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Franchising advise in food industry


michiganlambo
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I am looking to open a franchise store with one of the national brands pizza places and am looking for any advise from anyone that is a franchisee in the food industry.

 

The opportunity sounds promising, and I'm finally in a position financially where I can make this happen. I'm looking to open a store with the idea to open a few more in the next few years... I know competition is tough and location is important... but I'm new to the franchising food industry.

 

Does anyone happen to be in the franchise food industry that is willing to share some thoughts, dos, don'ts... etc

 

Appreciate the help.

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My wife had a franchise sandwich shop. It certainly made for a tough time for her (and us).

14 hour days, 7 days a week. No employee availability or loyalty. The franchise insists you by all products (ie cleaning chemicals, bags, napkins etc etc) at a much higher price from their vendors. The franchise mails out loss leader coupons without "break even" opportunities. Break ins/theft, obnoxious customers, something is always breaking (again expensive preferred repair vendors only) .

She could have hired a manger to take over some of the workload, but that leaves you with much less profit.

 

My $.02 , buy a business that is not a franchise and not open 7 days a week. You will be much happier.

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Thank you for the input Synystr...if I may ask did your wife end up selling it or did she stay for the term of the contract and just didn't renew (in my case it would be a 10 yrs term)?

 

Yea, I figured long days/hours will be part of any startup business, and thats been the case with some of the other business ventures I've been involved with.

 

The only thing that's attracting me to the 'franchise world' is the brand recognition/ recipes already proven/ processes in place.... I agree with the supplies, that's one of the downfalls.... I can see both sides as they want the consistency and they claim it's not a 'business' reselling the supplies, but it is a premium thats for sure....

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Don't do it. Consider this a serious warning.

 

I know people who own exactly what you're talking about (pizza franchises) in the region you're talking about. Would you mind sharing the franchise brand you're thinking of and disclosing your upfront investment amount? I could provide you with much guidance on some of these. They are good friends and I've reviewed their financials many times and given them advice. I certainly wouldn't invest in such things. Far better returns elsewhere and far more liquidity and lower risk.

 

Would you also mind sharing your ROI/profitability expectations and goals?

 

Unless you're planning on owning multiple locations doing $1M+ in annual sales, you should expect little more than buying yourself a full-time job. Why invest $200K to earn $50K working full-time when you can invest $200K elsewhere and just go work a full-time job earning more? This is not a business of never-ending, passive income. If you want a lot of passive income, you need to be the franchisor, not the franchisee.

 

By the way, the 10 year, full-term performance found in many franchise agreements is very serious and there is a not insignificant amount of litigation regarding how enforceable it is even when going out of business. It is case by case and jurisdiction dependent. Outcomes vary considerably.

 

Consider the following:

 

You sign a 10-year term. Minimum royalties are $20K/year, or 5% of gross receipts. You give it a shot and go out of business in 3 years. Maybe you're simply losing some money and it's not worth the time. Why stay in business for 7 more years if you lose $10K/year? Well, even if you're losing money and become insolvent, they can sue you for 7 years of future royalties. So even if you lose your ass, they can still possibly make you pay them up to $140K. Yes, that's correct, they can force you to pay royalties on an unsustainable, failing business. Why? Because they're paid on gross receipts, not net income. $10K loss to you on $400K in sales is still $20K in income to them.

 

Now, I'm a good guy and I wouldn't do that to someone, but many franchisors aren't nice guys. They could terminate the agreement and wish you luck, they could ask for full-term payment, or they could negotiate something in between. Who knows. Remember, they get paid royalties whether you lose money or not. They have no problem with you making 0% ROI so long as they're getting paid. They're paid on gross receipts, not profits. It's not profit sharing. That will be their stance and it has precedence in court.

 

And that's just if you go out of business. If you want to sell it to someone else or sell the assets to someone to open something else up (not the same franchise), your franchisor will no doubt have a lien on your assets and first right of refusal on all assets and your lease. They could even refuse to let you re-assign your lease. In short, they can really screw you over if they want.

 

And that's not all. You probably have a personal guarantee not only with the franchisor, but also with your landlord. That means your LLC won't protect you if it fails. You'll be personally on the hook.

 

Honestly, I would not do it. If you want to go into the pizza business, go independent and invest in yourself and your own company. The franchisor isn't just giving you their name for free. They have a very significant amount of leverage over you. These big national franchisors are large corporate entities and you're just a name on a contract to them. There is no guarantee they treat you "fair" and give you a "fair" out if things don't work out. They won't sit down and have a beer with you and shake hands and terminate the agreement since it's the "right" thing to do. First thing they'll probably do is have their lawyer contact you and tell you that you owe them $X. Then it's on you to get a lawyer and negotiate out of it.

 

You'd better be very, very committed before you sign a 10-year contract.

