In the past week, three people have raved to me about various Brazilian churrascaria steakhouses, particularly Fogo de Chao in Chicago and Las Vegas. Unfortunately, the restaurant does not franchise. It’s a unique approach to dining, especially for the many low-carb carnivores, myself included. People always mention Fogo de Chao’s outstanding salad bar, and how they made the mistake of filling up on salad and couldn’t eat that much meat (beef, pork, lamb and chicken on skewers is carved at your tableside).

The restaurants follow a centuries-old tradition in which “gauchos,” or Brazilian cowboys, put meat on a stick and cooked it over an open fire.

The only franchised Brazilian steakhouse I’m aware of is Fire of Brazil ($50,000 franchise fee). This was interesting regarding Fire of Brazil:

If Florida isn’t far enough, how about the Kingdom of Bahrain, Saudi Arabia, Kuwait, Lebanon or Algeria? Those are some of the Middle Eastern and North African locations that could soon see a Fire of Brazil restaurant. The company has sold the master franchise rights for the Middle East and North Africa to a company called the Living Concepts out of the Kingdom of Bahrain. Spokeswoman Mary Lou Rodgers said it also plans to sell franchises in this country. Right now, the company has four restaurants — two in the Atlanta area, one in Wellington, Fla., and one in Nashville.

The concept is strong and proven popular. Fogo de Chao paved the way and proved the right formula, and soon I’m sure entrepreneurs will franchise nearly identical concepts in the coming years. Done right (see Fogo de Chao or El Gaucho), this concept in my opinion will be a winner over the next decade.

Tim Horton’s, a 2,885 upscale coffee and donut outlet, is entering the public capital markets of Canada.

The reporter characterized the IPO as “destined to go down as the most popular IPO this country has seen to date” and “The frenzy around this doughnut deal is putting Google to shame”. Is the author over embellishing? Tim Horton’s IPO buzz seems to be more in line with fellow Chipotle’s enthusiastic IPO, not the crazed delirium over Google’s IPO.

Is going public good for franchisees? I haven’t explored arguments on both sides, but my initial impression is no. The pressure to increase margins, meet analyst expectations, and pay for the increasing regulatory costs is going to increase the pressure for franchisors to squeeze more money and profit from their relationships with franchisees.

Why does this site often post negative horror stories about franchisees who don’t do enough due diligence or franchisors who appear to take advantage of naive entrepreneurs? Because the “scared straight” method often works, and you’ll be happy you spent a little extra time researching the financial and legal aspects of the business. The franchise salesman and commissioned consultants rarely fully apprise the franchisee of the risks and obligations from entering into a legal contract that could potentially have the franchisee on the hook for hundreds of thousands of dollars.

Franchising can be wonderfully prosperous and rewarding endeavor, or it can be an angry and bankrupting experience. The later can usually only be controlled BEFORE you pay the franchise fee and sign the franchise agreement. For example, if your franchise agreement grants the exclusive territory in such a way that another location can be theoretically constructed 2 blocks away, perhaps you are best to walk away if this will obviously overly dilute your customer base to the point of unsustainable sales. Franchisors are notorious for milking profitable locations by stacking franchises as close as legally possible. Why? Because franchisors make more money from each additional $25K franchise fee plus the additional gross revenue, and two stores will always gross more than one. Some poorly organized and managed franchisors get themselves into a virtual Ponzi scheme where the company must keep earning increasingly more franchise fees to support their growing franchisor operations that is not sustainable by royalties alone. If the franchisor won’t carve out a territory big enough for you to make a comfotable profit, you don’t have to ask why, you know why.

Here is an extreme example (Caught in a Franchise Fiasco, The Toronto Star, Mar. 14, 2006) of what can happen when the franchisor-franchisee relationship evolves in unanticipated ways.

From the forum:

March 20 ’06 issue of NRN cover story states that KFC franchisor-mandated remodels ($250-500K per unit) may force smaller franchisees to sell; www.nrn.com

When buying a franchise, remember to ask about any upcoming mandated capital improvements. Particularly in the hospitality industry, many franchisors have a schedule for upgrades/remodels; this is necessary to keep the brand image fresh.

What appears to be a “bargain” price from a selling franchisee may cost more than an “expensive” alternative outlet if the higher-priced outlet has the current decor and the cheaper outlet will be needing a facelift.

Hat Tip: Paul Steinberg

In the forum, we batted around the new meal preparation and assembly kitchens concept such as Super Suppers and Dream Dinners. There are lot of non-franchised startups, and they already have their own trade association called the Easy Meal Preparation Association. The general sentiment from the forum is that this concept is a “maybe”, with the big questions being

1. how much you can charge customers (and margins) before customers will just order restaurant takeout?
2. is the change of behavior and lifestyle too much to create a solid base of loyal customers?
3. how many competitors, if any, can enter the market and you still survive?  what if they have slightly lower prices and a nicer, larger facility and more creative menu?

