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8 Key Costs To Consider When Opening A Restaurant

Posted on September 1, 2021September 3, 2021 by Franchise Strategist

8 Key Costs To Consider When Opening A Restaurant
By Gary Occhiogrosso – Managing Partner – Franchise Growth Solutions

Two of the most frequent questions I’m asked at a seminar, workshop, or when teaching a restaurant development course at New York University are; “how much money do I need to open a restaurant, and how do I get the money?” This is the first installment of a two part article answering those questions.

Before we can address how to fund your restaurant, we need first to understand what we’re building and its cost. The type of restaurant you’re opening will determine the amount of money you need. In addition, the kind of restaurant will affect the type of funding and who may have an interest in investing or supplying a loan. Additionally, you’ll need to evaluate how much of your own money you need to provide. That’s because part of the process necessary to convince an investor, banker, or private lender is that you’re genuinely committed to the project. You know the expression, “put your money where your mouth is”

For the sake of this discussion, let’s say you’re opening a fast-casual restaurant. Not a franchise but an independent concept that you have developed on your own. This type of project may require a conventional business loan or an SBA loan. In many cases, investors other than family and friends may not be interested in investing in a brand new concept with no track record of success. It becomes further complicated if this is your first foray into the restaurant industry.

Fast-casual restaurants typically cost between $250,000 and $400,000 to “turn the key” and open the doors for business. The various costs associated with opening a restaurant will range depending on factors such as location, size and condition of the space, everything from security deposits to the reserve capital you’ll need to carry possible shortfalls the first few months you’re open.

Investment Costs to Consider

* Professional fees: This is usually necessary to set up your business entity, whether a corporation or LLC. Also, you’ll want to have a lawyer review any lease you may sign to rent a space where you will construct your new restaurant.
* Security deposits: This may be one to three months of rent paid to your landlord. In addition, many utility companies require deposits to set up electric, water, and Internet connections.
* Equipment: The cost for all of your kitchen equipment. Items include hoods, grills, ovens, stoves, stainless steel prep tables, shelving, hot tables, cold tables, a Point of Sale (POS) system, and a walk-in refrigerator. In addition, small wares, things like scoops, ladles, fry baskets, flatware, dishes, glasses, and other small items you need to prepare your menu and serve your guests. Now let’s move to the front of the house. Additionally, you’ll be looking at furniture and fixtures, countertops, workstations, tables, chairs, decorative shelving, and other items. These are the items you use in the front of the house to create the environment that will best suit the concept you’ve created.
* Leasehold improvements: In most cases, this will be your most significant expense. Leasehold improvements are generally construction costs for electrical installations, hood venting, plumbing, heating, and air-conditioning. These items are referred to as “the mechanicals.” And let’s not forget building one and, in many cases, two ADA-compliant bathrooms. Also, installing the proper ceiling, flooring, millwork, painting walls, and other elements that we typically think of as construction. On a side note, you can take advantage of opportunities due to the abundance of restaurants that have closed during the pandemic. These empty restaurant spaces are referred to as “second-generation restaurant spaces.” You can save thousands of dollars if you find and secure a space that was formerly a restaurant. In many cases, you will find the mechanicals have remained in the building. These second-generation restaurant spaces help to reduces your cost if you don’t need to install a hood, venting, plumbing, electrical, and restrooms.
* Signage: Properly identifying your restaurant will mean you will need to sign for your storefront. Also, consider that you may need lighted signs in the windows and other signage throughout the restaurant.
* Start-up inventory: This is probably the most extensive inventory order you’ll ever place. This initial order is for food, paper, beverages, and other supplies you’ll need in your restaurant daily. You’ll replace these inventory items as you use them, but when you first start, you’ll need to stock your restaurant from scratch with every single thing for the first time.
* Grand Opening Advertising: This is an item that most restaurateurs neglect. You’ll want to launch your restaurant by making a big splash in the neighborhood. To do this, you need the proper budget for social media, print, and other forms of advertising & marketing so you can get the word out.
* Reserve Capital: As I mentioned earlier, you will need to reserve cash in the bank. This reserve cash is required to meet shortfalls that may occur when you first open your new restaurant. You may not break even for months. Therefore, it would be wise to be prepared to cover payroll, inventory, utilities, and other costs incurred as you operate.

Understanding the actual cost of opening your restaurant is vital. An investor or bank will want to see that you’ve applied critical thinking to the project by taking time to evaluate the start-up cost honestly. In addition, you will need to prepare a business plan and projections to secure bank financing or satisfy an investor. Properly evaluating the required investment will lead to accurate budgeting these key startup costs.

So now that you have an understanding of cost, you should be prepared for a banker or investor to inquire how much of your own money you’re willing and able to invest into your business. In many cases, the SBA, private lenders, or conventional loans through a bank will require that you supply somewhere between 15% and 25% of the total amount necessary. As an example, if you project a cost of $400,000 to open your new restaurant, you will need between $80,000 and $120,000 in cash. Your cash investment demonstrates to the bank or investor that you have “skin in the game. “I have never seen a bank or investor finance a new restaurant 100%.
Now that we’ve covered the investment information necessary to open a new restaurant, we’ll tackle the second question in our next article. We’ll dig into funding methods such as a conventional business loan with a bank, an SBA loan, a private investor, and of course, family and friends.