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Don't do it. Consider this a serious warning.

 

I know people who own exactly what you're talking about (pizza franchises) in the region you're talking about. Would you mind sharing the franchise brand you're thinking of and disclosing your upfront investment amount? I could provide you with much guidance on some of these. They are good friends and I've reviewed their financials many times and given them advice. I certainly wouldn't invest in such things. Far better returns elsewhere and far more liquidity and lower risk.

 

Would you also mind sharing your ROI/profitability expectations and goals?

 

Unless you're planning on owning multiple locations doing $1M+ in annual sales, you should expect little more than buying yourself a full-time job. Why invest $200K to earn $50K working full-time when you can invest $200K elsewhere and just go work a full-time job earning more? This is not a business of never-ending, passive income. If you want a lot of passive income, you need to be the franchisor, not the franchisee.

 

By the way, the 10 year, full-term performance found in many franchise agreements is very serious and there is a not insignificant amount of litigation regarding how enforceable it is even when going out of business. It is case by case and jurisdiction dependent. Outcomes vary considerably.

 

Consider the following:

 

You sign a 10-year term. Minimum royalties are $20K/year, or 5% of gross receipts. You give it a shot and go out of business in 3 years. Maybe you're simply losing some money and it's not worth the time. Why stay in business for 7 more years if you lose $10K/year? Well, even if you're losing money and become insolvent, they can sue you for 7 years of future royalties. So even if you lose your ass, they can still possibly make you pay them up to $140K. Yes, that's correct, they can force you to pay royalties on an unsustainable, failing business. Why? Because they're paid on gross receipts, not net income. $10K loss to you on $400K in sales is still $20K in income to them.

 

Now, I'm a good guy and I wouldn't do that to someone, but many franchisors aren't nice guys. They could terminate the agreement and wish you luck, they could ask for full-term payment, or they could negotiate something in between. Who knows. Remember, they get paid royalties whether you lose money or not. They have no problem with you making 0% ROI so long as they're getting paid. They're paid on gross receipts, not profits. It's not profit sharing. That will be their stance and it has precedence in court.

 

And that's just if you go out of business. If you want to sell it to someone else or sell the assets to someone to open something else up (not the same franchise), your franchisor will no doubt have a lien on your assets and first right of refusal on all assets and your lease. They could even refuse to let you re-assign your lease. In short, they can really screw you over if they want.

 

And that's not all. You probably have a personal guarantee not only with the franchisor, but also with your landlord. That means your LLC won't protect you if it fails. You'll be personally on the hook.

 

Honestly, I would not do it. If you want to go into the pizza business, go independent and invest in yourself and your own company. The franchisor isn't just giving you their name for free. They have a very significant amount of leverage over you. These big national franchisors are large corporate entities and you're just a name on a contract to them. There is no guarantee they treat you "fair" and give you a "fair" out if things don't work out. They won't sit down and have a beer with you and shake hands and terminate the agreement since it's the "right" thing to do. First thing they'll probably do is have their lawyer contact you and tell you that you owe them $X. Then it's on you to get a lawyer and negotiate out of it.

 

You'd better be very, very committed before you sign a 10-year contract.

 

 

Incredible response. Thanks for sharing your insight/experience.

 

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Lightning - I appreciate in taking the time to respond.

That's one of my biggest concerns as between royalties, advertisements funds etc. 10+% goes away to the franchisor before I can even call a penny to my name...

You reinforced some of my concerns. I will send you a PM later with the details as Im not sure of the rules ( don't want the mods upset) and by no means am not trying to promote any pizza brands...but I may have to look at other options.

 

 

Rawr - thank you for the article. Very interesting, I think I would consider him more on the franchisor side of the business as opposed to a franchisee, don't know maybe he has stores also and might be making a little on both sides.

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Before I started my company, I looked at several franchise competitors. After going through the FTD process it became clear many franchisees were very unhappy with the franchisor. Also, the territories were small and expensive, minimal economies of scale gained by expansion, complaints of favoritism, other franchisees damaging the name by being poor operators, being forced to update decors, lack of support, expensive ad campaigns, and promotions which they had no control over, it went on and on.

 

However talking with the franchisors and especially the franchisees (I probably spoke to 30 different franchisees from 4 competitors) was extremely helpful. Basically, I gained a Ph.D., in how to start and avoid common mistakes which saved tons of $$. It also allowed me to put more capital into the business rather paying a franchisor. My supply costs were lower and higher quality than a typical franchise. Not being limited by a territory agreement, there were no constraints on growth. Hence I got to an operating profit 3 times faster than a typical franchise and quickly grew much larger than a typical franchise where I gained significant economies of scale. We were twice as profitable as a franchise operation, we were leaner and could react more quickly to changing market conditions. When I sold it, there were no constraints either.