A surprising celebrity newcomer is jumping in this arena – Suzanne Somers. Inc. magazine did a feature article and mentioned this tidbit.

And next? Suzanne’s Kitchen, an entry in the red-hot meal prep category, in which customers move from station to station inside retail stores, assembling family-size dishes from chopped meats, vegetables, and sauces. The first two outposts of Suzanne’s Kitchen, which Somers and her husband and business partner, Alan Hamel, expect to franchise, will open later this year.

Why is she getting in this business? I think it has more to do with an attempt to leverage her brand name to command higher franchise fees rather than this being an inherently superior and profitable business model. Certainly Somers will draw media attention to the industry, which currently suffers badly from low recognition amongst its target audience.

A banker answers questions about the SBA’s guaranteed loan program @ Franchise Times. Here is a summary:

1. When is a SBA loan a good choice for borrowers?
• anytime
  
2. What can I finance with a SBA loan?
• any legitimate business need
3. How much down is typical?
• 10%-30% (higher for startups)
4. What do I do first?
• write a business plan and see your banker
5. What are some basic term guidelines for an SBA 504 and 7a program?
• 7a: These are general small business loans. The term of the loan tends to mirror the use of funds (how long you can amortize the asset, length of equipment loans are based on the life of the equipment). They’re one through the bank but SBA guarantees a portion of the loan.
• 504: These are restricted to expenditures that will spark job creation or retention. Generally used for long-term fixed assets and facilities (not working capital). Max net worth of applicant must be under $7.5 million.
6. Can they be used together?
• Yes.
7. Can you give me an example of a deal that works with both 7(a) and 504?
• restaurant
8. How does a construction loan work?
• Short-term loans that typically require interest-only payments during construction and become due upon completion.
9. How is the money I borrow actually disbursed?
• The bank distributes the money as needed and planned. The contractor will submit a draw request monthly to cover the labor and materials for work completed to date.
10. How long does the draw approval process take?
• Ideally 3 days
11. How long does it take to obtain a construction loan approval?
• No timeframe given

Quiznos is facing more class-action lawsuits over delays in getting locations approved for its franchisees, and keeping their $25,000 franchise fee.

More from the Denver Post article:

The case alleges “deceptive business practices” in the company’s franchise sales method and demands that the company stop selling franchises in New Jersey until all existing franchisees get locations or are refunded their franchise fees.

In a separate case filed in December in the Ontario Superior Court of Justice, the plaintiffs allege that the company is violating Canadian franchise law by not disclosing to potential franchisees full details and processes for securing locations.

Quiznos, of course, denies violating any law.

Hat tip: Paul Steinberg

Franchisors usually carefully craft the franchise agreements to enable wiggle room in stalling or denying approval of locations. Warning flags include evidence of high franchisee turnover or higher proportion of revenue from non-royalty revenue which can sometimes be gathered and deduced from the UFOC Items 19-21. I know of a major dating franchise where one location in a big city has been sold 3 times over in the past few years, with the most recent franchisee begging the previous franchisee who sold it to him to take it back for FREE because it was draining money. If he closed the business, he would have breached the franchise agreement and would be obliged to pay tens of thousands in fees, charges and damages.

Update: March 1, 2006
You can track the Ontario case on Goldman Sloan Nash & Haber’s web site, the Canadian law firm representing the plaintiff. The firm posted the detailed statement of claim (complaint) against Quiznos.

Hat tip: Michael Webster

A participant in the discussion forum brought up a good point whether a “delivery only” local restaurant business was an especially good business model. Steak-Out was the franchise mentioned, which delivers char-broiled steak and chicken dinners, salads, sandwiches….you get the idea. Why do you get the idea? Because the food is similar to the restaurants we all know – Applebee’s, TGI Friday’s, and Chili’s. The difference is Steak-Out is delivery or pickup only, and the others are sit-down AND are starting to contract out delivery to local entrepreneurs.

Having a dinning room exposes your menu to more people. In turn, more people will be familiar with your menu and more likely to think about using you for delivering business lunches or family dinners. The more you are exposed to a product, the more likely your to think of it when the time for the service comes. It’s partly a numbers game, and I’d rather have my customers experience my product in person in my controlled atmosphere then exposing them to my product on a piece of paper, coupon or flyer.
I’m not saying delivery only business are a bad idea, I just wouldn’t want to take the risk when my competitors out-of-the-box are going to be exposed to exponentially more customers. That raises my marketing costs. Pizza is the only food that has carved out room for delivery-only stores. Papa John’s is going from delivery only to delivery + sit down.

