Ryan is an attorney and valuation specialist residing in Chicago. He chronicles his thoughts and research on FranchisePundit.com. You may reach him by email ryanknoll@gmail.com or mobile telephone 312-212-3423.
BlueMauMau recently had an article about the increase in “better burger” franchises. I too have seen in the past two years an increase in the high-end burger space from both independent stores like The Daily Grind in Port Orange, FL (great store-baked buns) and franchises like Cheeburger Cheeburger and Five Guys. I recently performed a valuation on a group of high-end burger franchises for a client and I walked away with mixed feelings. The key driver of profitability was the lease costs, and the key driver for sales was location. The basic formula for a decent ROIC (return on invested capital) was convenient, high traffic location with a rent at or below 6% of gross sales. This ends up being the simple formula for most restaurants. Your restaurant’s cost targets should be:
- Prime Costs (Food and Labor) a combined 60% (about 30% each depending on type of restaurant),
- rent below 6% of gross sales,
- interest costs below 1.2%,
- owner’s net profit at least 10%,
- which leaves about 22% of your gross sales left for overhead, maintenance, royalty payments, advertising, and other costs.
As you can see, an 8% royalty and advertising costs for a franchise cost takes a big chuck out your remaining 22% budget.The HARDEST part of predicting a restaurant franchise’s success is forecasting sales. Forecasting sales requires an analysis and comparison of other local restaurants, proximities (closeness to road, attractions, anchor stores, etc.), parking/drive thru, local demographics, competition, signage, brand awareness, and many other details. If your sales projections cannot confidently support sales at least 20% more than your break-even point, don’t do they deal.
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Hey, this is a really good checklist. I think anyone who is serious about buying a franchise needs to extensively review the franchise agreement.
Hey, this is a really good checklist. think anyone who is serious about buying a franchise needs to extensively review the franchise agreement.
This has to be among the Pundit’s most profound posts. IMNTBMFHO, far too many people lately seem to be preaching a mantra of vetting an offering from a legal perspective without enough attention being paid to the fundamentals of good business.
I have often opined that I believe a very rigorous study that attempts to test the hypothesis that the majority of a businesses profitability is tied to situs, financing, industry vertical and macro economics. I believe the results would be analogous to the studies done on actively managed mutual funds verses indexes.
As an overt statement I would say the primary value in retail franchise concepts is related to the ability to secure A locations for the business.
I have examined this closely in several large metro areas where branded franchise concepts compete against roll-your-own and I have been unable to discern a customer difference. In interviewing people situs and the ability to get seated or in and out are the primary consideration.
This would imply as an adjunct to the afore mentioned hypothesis that some of the perceived success and therefore value of franchising is simply happenstance correlation, i.e. franchises currently secure more A locations, which drive customer counts, and under a per unit of sale model where each unit is above the costs of good sold, it drives a perception that franchises provide a superior venue. However as I pointed out, looking at commoditized concepts in large metro areas appears to belay this believe(for example deli/sub/sandwich concepts in Manhattan – try around the 6th Avenue Hilton).
Back to the Pundit’s fine comments: Ryan’s blog entry consists of a number of astute business factors that are concept and format agnostic. People would be well served to give them heed.
FuwaFuwaUsagi
It’s definitely tough to own a business right now, but it’s still good to know that there some great opportunities out there.