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Exitr - thank you!!

I'm not sure how to edit the reply... but that was meant for you....I just sent you a PM.

 

Exitr - I appreciate in taking the time to respond.

That's one of my biggest concerns as between royalties, advertisements funds etc. 10+% goes away to the franchisor before I can even call a penny to my name...

You reinforced some of my concerns. I will send you a PM later with the details as Im not sure of the rules ( don't want the mods upset) and by no means am not trying to promote any pizza brands...but I may have to look at other options.

 

 

Rawr - thank you for the article. Very interesting, I think I would consider him more on the franchisor side of the business as opposed to a franchisee, don't know maybe he has stores also and might be making a little on both sides.

 

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I have a close friend here in Australia that owns a franchise sandwich business. I wouldn't advise anyone to get into a food franchise business unless it was one of 2 things:

 

1. At a "captive audience" place such as an airport waiting area.

2. The store was a McDonalds. I dont know about over there but here it's constantly got customers there at all hours of the day.

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Some VERY good advice given already.

 

I owned multiple (5) food franchise locations for several years. I bought them one at a time and they were in bad shape losing thousands a month for multiple reasons. I spent a couple years going through them, implementing new procedures to "make them right" as I called it. They all became profitable and I started selling them off.

 

I worked my ass off 7 days a week at each location in order to accomplish this......no such thing as a 40 hour week..........

 

In the end did I have success, yes....

 

Do I consider myself lucky for having success....Yes!

 

Did I learn a lot about business in general, what to do and what NOT to do....Yes!

 

Was it worth it considering the ROI.......HELL NO! I'll never get back the time I spent......

 

My advice is this... If this is something you are deeply passionate about, like you get butterflies and shit every morning thinking about this being your career the rest of your life, then great! Go for it! but if you are going into a "franchise" thinking you are gonna have multiple locations, make all this money and stop by and check in on things in the next "few" years then stop now.

 

Not trying to be a downer, just giving you my honest opinion based on my experience.

 

Best of luck in whatever you decide!

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Thank you everyone for your feedback and advise;

I was looking at it more from an investment point - not necessarly 'buying myself a job' kinda scenario... even thou any investment requires a certain degree of dedication/research/work etc no matter what it is...

 

Seeing SOOO MANY franchises around on every corner, and not just in the food business, I figured that would be a desirable space.. It sure sounds like there's better ways to get ROI then opening a $250k business/store... maybe the $1+mil businesses/stores have a different perspective?

 

Thank you everyone so far, and would like to hear more if anyone has experience in this space..

 

I have to say I was hesitant, thus posting on here looking for unbiases opinions and now I'm thinking there may be other options outthere..

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I agree with everyone's comments and would also suggest against it.

 

In short, 1) operating a franchise is essentially printing money for the franchisor. 2) unless you are in the food wholesaling and distribution sector, food industry on a retail basis requires a different mindset and is very challenging. Add the two together and chances are the problems will multiply at least 4X. You would be lucky as a franchisee to survive all that and even if you come out profitable, the time and effort investments ratio would not be linear. You are much better off doing the same on your own as a entrepreneur. Good luck.

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I would not touch a pizza franchise or any food franchise as a passive investment period , and that includes McDonald's , which in my opinion would be the best franchise to get , should you be totally adamant about the idea . The food industry is very tough to begin with and , besides all the issues that the guys pointed out that are all valid , not being hands on in an industry that is so dependent on people is a fabulous formula for being taken advantage of and being ripped off.

 

Whatever you are considering as a passive investment , make sure it is something you can put checks and balances in place that allow you to have a handle on the business from anywhere .

Manpower , staff is always your weakest link , that is why banks introduced ATM's , so the less you have to rely on people , the further ahead you will be.

 

Good luck

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Unfortunately in the fast food industry you will have to deal with a lot of unreliable teenagers, I know two guys here who lost their shirt on similar ventures, the food industry is very hard work, I wouldn't have the guts to take it on.

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My wife had a franchise sandwich shop. It certainly made for a tough time for her (and us).

14 hour days, 7 days a week. No employee availability or loyalty. The franchise insists you by all products (ie cleaning chemicals, bags, napkins etc etc) at a much higher price from their vendors. The franchise mails out loss leader coupons without "break even" opportunities. Break ins/theft, obnoxious customers, something is always breaking (again expensive preferred repair vendors only) .

She could have hired a manger to take over some of the workload, but that leaves you with much less profit.

 

My $.02 , buy a business that is not a franchise and not open 7 days a week. You will be much happier.

 

 

 

sounds familiar, I knew a guy who had 2 Subway stores and he said EXACTLY the same thing.