A 75-unit Subway franchisee group in South Florida bought the telephone number 888-SUB-TO-GO. Orders are processed via the store’s POS system and then delivered by Subway employees. Can a delivery-only subshop startup and compete with that? I doubt it, and I wouldn’t want to risk my capital trying.

If you are buying a restaurant, you should consider what provisions in the franchise agreement address delivery. If you think delivery may be an important distribution channel for revenue and competition reasons, then only consider businesses that are willing to address the issue before you hand over your franchise fee.

One concept I heard about several years back that I still think is a good idea are mobile oil changes franchises.  Specifically, those franchises that contract with large businesses to service their employees’ cars in the parking lot while they’re working.
Providing businesses and office buildings (especially in the suburbs where everyone parks in the same lot) with on-site routine services such as dry cleaning, child care, oil changes, and other concierge type is tremendously convenient. Often, in the case for oil changes, there is only a time saving benefit and no extra cost to the employer unless they want to subsidize it.

The oil change “van” is customized to hold the equipment to rapidly suck out the old oil and pump in the fresh oil (I’m sure companies use different methods, but that is how I understand one method). While the employees are working, the oil changer collects the keys and car descriptions. In a few hours and $25 later, the employee has a freshly oil auto. The employer has probably gained a half-hour of work from the employee. Maybe the franchisee offers other services, like windshield repair, minor maintanence, car detailing, tire changes, or inspections…maybe even a mobile mechanic.

I would feel comfortable selling and coordinating this type of service with corporate customers. You have a very compelling story with real cost and time savings for the employees.

A quick search on my favorite search engine turned up these companies:

• Oil Butler
• Lube N’ Go
• On Site Lube
• …readers can post more in the comments

If you want to start this business on your own, the equipment per truck costs about $10,000.
I haven’t heard of the big guys (Penzoil, Jiffy Lube, you know who they are) getting into this, but don’t be surprised if the do. In that case, the no-name small franchisees will be squeezed hard.

Here is some guy selling a biz plan for starting a mobile oil business for $25 by email. It looks a little shady so be careful. If you are going to go into this business on your own, you had better already have related experience working in the industry and know exactly how to sell employee benefit services.

I would feel most comfortable in this business if it was tied to a traditional quick lube service center. It gives you a revenue base and additional word-of-mouth. And, I’d only do this if I thought I could employ two or three trucks at least 9 months out of the year.

Papa Johns is building “restaurant” style stores. Good idea.

I still don’t understand why there are virtually no drive thru by-the-slice pizza franchises. There are plenty by-the-slice franchises in malls, but not stand-alones with drive thrus.

The site’s main RSS feed is only showing the comments instead of story posts as it is supposed to. Sorry, about the problem. It is a known bug in WordPress and has been reported, and I’m guessing it will be fixed a week or two by the developers. Thanks for you patience.

UPDATE Feb 19, 2006: THIS BUG HAS BEEN FIXED!

I have close friends in the pretzel and snack-food business (and worked in the snack food industry for a short time), so I think I can speak from an especially knowledgeable perspective on this. Stores like Auntie Anne’s, We’re Rolling Pretzel Company, Pretzel Time (by Mrs. Fields), and Wetzel’s Pretzels must have some of the highest margins in the QSR business. The dough is literally a few pennies per serving, if that. The seasoning and butter is another few pennies, and your selling the product for almost $2 each. I’m sure the franchisors significantly increase the cost of dough and supplies force margins more inline with the typical mall store.

Fresh pretzel businesses need very little square footage, and can often be served from a kiosk. They have the added advantage of smell in a mall, drawing people in with the scent of fresh baked buttery bread (OK, can you tell I love soft pretzels?). Most malls already have at least two pretzel franchises, but some do not. Depending on the rent, storefronts along a busy downtown street can capture enough of the afternoon foot-traffic to possibly turn a profit.