About the Author:
Gary Occhiogrosso is the Founder of Franchise Growth Solutions, which is a co-operative based franchise development and sales firm. Their “Coach, Mentor & Grow Program” focuses on helping Franchisors with their franchise development, strategic planning, advertising, selling franchises and guiding franchisors in raising growth capital. Gary started his career in franchising as a franchisee of Dunkin Donuts before launching the Ranch *1 Franchise program with it’s founders. He is the former President of TRUFOODS, LLC a multi brand franchisor and former COO of Desert Moon Fresh Mexican Grille. He advises several emerging and growth brands in the franchise industry. Gary was selected as “Top 25 Fast Casual Restaurant Executive in the USA” by Fast Casual Magazine and named “Top 50 CXO’s” by SmartCEO Magazine. In addition Gary is an adjunct instructor at New York University on the topics of Restaurant Concept & Business Development as well Entrepreneurship. He has published numerous articles on the topics of Franchising, Entrepreneurship, Sales and Marketing. He was also the host of the “Small Business & Franchise Show” broadcast in New York City and the founder of FranchiseMoneyMaker.com
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FRANCHISE YOUR BUSINESS TODAY: www.franchisegrowthsolutions.com

WHO BUYS A FRANCHISE?

Posted on August 1, 2021August 2, 2021 by Franchise Strategist

WHO BUYS A FRANCHISE?
By TOM SCARDA, CFE (Posted with permission)

A very high percentage of people who choose to invest in a franchise usually do it as a second, third or fourth career. Most franchise owners are corporate refugees who have escaped their cubical and the blight of corporate America to control their destiny and grab their piece of the American dream.
Many people also invest in a franchise as an investment vehicle and a way to diversify their investments and gain a tax shelter. Some franchises allow for keeping a full-time job as the franchise owner builds their franchise. These types of franchises are called manager-run franchises. A word to the wise, many companies will tell you that they can be run absentee or have a manager in place. However, they may be just trying to sell you a franchise. Ask for the percentage of franchise owners who are currently operating in that manner. Then ask for an email introduction to each one or at least a list of those owners so you can call them and validate that the operation works without them being there.

In addition, you don’t have to have experience in the industry of the operation you buy into. As a matter of fact, many times, the franchisor prefers if you have no experience or exposure to the industry. If you do, you will likely bring baggage and bad habits to your operation. An excellent franchise company will train you in best practices for their industry.
As an example, if you have a barber or beautician’s license, you may not be granted a franchise in a hair cutting concept. See, the franchise knows that if you can act in the worker’s role or be the technician, you’ll slowly slide into that position and not be the CEO or CFO of your franchise. Once that happens, you plateau in the business, revenues become flat, and you have essentially bought yourself a job.

Many people come to me and say, “I’m an accountant, I want to open an HR Block, or I love to bake, so I want to open a Nothin’ Bunt Cakes. Interestingly, Nothing Bunt Cakes want managers and leaders who can translate their corporate experience into building a significant franchise operation. They will then hire great bakers to do the daily grind. They do not want folks who like to bake.
Work on the business, not in the business

The phrase, ‘work on your business not in it,’ is the central tenet of franchising and successful business ownership, even outside of franchising. As you look at franchising, you’ll realize that the barrier to entry is low in many cases. However, the barrier to scalability is very high. Many non-franchised business owners own a store and make it happen every day. Many times, that owner is frazzled because they are good at a specific task in an operation. Whether it’s managing people, sales, marketing, or specific duties such as being the baker or the auto mechanic. It’s rare that any one person is good or can have the time in a day to be good at everything.

My advice is to drop employee mentality and start thinking like a business owner. Usually, an employee is focused on one or a few items within a business, and that is what they are paid for.
If you become a business owner, you are the Capitan of the ship, and you have deck hands running the operation of the boat.

Like the Capitan of a ship, a business owner focuses on the big picture and directs that ship toward the intended port or its goals in the case of business. The owner should have a leadership mentality and be or get comfortable delegating.

It’s said that the most valuable commodity to a human is time, and you can buy time. However, in a well-run business, you can buy time. You are leveraging other people’s time, thereby giving you time to do other things. Some of your time could be geared toward building the business by marketing or networking. Or having a staff ultimately gives you time for your family, extended vacations, or just enjoying your hobbies and passions. With a properly run business, you can really by time. I call that success.
#FranchiseOpportunities #controlyourdestiny #changeyourlifetoday

About TOM SCARDA, CFE
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Tom failed in a franchise. That is why you need to talk with him. Easily avoid the mistakes he made.

Tom is now a nationally recognized small business and Certified Franchise Expert (CFE), motivator and dynamic speaker. Tom has authored three books: Franchise Savvy, The Road to Franchise Freedom and The Magic of Choosing Uncertainty: How to Manage Change, Embrace Fear and Live a Fulfilled Life.

30 years ago, searching for his inner drive, Tom left college and submerged himself in the motorcycle underworld in lower Manhattan. This made his mother worry. It was the first time Tom chose uncertainty over the status quo.

After four years of life in the outlaw motorcycle subculture in NYC, Tom got a haircut, took a shower and landed a respectable job in the New York Subway system. After more than 13 years in the subway Tom became frustrated with the bureaucracy and politics. So he quit his job and left his pension behind to pursue his dreams of business ownership. This also made his mother worry.

In 2000, he purchased a smoothie franchise, which he built into three units and sold five years later for a considerable profit. He was the #1 franchisee of the year in Maui Wowi Smoothies in 2002. He purchased a second franchise in 2006 called Super Suppers and failed miserably in that franchise concept. The lessons he learned from failure is what makes him such an expert. Tom has owned and operated both franchised and non-franchised businesses and has years of knowledge and wisdom to share with you.

After selling his smoothie operation and closing down Super Suppers, Tom started helping people figure out if franchising is for them and not make the mistakes he made. Tom previously hosted “The Franchise Hour” radio show in New York City. He currently Hosts two Podcasts and has been featured in dozens of magazines and newspapers and is a sought-after radio and TV guest. His mom has stopped worrying.

