I just finished reading an article titled, “4 Tips for Investing in the Right Franchise” by Wall Street investor turned franchisee Jon Blob. This article laid out his financial secrets for quick-serve operators.
That got me thinking about my buyers for franchise restaurant resales like the ones We Sell Restaurants specializes in. Is there a difference between main street purchases and someone managing an investment portfolio of restaurants on the stock exchange floor? What’s the difference when risking an investor’s capital and someone putting their entire family’s savings at risk? I would argue that the latter carries more risk and thus needs even better focus. Let’s look at his advice and I’ll weigh in as a restaurant broker specializing in franchise resales.
His tip #1: Start with a Sound Concept.
There is no way to argue with this one. Whether you’re investing in a restaurant chain with sales in the millions or a single store; first understand the brand. How do they train you? What does their marketing support consist of? What is the trending in the field with not only their best franchisees but their worst performers? How many stores are turning over? What does the franchise balance sheet and P&L look like? Any time you are buying a franchise restaurant resale, you’re provided with the FDD and the brand’s financials are fully disclosed. Study these before moving forward.
One piece of advice directly from Jon Blog couldn’t ring more true for me. He says, “Make sure you like the product you are selling and are passionate about the business and brand.” If you don’t like the food business, customer interaction, sales and driving business, then look at another line of business. The fast casual business is competitive and requires dedication and drive.
His Tip #2: Buy Smart
As a restaurant broker, I am all about this tip. Now the original author, Jon Blog is weighing in on the basis of a multi-million dollar transaction but the same principles apply to a single unit in the inventory of We Sell Restaurants. You never want to overpay. Look at the time it will take to return your investment. For most franchise restaurant resales, the multiple you can expect to pay is roughly three times earnings. That gives you a payback period of three years assuming no improvement in the trend line or, worst case scenario, no decline in sales or earnings. Since your loan for the store typically requires a 20% down payment and is spread over ten years, that means you’ll reap an immediate reward from a franchise restaurant resale with earnings on the books.
His Tip#3: Work Hard and You’ll Be Rewarded
This is again, super savvy advice, whether you’re a mergers and acquisition expert acquiring revenue in the tens of millions or a single store franchise restaurant resale buyer. The restaurant business is a penny business that requires tight control over costs to generate earnings. It is not an industry where someone absentee is rewarded for their efforts. It takes a hands on commitment to thrive.
His Tip #4: Control your cash by appointing the right people
This is a great call out by this author who says, “While owning a restaurant is more of a marathon than a sprint, it is easy to get off track quickly.” For a single unit buyer, it’s impossible to be at the restaurant every single hour it is open. You need to surround yourself with good people. This is a greater struggle in this restaurant broker’s opinion for a single store versus a multi-unit opportunity. You won’t have the cash resources to pay larger salaries and attract the best so you will have to focus on finding and grooming talent.
All in all, Jon Blob’s article for Wall Street level investors translates just as well to the single unit buyer seeking a franchise restaurant for sale to provide for their family. In this restaurant broker’s opinion, you can apply all four of these tips when investing in the fast casual franchise restaurant industry whether you’re buying a single store or a multi-unit, multi-million dollar chain.
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Robin Gagnon is the co-founder of We Sell Restaurants and wesellrestuarants.com. She is one of the nation's most prolific franchise resale specialist and sells hundreds of units each year. She and her husband Eric, also wrote the book on restaurant broker, Appetite for Acquisition was named Best of 2012 by Small Business Book Awards. Her listings can be found online at wesellrestaurants.com or by clilding the folloing link.