 

flip side, I knew a guy who had 40ish franchise pizza joints and he was printing $$$ for years,

 

my 2 cents, if you have enough $$$ to roll out big and have lots of stores the economies of scale kick in and you can make a great living, starting with one or 2 stores is a loooong trip to success and there are better ways to make $$$.

 

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I have a close friend here in Australia that owns a franchise sandwich business. I wouldn't advise anyone to get into a food franchise business unless it was one of 2 things:

 

1. At a "captive audience" place such as an airport waiting area.

2. The store was a McDonalds. I dont know about over there but here it's constantly got customers there at all hours of the day.

 

 

I knew a McD owner, they had one store in the mid 80's in a huge mall and they made huge $$$, but that's the exception to the rule, that long reply towards the top of this thread is gospel truth. Back to McD they both worked at McD's for years before they could even get a store, back then it wasnt something you could just "buy". I'm not sure now how that works now, but in the 80's getting a McD franchise was VERY difficult.

 

 

The franchise pitch is just that, a sales pitch to make people feeel comfortable about a business opp that's total bullshit, the guy selling the franchise is the winner, everyone else is a worker.

 

 

run, don't walk.........away

 

 

get creative and invent your own business and invest in yourself NOT someone elses pitch.

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Franchise like everyone says, is a 24/7 365 job. Minimum wage employees are unreliable.

 

That being said, if you can follow a good formula and secure good locations you can do well

 

 

I'm my town there is a Jordanian family that are great at business. They own some pharmacies and 10 dominos franchises. They mint $.

 

I also know a guy who was an engineer scraping by out east. Sounds like that guy kmb. Anyway he saw his uneducated family members killing it with Subway franchises. He came to Cali and bought a couple. He and his wife worked their asses off. They have about 14 stores now. Subway averages about $60k per shop. He now has a good general manager and no longer works. He apparently just bought an estate in the neighborhood that Kinsella is in.

 

Anything takes work. Coming up with your own idea is hard whereas if you can work in a formula franchises are plug and play. You just have to put in the time and get big enough to where it's worth it and it runs itself.

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The restaurant business is a PITA as most others have said. I'll outline below a few suggestions based on my experience.

 

Average unit volume (yearly) = 3x or better the build out cost

$/SF generated = $500+

Full ROI = 2yrs or less

Royalty = 6% or less

 

1) Make sure your franchise agreement is transferable and the business terms remain the same for the buyer.

 

2) If you're purchasing development rights try to extend your target development dates as far as possible and include a ROFR for any new rights being sold in your area.

 

3) Solid lease in place. Ability to assign lease to approved franchisee (without LL approval). No personal guaranty on the lease. 20 years min total (including options). No percentage rent. Limit of liability in place for the tenant entity. This is to protect your exposure and also provide you the option to get out of the lease if a better site comes available during the lease term. Do not settle for a B/C/D location. Pay a little more rent and make sure you are in a good location for your business.

 

4) Tenant Allowance - may be tough to get depending on the RE market but we typically see $30-50PSF on new space. That is with electric, HVAC, and slab in place.

 

5) Solid franchisor. Align yourself with a solid franchisor that is showing good growth. This is important as you'll be able to capitalize on the exit.

 

6) Incentives - ask about reduced royalty/marketing incentives along with reduced franchise fees. Review FDD as these will be disclosed as well.

 

7) Have an exit strategy. Remember you'll need new equipment, remodels, franchise renewal, etc between year 5-10 typically. The exit is extremely important and often overlooked when just getting into a new venture. Most units trade for 3-5X unit level EBITDA. Hot brands on the higher end with less desirable brands trading lower. E and W coast will trade at a higher level as well. Higher EBITDA/unit ($200K+) will also impact the multiple.

 

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Great advice. My wife and I toyed with the idea of "oh we should open a wine bar" or franchise or something. This thread has put all such thoughts to rest.

 

Back to dreaming of a beach house I suppose.

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Yea, it kinda puts it in perspective...that's why I was looking for some feedback from the more experienced people on this board that may have 'paved' this road before.

It's all great advise.

 

 

 

Great advice. My wife and I toyed with the idea of "oh we should open a wine bar" or franchise or something. This thread has put all such thoughts to rest.

 

Back to dreaming of a beach house I suppose.

 

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Great advice. My wife and I toyed with the idea of "oh we should open a wine bar" or franchise or something. This thread has put all such thoughts to rest.

 

Back to dreaming of a beach house I suppose.

 

 

Beach house is a much better plan! At least if it consumes you 24/7 like a franchise, it's time much better spent :eusa_dance:

 

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Beach house is a much better plan! At least if it consumes you 24/7 like a franchise, it's time much better spent :eusa_dance:

 

+1 on Beach House. I got a rental management company that manages mine, while they charge a lot it means I do absolutely zero work and receive a wire once a month. If I want to use it myself I just log onto the website and block off the dates.

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