Born and raised in Brooklyn, NY, Tom was named one of the top 50 business leaders on Long Island by Long Island Business News. Tom lives on Long Island, NY with his wife of 32 years, Gina, Darla the BernaDoodle and a few chickens. He is the proud father of two grown children and a new Grandfather. He enjoys flying airplanes in his spare time and still appreciates old school Harley-Davidson choppers and tattoos. (OK, mom still worries a little).

Tom’s mantra is “There are no wrong turns, just different experiences.” However, some folks just move in circles. Tom believes that everyone has a passion sleeping within his or her soul. Tom’s mission is to help people harvest their own passion for the betterment of the world. He inspires people to surf on the edge of their comfort zone and choose uncertainty over unhappiness.

🔑Education 🔑 insight 🔑 inspiration – Have you been working from home and don’t want to go back to your office? Have you tasted freedom and want out of the corporate rat race? We should talk. No Sales, No Kidding.

THE RESTAURANT INDUSTRY AT THE PANDEMIC’S ONE YEAR ANNIVERSARY – WHAT NOW?

Posted on March 9, 2021March 9, 2021 by Franchise Strategist

We thought that the last twelve months of performance for individual restaurant stocks might give us a hint as to where to focus going forward. Since some of the obviously large stock gains have taken place among those with the heaviest short position, we have focused on the “short interest ratio”, the number of shares sold short divided by the average daily trading volume.

THE RESTAURANT INDUSTRY AT THE PANDEMIC’S ONE YEAR ANNIVERSARY – WHAT NOW?

By Roger Lipton with permission

The last twelve months have been unprecedented, not only from a business/health standpoint, but from a fiscal/monetary standpoint. There has been more governmental stimulus as well as monetary accommodation than ever before, which has floated all kinds of boats. The Dow Industrial Average hit an all time high just this morning, and, though the NASDAQ index has retreated the last month or so, stocks from Apple to Tesla to Gamestop have written a new book in terms of valuation.

Based upon the new $1.9 trillion Covid bill, the likelihood of a new multi-trillion dollar infrastructure bill, as well as the Federal Reserve’s ongoing willingness to buy at least $120B of Treasury securities every month, there is every indication that the above trends will continue.

From a broad brush, it is shocking to see how large the moves have been from March 8, 2020 until now. It is interesting that several of the best performing “pandemic plays”, namely Domino’s, Wingstop and Papa John’s, which made very big moves over six to nine months, have retraced and are up more modestly now (zero, 56% and 47%, espectively).

This industry, by no stretch of anybody’s imagination is generally in a place that makes these companies “worth” from 50% to 90% more today than they were before the pandemic. There is somewhat less independent competition, and some companies may have learned how to serve off-premise diners better than before, but there are also a great many uncertainties. These include (1) the cost of labor with a new mix of in-store vs. off-premise (2) commodity inflation (3) other expenses to meet health requirements (4) unpredictable consumer spending (5) still substantial competition (6) ongoing high occupancy expenses, especially for new sites. There is also, in many cases, new debt to service.

Fundamentals aside: the stocks have done the following, ranked by today’s short interest ratio.

What do we see? The average gain among the fourteen stocks with the highest short interest ratio is 90%. The bottom fourteen stocks went up by 57%. Without our focus on individual company fundamentals, readers can scan the list and conclude for themselves which stock performance is most removed from the fundamental outlook.

Where do we go from here?

Before considering the above noted $1.9 trillion Covid bill and trillions more for infrastructure, the Treasury is sitting on $1.44 trillion (to be reduced to $500B by June 30th) that was returned from the Fed last year and the Fed is currently creating $120 billion per month. This means that almost $1.5 trillion of accommodation will be provided to the economy and the markets by June 30th, before the effect of the new $1.9 trillion. This also means that equities, including restaurant stocks, may well go a lot higher in the short term. There is just too much liquidity in the capital markets.

THE BOTTOM LINE

For investors: Other things equal, we would focus on the top portion of the table above. 90% is better than 57%

For companies: In almost all cases, we would sell company stock. Pay down debt and/or build your cash balance. It may be a long time before you see these valuations again.

For management: Lighten up. You can always grant yourselves some more stock options.

Roger Lipton

Click here to visit Roger’s website: https://www.liptonfinancialservices.com/2021/03/the-restaurant-industry-at-the-pandemics-one-year-anniversary-what-now/

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About Roger Lipton
Roger is an investment professional with over 4 decades of experience specializing in chain restaurants and retailers, as well as macro-economic and monetary developments. After earning a BSME from R.P.I. and MBA from Harvard, and working as an auditor with Price, Waterhouse, he began following the restaurant industry as well as the gold mining industry. While he originally followed companies such as Church’s Fried Chicken, Morrison’s Cafeterias and others, over the years he invested in companies such as Panera Bread and shorted companies such as Boston Chicken (as described in Chain Leader Magazine to the left) .

He also invested in gold mining stocks and studied the work of Harry Browne, the world famous author and economist, who predicted the 2000% move in the price of gold in the 1970s. In this regard, Roger has republished the world famous first book of Harry Browne, and offers it free with each subscription to this website.

Good News for Franchisors: New Favorable Accounting Rules Go Live!

Posted on February 20, 2021March 10, 2021 by Franchise Strategist

Good news for franchisors: New favorable accounting rules go live!
By Michael Iannuzzi
Posted with Permission from Franchise News Wire

Who said accounting was boring? For the past two-and-a-half years the International Franchise Association’s Financial Accounting Standards Board (FASB) Task Force has been working with the FASB to issue guidance to help reduce some of the cost and complexity in applying Topic 606 — revenue recognition rules over initial franchise fees. On January 28, 2021, the FASB released Accounting Standards Board Update 2021-02 to Topic 606, an “expedient” that can be adopted by non-public franchisors on their December 31, 2020 financial statements. What does this mean for non-public franchisors?

