Opening a franchise/franchise restaurant

Does anyone have any experience with (or know persons/family members with) experience opening and/or operating a restaurant franchise? My friend approached me the other day wanting me to be an investor in a fast food restaurant franchise. Was curious what people's experience was with them, how hands-on investors are, etc. Was curious if they're known to be decent investments overall. I'm definitely interested in being a limited partner with little hands-on management.

It's not a franchise like Chic-fil-A that requires hands-on ownership.

 

Generally the more expensive the franchise the better off you are. However these are not huge money makers. You might gross a million a year and net 50 to 70k. That isn't too far from the norm. I personally do not invest in franchise establishments unless they are unique and smaller franchises because I can bully them in negotiations.

Follow the shit your fellow monkeys say @shitWSOsays Life is hard, it's even harder when you're stupid - John Wayne
 
Best Response
SSits:

There was a thread about this in the PE subforum earlier this year. I can't remember who the OP was. I put some comments in there and there were other who provided more informed comments.

EDIT: Here's the link //www.wallstreetoasis.com/forums/convenience-...

OP was me.

I've talked to several people who own franchises, particularly in fast-food....

It's kind of hit-and-miss; some work out, some don't. I'm currently looking at opening one, but I would not be an absentee owner or partner like you're contemplating. The thing that attracts me to small, retail business is the ability to grow on your own. At a hedge fund, at a bank, etc., you are always locked down by what other people tell you you can do. At a business, it's all on you. If you make enough money and have the finances to open new units, you can expand and make a lot of money. I know of a guy who's only 28 and has over 30 stores (not fast-food)....makes more money than anyone that I know in their 20's/early 30's in finance. However, his family provided him the credit lines to expand (can't overlook that). Either way, his stores are doing very well and he is the 2nd largest franchisee in the state.

www.bluemaumau.org is a good place to look.

Also check out "Dunk'd" by Irwin Barkan. It tells a horror story of being a franchisee.

http://www.franchising.com/empirebuilders/ being there is how people get started who go on to build networks of units.

 

Excellent insights. Thanks, guys. I think the reason I'm considering the investment is because the real estate market is so over-heated in my market right now that I can barely find a good deal to invest in, so I'm looking for some alternative assets. I'm looking for some long-term cash flow investments that payoff debt over, say, 20 years so that I have some residual "retirement" (I don't plan to ever retired) income.

But good point about active/passive management. The guy who pitched me seems pretty passionate about it. I guess I figured that he would actively manage as the GP while the rest of us invested. But I really have no idea at this point.

 

Passion and drive are not always the best things to look for in partners for franchises. Sure you need driven people to run the business but I have found in my dealings with passionate people is that they are often passionate to the point of destruction. This isn't a business you can run by your own rules. This is a business that you follow the rules given to you. I think people who make good middle managers make good franchise owners. They can direct people and get things done, yet still color within the lines given to them. They aren't mavericks. Remember your license can be pulled at just about anytime if the parent company doesn't like what you are doing.

Follow the shit your fellow monkeys say @shitWSOsays Life is hard, it's even harder when you're stupid - John Wayne
 

I've never owned a restaurant, nor had any desire to invest in one, so consider that when reading my thoughts/opinion on the matter.

My first thought, do you really want your capital to be tied up for 20 years? Let alone into a restaurant and outside of your control? Just count back 20 years from today, that's a long time. If your main motivation is not being able to currently find good deals, you should be sitting on your hands, not venturing outside of your wheelhouse.

 

I'm looking for diverse cash flow investments. My goal isn't get rich quick--it's to buy things with leverage that payoff in 10-20 years, leaving me with an asset owned free and clear. So I'm not sure a restaurant franchise is the right choice, but I've been waiting a year to put my money to work in real estate and it's just been idle. I don't foresee good deals for years to come in my area, unfortunately.

 

Yep, looking at 10-20 year investments. I've got cash to spend. I've seen the way my employer has made ridiculous amounts of money. Medium leverage (50%), long-term investments, fully amortizing. Once they're paid off, more cash flow than they know what to do with and posterity set up for generations.

 

I've never owned a franchised restaurant. However, the main advice I have heard regarding owning a franchise is do your due diligence on the firm. This goes for franchising fees, transfer fees, restrictions, suppliers, etc. Additionally, I know this is a no brainer but you want to partner with a restaurant that will be around for decades. You could talk with current franchise owners in or around your area. They'll give you great insight.

Robert Clayton Dean: What is happening? Brill: I blew up the building. Robert Clayton Dean: Why? Brill: Because you made a phone call.
 

Franchises can be a good investment. I am currently opening my own restaurant, signed lease and started construction. Its a sit down restaurant that has goals to franchise in the future, my partners are getting in on the ground floor. Sit down restaurants with full bar should be averaging 18-23% profit margins, therefore if you do a 1 million in sales you should be getting about 200k profit.

Now if you are looking at a QSR concept (such as subway) your profit margins around 8-12%, therefore to make money, acquiring or opening new locations should be your goal. The great thing about established franchises is that they are relatively easy to scale. The average subway nets an owner about 50k in a year profits, I am just using subway as an example because I am currently looking to acquire an existing one and have done a lot of research on it.

 

Google "SBA franchise failure rates." It's not a tell all but I'd much rather invest in a franchise with a 4% failure rate than 30%.

Also, Jimmy John's has average income info available on their website and is near the bottom in SBA loan failure rates. They're also a lot less over saturated than Subway, Quiznos, etc.

Note: Income info for stores looks like a very selective sample, so I wouldn't expect an ROI quite as high.

 

I know this thread is a few months old, but I'm in the process of buying a franchise. I'd suggest speaking with a franchise consultant before you buy a franchise. There are so many choices out there that you would never even know about unless you speak to someone who's sole job is to network with franchisors and vet them. Now, I would highly recommend against investing in your friend's restaurant for several reasons:

  1. What is your exit strategy? If you need the money, how can you get access to it? Who is going to want to buy a percentage of a restaurant?

  2. Restaurants are one of the most competitive businesses to get into. The failure rate is insanely high and markets are saturated with food.

  3. You're relinquishing all control of this investment. What happens if he quits? What happens if he gets ill or dies? Who's going to take care of the business?

It just seems like there are way too many issues with this idea. If you want passive income, invest in dividend paying stocks where you have a ton of liquidity and you know that they are quality businesses.

 

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