY from 2013-2022, providing commercial and personal insurance consultation and coverage options, including life, auto and home. From 2000-2013, he was the Market Sales Manager for a national payroll provider, managing an inside sales team of P&C licensed reps selling workers' comp to payroll clients and prospects.