During the year-end December 31, 2019, non-public franchisors that issued their financial statements prior to the FASB issuing an election to defer Topic 606 during June 2020, were tasked with the challenge of implementing Topic 606 for the very first time by following these steps:

Step 1 – Identify the contract with a customer (in our case, a franchise agreement)
Step 2 – Identify the performance obligations in the contract (training and the right to use the license, as examples)
Step 3 – Determine the transaction price (the franchise fee paid)
Step 4 – Allocate the transaction price to the performance obligations (determine the value to be received, more on this later)
Step 5 – Satisfaction of performance obligations (delivering the service)

The current method (prior to issuance of the expedient)
The struggle for franchisors was how to identify the performance obligations in Step 2 and how to value the transaction price to be recognized as revenue in Step 4. Using pre-opening training as an example, many franchisors offer training that is specific to their brand as well as generic training, such as how to use QuickBooks. The challenge was to separate the training into brand specific vs. non-brand specific trainings (Step 2), then to come up with a value to allocate (Step 4), and ultimately recognize a portion of the initial franchise fee as revenue and record the remaining initial franchise fee as deferred revenue to be recognized over the life of the franchise agreement. This proved to be very difficult and costly for franchisors of all shapes and sizes. There were assumptions made that the entire amount of the initial franchise fee should be deferred and bypass the steps above. That’s not to say that isn’t the case; however, you would have had to do the analysis to conclude that the entire fee should be deferred and not just default to that position.

In applying the practical expedient, “pre-opening services that are consistent with those included in a predefined list within the guidance may be accounted for as distinct from the franchise license.” What does this mean? The intent was to simplify Step 2. In Step 2, non-public franchisors can now look at most of their pre-opening activities and count them as one performance obligation, meaning they are delivering an upfront service to a franchisee. This would potentially allow them to recognize more of the initial franchise fee as revenue, creating an income pickup for franchisors compared to the amount being recognized based on prior rules, as they are now allocating more of the transaction price identified in Step 4 to these costs.

Even though we are in the middle of audit and registration renewal season, these rules could prove to be beneficial for franchisors. The expedient will allow for more representative income recognition and allow franchisors to adjust their opening equity for prior franchise agreements. Careful consideration needs to be given when adopting the expedient. Most importantly, this is meant to be general advice, and franchisors should always consult with knowledgeable franchise and accounting professionals before forming any conclusions.

Michael Iannuzzi is a partner and co-leader of Citrin Cooperman’s franchise accounting and consulting practice. The company provides audit and accounting, business consulting and advisory, and tax planning services to a wide spectrum of clients within the franchise community. Iannuzzi works with franchisors and multi-unit franchisees in a variety of industries, including, but not limited to, fitness and athletic centers, children’s entertainment services such as recreational youth programs and party providers, junk removal companies, mobile concepts, pet hotels, quick service restaurants (QSRs), and grocery stores. For more information, call 212.697.1000 x 1250 or email [email protected]

10 Tips To Support Small Businesses

Posted on February 18, 2021February 18, 2021 by Franchise Strategist

“Small businesses are the heart of our country and Ball® home canning products business,” says Kris Malkoski, CEO of the Food Business Unit at Newell Brands. “We have been moved by the love our small business customers have shown their communities this past year. Still many small businesses are facing hardships and they need our support now more than ever.”

10 tips to support small businesses

By BrandPoint

(BPT) – The COVID-19 pandemic has been difficult on small businesses. Whether it’s a local eatery, service provider, retail store or another type of business, when you shop small, you’re supporting a real person who is striving to keep his or her entrepreneurial dream alive.

“Small businesses are the heart of our country and Ball^® home canning products business,” says Kris Malkoski, CEO of the Food Business Unit at Newell Brands. “We have been moved by the love our small business customers have shown their communities this past year. Still many small businesses are facing hardships and they need our support now more than ever.”

You can personally help make a difference by considering 10 simple ways to support small businesses:

Shop now: No need to wait for a sale or special event. By shopping now you’re putting much-needed funds into a small business that is depending on income each month to make ends meet and keep doors open.

Reverse shopping: Rather than thinking of the recipient and then where to shop for a gift, think of the shop first and then the recipients that would most like items from that particular business.

Go online: For small businesses that offer e-commerce options, be sure to consider online orders that ship directly to your home. This is a safe and convenient way to support your favorite businesses.

Shop in person: For businesses with physical locations, visit shops in person if you can use proper safety measures. If you know what you want, many businesses let you order ahead and opt for curbside or doorway pickup as well.

Consider gift cards: Not sure what to buy? Gift cards are always one of the most desired gifts, so if you need to send a little love to a loved one, wrap up a gift certificate in a beautiful card and feel good about your present choice.

Leave reviews: Online reviews can make a big difference for small businesses in expanding clientele. Go online and leave rave reviews for your favorite stores and why others should support them as well to help spread the word.

Be vocal: In addition to online reviews, talk up your favorite small businesses among friends. From independent restaurants to local service providers, use your voice as a powerful tool to build their reputation and support growth.

Partnerships: Look for small businesses who partner together to offer products or services that complement each other in packages, such as a gift basket bundle featuring your favorite local treats. You’ll support multiple businesses at once and often get a discount compared to buying separately.

Double up: For businesses like independent coffee shops or bakeries, consider a larger order. For example, go with that grande latte and order two dozen cookies to share with your neighbors.