Let’s look at some fees charged by franchisors:

Pretzel Time:

• Initial Franchise Fee: $25,000
• Ongoing Royalties: 7% of Gross Sales
• Advertising Fee: 1-3% of Gross Sales
• Initial Training Fee: No charge for first two individuals
• Total Estimated Initial Investment: $107,000 – $238,500

Wetzel’s Pretzels:

• Initial Franchise Fee: $30,000
• Ongoing Royalties: 6% of Gross Sales
• Advertising Fee: 1% of Gross Sales
• Initial Training Fee: No charge for first two individuals
• Total Estimated Initial Investment: $102,000 – $211,000

Auntie Anne’s:

• Initial Franchise Fee: $30,000
• Ongoing Royalties: 7% of Gross Sales (paid weekly)
• Regional Advisory Council Dues: $300/year
• Audit Fee: All expenses unless if receipts were understated by more than 2%
• Advertising Fee: 1% of Gross Sales (paid weekly)
• Transfer Fee: $3,000
• Franchise Renewal Fee: $15,000 or 50% of current franchise fee, whichever is greater
• Lease Renewal: $2,000
• Polling Set-up Fee: up to $400
• Polling Recurring Fee: up to $100 per month as incurred
• Lease Documentation Late Fee Penalty: $500
• Relocation of Business Fee: 25% of current franchsie fee
• Franchisor’s Lost Profits Following Termination: Royalty and Advertising Fees for the remaining term of the Franchise Agreement plus the greater of 18% per annum for the interest or the highest possible amount under your state’s law
• Operating in Event of Default: $250 + travel + lodging + meals until default is cured
• Initial Training Fee: No charge, minimum of 3 people
• Service Fee: $250/day of help per person
• Franchisee must cover legal and incidental costs incurred by franchisor if franchisor brings an action against the franchisee.
• Total Estimated Initial Investment: $192,550 to $382,500

* I took the time to list most of Auntie Anne’s fees; Wetzel’s and Pretzel Time probably have similar fees

They are all similar, with Auntie Anne’s having the highest initial investment, probably due to their more ornate store style and you are buying into a more valuable and recognizable brand. I heard it’s near impossible for an individual franchisee to open up an Auntie Annie’s anymore in the U.S.A. (Auntie Anne’s Director of Franchise Sales seems to indirectly imply otherwise in the comments), but most other brands are actively seeking individual franchisees. Though Auntie Anne’s is the brand that most everyone knows, my guess is brand loyalty is low particularly for the reason that if you want a pretzel in a mall, you buy what’s available, whether that be Auntie Anne’s, Pretzel Time, etc. Several franchisrs predictably have expanded their menu to include hot dogs, frozen custard and burgers, or from the other direction to include pretzels in their existing menu. When evaluating which franchise system to buy into, I’d pay special attention to the franchisor with the lowest food and supply costs (a location will only support a narrow range of sales no matter what the franchise, so lower costs and fees over the year is very important), and competent level of responsive service. I’d also consider whether there is room for entrepeneurial selling, such as supplying local businesses, schools, or other events with tasty pretzels (the extra sale can make the difference between taking a salary or not).

For those who enjoyed our previous posts on Curves, here is a good background puff article, describing their interesting no frills approach.

A Curves franchise owner:

“We have found a niche — where women who would not necessarily go to a regular gym, feel comfortable here,” Moore says. “Nobody has to dress up — as you see sometimes in the regular gyms — to appeal to men, and they don’t have to here. It’s a very comfortable easy, friendly, supportive atmosphere.”

Description of operations:

A Curves club is basically a large room — usually located in a shopping center — filled with about ten pieces of weightlifting equipment. A recorded voice and a pulsing disco music lead patrons through their workout.

Thirty seconds working with the equipment at each station alternates with 30 seconds of running in place. The women keep going for 30 minutes and most come to Curves about three times a week…The monthly membership fee is as basic as the workout, between $40 and $50, quite a bargain compared to most health clubs.

Chipotle Mexican Grill Inc., a majority owned subsidiary of McDonald’s Corp., plans to offer 7.9 million shares for between $15.50 and $17.50 a share in an initial public offering, according to a regulatory filing on Friday.

http://www.chicagobusiness.com/cgi-bin/news.pl?id=18917

UPDATE: Jan 25, 2006

Chipotle may sell stock at $18 to $20 a share, up from an earlier estimate of $15.50 to $17.50 a share, the Denver-based company said in a regulatory filing

UPDATE: Jan 26, 2006

After the 7.9-million-share offering priced at $22 a share, Chipotle shares doubled to close at $44 Thursday, after reaching as high as $48.28. Chipotle sold 6.1 million shares in the deal, raising about $134 million, while its parent, McDonald’s, sold 1.8 million shares.

The 13-year-old burrito and taco purveyor currently has about 480 stores and produced revenue of $471 million in 2004, up 49% from 2003.

At $44, shares of Chipotle are trading at roughly 80 times earnings. Meanwhile, Applebee’s and Ruby Tuesday are trading closer to 20 times earnings, making Chipotle’s valuation look laced with some irrational exuberance, even when its growth prospects are accounted for.

Part of the IPO proceeds will be used to pay down a $30 million line of credit with Chipotle’s parent.

Here is a list of companies that have voluntarily signed up with the SBA for streamlined franchisee loan application reviews.