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SO YOU WANT TO FRANCHISE. HERE IS THE MOST IMPORTANT POINT!

Dec 29, 2014
Article #279
Author: Mel Jones

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As a restaurant broker for more than 11 years and a Chief Financial Officer for Universal, the entertainment company, I'm often asked about whether or not someone should franchise their business.  I'm no expert in this space, but I am a financial and general business expert with lots of experience in the restaurant industry.  I've seen plenty of successes and failures. 

So I was asked by Natalie Ramos "I was hoping you may be able to give me some advice on taking her brand national through franchising..."

Of course, every business is different, but there are some basics one needs to stick to if you're considering franchising your business model. 

The most important is profit.  Before you franchise a business you need to make sure you have lots of profit!  As a rule of thumb, the business should net 25% to the bottom-line or more.  That's before you pay yourself.  Why?  Because that's where you're going to make your money as the franchisor.  The greater the profit, the more you're going to take and the higher the chances of success for your franchisees.  Major franchises such as Subway earn their franchisees 10% with well run stores earning 15+%.  I personally think that's thin margins in a business and would like to see 15% or more the the franchisee. 

So how is this achieved in the food business?  Simple.  There are three critical variables: Food costs, labor costs and rent. 

Let me give you an example of what I would consider a failed business model.  There is a national pizza franchise that blasts the airways with advertising, and lately I've heard them looking for franchisees...suckers really. 

In 2014 I had a franchisee that owned 10 stores of this brand and wanted to sell.  I was linking my chops on that deal until I saw the financials. The food and labor costs alone were 63%.  I thought the franchisee was running the stores poorly because a pizza business should be abe to run food and labor costs (prime costs) at less than 50%. The franchisee showed me the corporate manual where it clearly said food and labor costs should be 63%. 

The franchise fee was 13% (royalty and marketing). WOW!  So before one starts his costs are already 76%! How can anyone make money I thought. Add in the rent factor which was about 10% for these place.  Now we're at 86% costs. Add in the insurance, utilities, cleaning, etc. and there was nothing left. 

To better illustrate this concept, the franchisee had one store that sold $360,000 of pizzas a year and broke even. He had another store that sold $560,000 in pizzas and had a net income of $30,000. In other words, on $200,000 of additional sales - that's a lot of pizzas - he only made 15% incremental income. A typical pizza place you have made no less than 50% (prime costs) on those increased sales. 

So if you're going to franchise, build those prime costs at less than 50%.  

I'll write on more topics about franchising in future articles. 

 

                                                                                                                                                                                                                                                      

Mel Jones is one of the premier restaurant brokers in the nation having published hundreds of articles on buying and selling a restaurant and bar business, selling thousands of restaurants in CA., WA and AZ and building one of the most copied business models in the brokerage industry.  Mel started SellingRestaurants in 2004 with the one simple concept, give the buyers the information they need to make intelligent buying decisions without being pestered by a broker or hiding information, prepare the business for market by researching key details that make or break deals and educate the buyer on the buying process to create an intelligent buyer.  Prior to SellingRestaurants, Mel was a Chief Financial Officer for Universal Music Group, the largest music company in the world.  There he participated in more than $11.5 billion of merger and acquisition transactions.  He also work for top companies such as Nestle Foods, USA. He hold a Bachelors in Business Administration Finance as well as attened Law School at Gonzaga University.  Give Mel a call at 480.274.7000 or e-mail him at [email protected] if you have any questions. 

 

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