Be patient: Small businesses are dealing with a multitude of challenges these days, from supply chain holdups to sluggish shipping and beyond. Your kindness is valued and your patience is crucial during these times.

“Actions big and small will help make a difference,” says Malkoski. “This is our time to give back to the businesses that help build our culture and communities, and we at Newell Brands want to give back too.”

Warning Signs Your Restaurant Is Not Ready To Franchise

Posted on February 10, 2021March 5, 2021 by Franchise Strategist

Warning Signs Your Restaurant Is Not Ready To Franchise
By Gary Occhiogrosso – Managing Partner, Franchise Growth Solutions, LLC.

As a former franchisor and now a consultant to the franchised restaurant industry, it has always been my role to promote, expand, improve, and advocate franchising as the most influential business development tool ever created. As my regular readers might imagine, the mere thought that I would approach the idea that a business would not be better off as a franchise is personally challenging. That said, I have worked with scores of companies and seen hundreds of concepts in the franchise industry. Some of which left me scratching my head as to why anyone would believe a particular idea would be a viable business under a franchise model. As a result, and as a follow up to my previous article, I’ve compiled my top four warning signs for delaying a franchise launch or avoiding franchising your restaurant altogether. It’s a short checklist when deciding if your business is ready and feasible for franchising. These reasons alone or any combination would cause me to pause and “go back to the drawing board” before launching a franchise brand.

No Proven Operating Prototype

On occasion, the owner of a marginally successful restaurant or one with a minimal track record of successful performance considers expansion through franchising. Sometimes, the wannabe franchisor may believe that building additional restaurants without the founder’s initial mistakes using a franchisee’s money will make up for a brand’s shortcomings and somehow be successful. Not only is this thinking irresponsible, but it disregards the fact that potential franchise buyers expect a franchise system that works and is proven. Using a franchisee’s enthusiasm and investment as your “canary in a coal mine” will almost always end in disaster.

Ed Teixeira, a former franchisor executive and franchisee with 40 years of franchising experience states “that when franchising an existing business, a key precept is that the business used to develop the franchise must be a profitable operation. To expect a new franchisee in a startup franchise program to surpass the existing business owner’s financial performance is a dangerous strategy. In this case, the fledgling franchisor should identify why his business is not profitable and correct the situation before expecting a new franchisee to solve the problem. A flawed business used to develop a new franchise will end up creating a flawed franchise.”

I cannot emphasize enough that any franchise company’s overall growth and success depends on its franchisee’s success. Your restaurant concept needs to have proven methods along with quantifiable sales results. Every system in your operation, from recipes to marketing, needs to be documented and “teachable” through your confidential operations manual. If this is not the case for your restaurant, take a step back and continue working on the total operating system before offering franchises.

Your Menu Is Too Big Or Complicated To Replicate.

Chef owners often fall into the trap of creating an elaborate, difficult to produce menu because their professional skill set is highly developed. They are not looking at the reality of who their franchisees may be and the level of experience they bring to the table. Delivering a chef-quality menu is perfect for a chef, but maybe not so much for a franchisee or a franchisee’s young entry-level employee. There is nothing wrong with a unique, high-quality menu in a franchised restaurant. In fact, it’s a great thing. Innovative and delicious food is one of the points of differentiation that every restaurant should pursue. However, in the world of franchising, it’s about delivering a product and experience the same way for every customer, flawlessly and consistently. Your menu needs to be simple to execute and served without the complexities of a fine-dining, chef-driven process. Your menu also needs to be crave-able, profitable, and very focused.

Fred Kirvan of Kirvan Consulting LLC, a New Jersey-based restaurant development and operational assessment firm for the franchise industry, says: “many independent restaurateurs find it challenging to embrace the idea that less is best. Offering guests too many choices or menu items with complex procedures may create confusion for the guest; it can negatively impact the overall cost of goods, and often increases employee mistakes.”

You Haven’t Branded Your Concept.

People buy brands. When customers step into a successful franchised restaurant, there is usually a theme and a brand voice surrounding the guest. The guest leaves with more than just a satisfied stomach. You want them to remember the service, the decor, the music, and the restaurant’s messaging. Many restaurants simply focus on the food without regard to the many facets of an overall guest experience. Suppose you have not developed a distinctive decor and brand identity. In that case, you may have difficulty competing when it comes to selling franchises because you haven’t created the necessary points of differentiation that attract potential franchise owners. Your restaurant’s branding is not merely your food or the price point. Creative, disruptive restaurant brands are not only attractive to consumers but also to those seeking to invest in a franchise. That is why although some restaurants may sell similar cuisines, the successful franchise brands do it with a new twist and an exciting environment.

You Lack Sufficient Capital To Launch Your Brand

One of the most significant failings of fledgling franchisors is underestimating the cost of launching a brand into the sea of franchises. Some believe they can bootstrap the effort and fund their company’s growth by using the upfront franchise fees collected. I have always stated (sometimes at the risk of losing a potential new client) that “on a good day; you won’t lose money on a franchise sale.” In many instances, that’s the best-case scenario an emerging brand should expect. Franchisors should set their sights on royalties as their revenue stream, not initial franchise or license fees. You’ll need to consider the real cost of the franchise sale. For a startup brand or an emerging brand, the price to generate enough leads to sell one new franchise may be anywhere from ten thousand to fifteen thousand dollars. No matter what you may want to believe, franchises do not “sell themselves”.

Additionally, the sales commission to an outsourced franchise sales organization, in-house salesperson, or franchise broker may range from 40% to 60% of the initial franchise fee. Then there are legal fees as well as the cost to train and support the new franchisee. According to Evan M. Goldman, an attorney and the Chair of the Franchise Law practice at A.Y. Strauss LLC, “the legal costs to close a deal can range from a small amount ($1,000 or so) for a simple deal, to more than $5,000 for a complicated purchase with lots of requested changes by the franchisee.” Goldman adds, “without proper funding, you’re never going to sell that first franchise because it ‘takes money to make money.’ Undercapitalized franchisors face a difficult predicament whereby they can hold their limited cash but not be able to sell their franchise, or use all available money and potentially sell their first few franchises, but cannot support their franchisees. And to add to that, undercapitalized franchisors are potentially disastrous for franchisees who rely on the franchisor to provide services (advice, marketing, etc.), which they cannot do without capital. In essence, it is mutually-assured destruction.”

Carefully Weigh All The Factors Before Franchising

Although my list covers what I think are the most crucial reasons not to franchise your restaurant, there are numerous others. Everything from the market needs to unit saturation in the space to the economy at launch time. Indeed, my thoughts here are not intended as a deterrent to franchising your restaurant but rather a professional recommendation to look at all aspects and apply critical and long term thinking to the endeavor.

5 Key Reasons To Franchise Your Restaurant Concept

Posted on December 21, 2020February 10, 2021 by Franchise Strategist

5 Key Reasons To Franchise A Restaurant Concept
By Gary Occhiogrosso Managing Partner – Franchise Growth Solutions

Suppose you have a proven restaurant concept with a successful business system. Think McDonald’s, Panera Bread, Applebee’s, or Halal Guys. In that case, your next move may be to open additional locations. Franchising your restaurant and awarding others’ the rights to use your brand name, recipes, and procedures is a great way to expand. Why do restaurant owners choose to franchise their business? For the most part, it comes down to capital, time, people, and geography.

Lower Investment To Grow Your Brand

You can add additional restaurants while at the same time, you minimize your capital investment. Becoming a Franchisor and using franchising as the method to grow means other individuals (franchisees) will pay a franchise fee to gain access to your brand. Also, the franchisee will fund building the restaurant and assume the location’s financial responsibility. According to Harold Kestenbaum, a Partner with Spadea Lignana Franchise Attorneys: “Building out company units can get very expensive. Having a franchisee invest their own funds not only saves the franchisor money but allows the franchisee to have skin in the game. This is crucial for the success of a franchise system.”

Exponential Growth

Building corporate restaurants is limited to your capital, human resources, and, in many cases, geography. However, when you franchise, your brand may be growing more rapidly and in multiple markets. Once ramped up, some franchisors open as many as 20, 50, or more than 100 new restaurants a year. Michael Einbinder, founding Partner of Einbinder & Dunn, states: “Franchising restaurant concepts allows for fast growth. If you expand your brand through franchising, the investment in new outlets come from franchisees. Critically, franchising gives you an opportunity to grow in multiple markets simultaneously.”

Owners vs. Employees

In many cases, the most challenging aspect of running a restaurant is; recruiting, training, and maintaining good employees. As the Franchisor, that effort rests with the franchise owner of the individual location. Unlike owning and operating corporate locations, it’s the franchisees that have “skin in the game,” and unlike employees, they usually do a better job. Also, they can’t just quit at will because they have a vested interest in the business, usually in the form of personal cash and loan commitments. Franchisor, Charles Watson, CEO of Tropical Smoothie Cafe says: “Having franchisees who are aligned with your mission and willing to invest in their own success are critical for quality growth. You may not always have the same level of commitment from employees because their work does not impact their bottom line. Dedicated franchisees are often eager to execute the new initiatives that the franchisor rolls out systemwide to their local markets, which inevitably inspires guests to keep coming back to your concept, no matter what location is nearby. The franchisee/franchisor relationship is always evolving and is typically mutually beneficial.”

Residual, Royalty-Driven Income

As a Franchisor, your income is not derived from the operation of a restaurant. The Franchisor’s primary revenue source is a royalty payment made by the franchisee to the parent company. Also, this royalty is paid on top-line sales, not bottom-line profit. As a Franchisor, your role is to help franchisees increase their sales and increase the number of operating units. When done correctly, the Franchisor benefits, and the franchisee’s chances of higher profit through better operations and broader brand recognition are increased. The general public loves and trusts “Name Brands” and can sometimes be skeptical of the one-off mom & pop operations.

Better Selling Price At Exit

Suppose you’ve built your franchise company with reliable franchisees, a tight operating model, and strict enforcement of brand standards. In that case, the chance is a potential buyer will pay a higher price based on a multiple on your profits. All too often, non-franchised restaurant owners sell their corporate-owned restaurant chain at a price based on two or three times multiple of their bottom line profit. However, many investors, particularly private equity firms, are attracted to franchise companies whose revenue is driven by royalties.

According to Michael Einbinder: “Many franchisors build their concepts with the ultimate goal of creating value in the long term for an exit. In the last several years as private equity firms have become more involved in franchising, the trend has been that the multiples paid on franchisor EBITDA are higher than on company operations.”

Investment firms are often willing to buy based on a multiple double and sometimes triple that of an independent restaurant chain. Why? Because unlike profit earned by restaurant operations, royalty driven profit is virtually endlessly scalable. Franchisors usually have a lower operating cost with less overall risk compared to corporate-owned chain restaurant companies.

Closing Thought

Although each owner has their own reasons to franchise a business, these are the key motivators why restaurant owners franchise their concept. However, franchise companies are not without unique challenges. There are numerous other considerations, such as the cost to set up and maintain legal compliance, marketing & the cost of recruiting new franchisees, franchisee relations, and developing a unique skill set as a Franchisor. We’ll cover that other side of franchising in another article.

LEARN ABOUT FRANCHISING YOUR BUSINESS, check out our website: www.franchisegrowthsolutions.com

ABOUT THE AUTHOR:
Gary Occhiogrosso is the Founder of Franchise Growth Solutions, which is a co-operative based franchise development and sales firm. Their “Coach, Mentor & Grow Program” focuses on helping Franchisors with their franchise development, strategic planning, advertising, selling franchises and guiding franchisors in raising growth capital. Gary started his career in franchising as a franchisee of Dunkin Donuts before launching the Ranch *1 Franchise program with it’s founders. He is the former President of TRUFOODS, LLC a multi brand franchisor and former COO of Desert Moon Fresh Mexican Grille. He advises several emerging and growth brands in the franchise industry. Gary was selected as “Top 25 Fast Casual Restaurant Executive in the USA” by Fast Casual Magazine and named “Top 50 CXO’s” by SmartCEO Magazine. In addition Gary is an adjunct instructor at New York University on the topics of Restaurant Concept & Business Development as well Entrepreneurship. He has published numerous articles on the topics of Franchising, Entrepreneurship, Sales and Marketing. He was also the host of the “Small Business & Franchise Show” broadcast in New York City and the founder of FranchiseMoneyMaker.com Read Less

What You Need to Consider Before Opening Your Own Restaurant

Posted on December 11, 2020February 20, 2021 by Franchise Strategist

The amount of work it takes to not only survive but also make an impact with a restaurant is massive. According to FSR Magazine, 60 percent of all restaurants fail in the first year. A restaurant that lasts for years takes humility. You must acknowledge daily how bad you are at restauranting, until one day you’re not bad anymore.

What You Need to Consider Before Opening Your Own Restaurant
The following is adapted from Unsliced.
By Mike Bausch

Opening a restaurant is a huge decision—one of the biggest decisions you’ll ever make. It’s hard work, full of risk and failure, and can be disappointing and frustrating. It can also be rewarding and fun, and if you do it correctly, can be profitable.

But you may have a 9-to-5 job right now that brings in steady income. How do you trade that for the uncertainty of the restaurant business? For most people, it’s not a trade they’re willing to make. To know whether you’re one of those people—or the type of person who should try their hand at restaurant ownership—here are few important considerations.

Two Types of People: Which One Are You?
First, look at the two statements below. Which one best fits you?

I am a person who tries hard, and the effort is what counts.
I am a person who likes setting my mind to things and accomplishing them.

At first glance, both seem like positive, motivational statements. But the second statement is actually better because the mindset is results-oriented. You’re focusing on a goal, and just trying hard and giving it an effort isn’t enough.

This means that when things get bad, you enjoy finding a way out of it. I’m pretty sure that being a glutton for punishment isn’t necessarily normal or healthy. However, it’s an essential trait of anyone looking to own their own business—especially a restaurant.

Owning a Restaurant for the Right Reasons
You may have decided to own your own restaurant hoping to become a celebrity chef. Or maybe you just don’t like your job and think owning a restaurant will be fun. If these are your reasons, then forget it. A restaurant is not the answer to your problems. It’s asking for a lot of new problems—problems you’ve never encountered or imagined.

Asking Yourself the Big Question
The restaurant life will affect your home life drastically. Restaurants sometimes destroy relationships and consume your mental health and quality of life. This life choice is a gamble—a gamble you might succeed in, in your hope to serve people food in an industry with a meager financial return rate and as I said, an extremely high failure rate.

If you haven’t committed to a restaurant yet, please pause and say this out loud:

“I need this; I need to own a restaurant. I don’t just want to own a restaurant. I absolutely need to do this. This is my calling. I got this, and nothing else will suffice.”

If that statement sounded stupid when you said it out loud, restaurant ownership isn’t for you. If you don’t believe what you said, you aren’t ready to do this. If you’ve never even operated or worked in a restaurant, then don’t assume for a second that you know anything. In fact, your best move is to concede you know nothing so you can be a blank canvas ready for paint.
Make the Best Decision for You

So what’s it going to be? Safety or risk? The same old routine or unpredictability? Don’t feel bad if you choose to opt for that cubicle job. It usually offers a lot less stress and heartbreak than opening your own restaurant. The world needs people in those office chairs.

But if you choose to be a restaurant owner, be ready for a roller coaster ride. Be ready for long days and nights, unexpected changes, and some lean times. But you knew that, or you wouldn’t have made that decision, would you?

For more advice on deciding to open a restaurant, you can find Unsliced on Amazon.

About the Author:
Mike Bausch is an industry leader whose restaurant, Andolini’s Pizzeria, is a top ten pizzeria in the US, as named by TripAdvisor, BuzzFeed, CNN, and USA Today. Andolini’s began in 2005 and has grown to five pizzerias, two gelaterias, two food hall concepts, a food truck, and a fine dining restaurant by 2019. Mike is a World Pizza Champion, a Guinness Book world record holder, and a writer for Pizza Today. Mike is part of a Marine Corps family who has lived across America from New York to California. Mike calls Tulsa home and lives with his wife, Michelle, and son, Henry.

Tips on How a Franchise Brand Can Become a Top-Performer in the Franchising Industry

Posted on October 16, 2020December 10, 2020 by Franchise Strategist

How a Franchise Brand Can Become a Top-Performer

By Ed Teixeira.
VP Franchise Development FranchiseGrade.com , Author, Franchise Expert, MA Economics, Industry Partner of Stony Brook University Center of Entrepreneurial Finance, Pace University Lubin School of Business Advisory Board

For a franchise brand to become a top performer, franchisors must adhere to certain operating principles. One of the most important ones is to grow the number of franchise locations to promote the franchise brand. In the case of certain well-known franchise brands, system size alone doesn’t always convert to a top performing franchise brand.

Franchisors that want their franchise to be recognized as a top brand need to follow a set of building blocks that can serve as the foundation for a successful franchise system. Utilizing these building blocks will strengthen the franchise program, provide its franchisees the best opportunity for financial success and help establish the franchise brand as a top performer.

1. Equitable franchisee ROI must be a priority

The foundation of the franchise program operationally and financially must provide franchisees an opportunity for success that does not require extraordinary performance. If franchisees follow the franchise program and do not earn an ROI commensurate with their original investment, then the franchise may be flawed.

2. If the franchise program is flawed, then it must be fixed

Franchisors should adjust a franchise program that isn’t “working.” There is no reason why a royalty or advertising fund contribution can’t be changed. If certain products or services aren’t successful, then find alternatives. Conduct franchisee surveys to measure franchisee satisfaction levels.

3. The franchisor must control the franchise sales process and adhere to its ideal franchisee profile

Establish a franchisee profile and if franchise candidates don’t fit this profile say no! If the franchisor utilizes brokers, the franchisor must maintain control over the franchise sales process.

4. Be transparent with prospective franchisees

Provide prospective franchisees full disclosure about the franchise opportunity and what’s needed to be successful. The franchisor sales staff should act as more consultant and less salesperson.

5. Franchisor leadership must be engaged in the franchise operation

Franchisor leadership should be accessible and involved in the franchise operation, so they are aware of franchise system performance. There shouldn’t be surprises when it comes to franchisee performance.

6. Franchisee input should be solicited for important operational and marketing strategies

Significant changes or alterations to franchise operations and marketing, should involve the franchisees. This can be done using the FAC, advertising committee or other representative body.

7. New products and services should be evaluated and measured by franchisees before introduction

The franchisor should test new products, services or equipment in representative franchisee locations before introducing them. This process leads to objective and credible results that will earn the franchisees buy-in.

8. Obtain financial results from franchisees on a regular basis

Use franchisee financial statements to identify individual and collective franchisee performance. A lack of important financial information prevents a franchisor from knowing which franchisees are profitable and which are not.

9. Uphold and protect the integrity and standards of the franchise program

It’s critical that the franchisor uphold the standards of the franchise. The franchisees that follow the program deserve it and the customers that use the product or services provided by the franchisees are entitled to consistency. Franchisors that don’t protect the brand are not respected by their franchisees.

10. Invest in franchisee training and support

Top notch franchisors have viable and effective training programs. Training and support don’t end with start-up franchisee training but should be a continuing activity. When franchisor staff identifies weaknesses in the execution of franchisee operational practices the Training Department should implement programs to address these problems.

To build a top- performing franchise program franchisors can use these 10 building blocks, which requires implementing policies, practices and procedures to improve franchisee performance and success.
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Learn more about the author and Franchise Grade:
Ed Teixeira. VP Franchise Development FranchiseGrade.com , Author, Franchise Expert, MA Economics, Industry Partner of Stony Brook University Center of Entrepreneurial Finance, Pace University Lubin School of Business Advisory Board

Tips On Raising Capital to Expand Through a Private Placement

Posted on August 27, 2020December 10, 2020 by Franchise Strategist

Today’s article by our friends at the Law Office of Spadea Lignana touches on some of the tips to know when attempting to rise money through Private Equity Placement. Tom Spadea and his staff well versed and fully equipped to advise and guide you through the process. Franchise Growth Solutions assists in the process by working with brands seeking to expand their business.

Raising Capital to Expand Through a Private Placement Raising Capital to Expand Through a Private Placement
By Staff Writer at Spadea-Lignana Law Office

Even a Deal with Friends and Family Needs Proper Documentation
If you are an entrepreneur looking to raise capital by selling shares of your company to an individual that won’t be an active partner in your business, you have to be sure you are compliant with federal and state securities laws. If you are selling a portion of your company to an investor, you are subject to securities regulations. That is, UNLESS you fall under an exemption and you properly document, and in some cases, file for an exemption. This is a trap for many unwary entrepreneurs, who think they don’t have to worry about formal documentation of their deal because they are just offering shares of their company to a few friends and family.

While the offering they are contemplating may very well qualify for an exemption, if they don’t follow the laws and regulations by drafting a formal private placement memorandum (PPM) and complying with certain filing requirements, they run the risk of personal liability. This liability could include accusations of fraud and potential civil and criminal penalties for failure to properly register securities with federal and state agencies.

Drafting the PPM
The rules and regulations are designed to avoid Ponzi schemes and other fraudulent investing activities by making the transaction transparent and well documented. The creation of a PPM is not as difficult as many law firms and pundits may make it sound. We are not talking about an initial public offering with a six figure legal cost. Our experienced securities lawyers can walk you through the process and help you evaluate your project as suitable for a PPM. In many instances we can give you a flat fee project cost for documenting your deal. We have drafted PPMs ranging in size from a startup, fast casual restaurant to a multi-million-dollar alternative energy project.

Minimizing Personal Risk
Raising equity capital from outsiders is typically done to avoid personal debt, risk and liabilities while sharing the upside with those equity investors. If the deal is not properly documented, you are potentially erasing all of those protections and neutralizing the purpose of raising private money in the first place. Put another way, a poorly documented deal leaves the entrepreneur with all of the downside risk personally, with a portion of the upside sold off to investors. That is not a good business deal.

Seek Professional Guidance
Let us help you understand the cost, time and effort that it will take to draft a private placement memorandum for your deal. Call us at 215-774-3331 for more information. Visit https://www.spadealaw.com/