Culver’s, Marco’s Pizza, Finance, FranchisingIt’s no secret that running a restaurant is a risky business. The fact that many restaurants will ultimately fail early in their existence is not lost on most entrepreneurs, and yet they carry on anyway in hopes that their restaurant dreams can be made true. 

The risk inherent to opening a restaurant—both mom and pop and franchise—has made the post-financial-crisis period especially hard for operators, as they find it exceedingly difficult to secure financing. Commercial banks have tightened their lending policies across the board, and their assessment of the restaurant industry as a particularly risky investment has thwarted the expansion ambitions of many brands in the quick-service sector.

In this climate, quick-serve franchises have been forced to get creative in order to push on with expansion. One brand in particular, Marco’s Pizza, epitomizes that reality.

Based in Toledo, Ohio, Marco’s operates more than 220 stores in 17 states. In the last 18 months, the company has pursued five alternative financing options in an effort to realize its growth goals. Most recently, it enrolled in a lending program created by Bancorp and Franchise America Finance that all three parties are heralding as the next great financing model for restaurants.

The program works like this: Franchise America Finance vets a franchisor based on its business model, franchisees, and real estate selection processes. The approval process requires more due diligence than banks tend to do when processing a loan application, but franchisors that make it into the program are able to get their operators reliable access to financing provided they meet certain predefined qualifications—a dream come true in today’s credit climate.  “Financing has become that black hole that no one knows what’s going on with it,” says Ron Feldman, cofounder of Franchise America Finance. “We created this program to allow the approved brands to have a predictable finance model once again.”

Marco’s was the second franchisor enrolled in the program. The company first had to submit to analysis by FRANdata, the Small Business Association (sba) watchdog, per Franchise America Finance’s vetting process. After being approved, Bancorp agreed to lend Marco’s $9 million in SBA loans—$6 million for new stores and $3 million for resales or refinancing of existing stores. Marco’s franchisees that meet the predefined qualifications still have to go through an approval process with Bancorp, but the process is much quicker than through the traditional lending model.

Read more at: QSR

Gary Myers, Sizzler's largest franchisee, has remodeled several aging units in the last four years, initially without the blessing of the franchisor. The new design (seen here in a Hesperia, Calif., unit) now serves as the prototype for the entire system.

David Farkas writes at  Chain Leader that some years ago, a MaggieMoo’s franchisee in Columbus, Ohio, wanted to make a few bucks peddling coffee in the morning. Seemed like a good idea; he didn’t sell his first ice-cream cone until 11 a.m. yet paid rent for the entire day. He bought point-of-purchase displays and equipment, got franchisor approval and fired up his pots.

“I don’t think it worked, as I recall, and I probably could have told him that,” remembers then-CEO Richard Sharoff, now a franchise consultant in Annapolis, Md. “But if a guy has passion for something, why not let him try it? It sends a good message to the franchise system.”

Under current economic circumstances, sending an all-ideas-are-welcome message might seem like a good idea. Franchisees are a chain’s boots on the ground and therefore a likely source for operations best practices. But are they also a strategic resource?

Strategic Error

Right off the bat Sharoff can think of plenty of reasons why franchisees should not be a part of the strategic process. “Generally speaking, a franchisee is focused on what’s happening within the four walls of a store and not looking at the big picture,” he says, citing a recent KFC lawsuit as “a perfect example.”

In January, KFC franchisees asked a judge to rule that the franchisee-controlled advertising council have final say in directing ad spending. They claim franchisor Yum Brands promotes grilled chicken at the expense of better-selling fried chicken. (The franchisor dubbed the lawsuit “baseless.”)

“When a franchisor tries talking about changing the menu for the long-term benefit of the system, the franchisee is thinking, ‘What’s it going to cost me today in the store?’” Sharoff explains. “That makes it difficult to seek strategic input because the franchisee is thinking about how much his revenue is going to be today or tomorrow.”

Then again, not all franchisees are created equal. Just ask John C. Metz, who franchises 33 Denny’s; he is also a franchisee of Dairy Queen and Marriott. Last year, Metz became the franchisor of 30-unit Hurricane Grill & Wings. “I’m unique insofar as I bridge the gap better between corporate and the franchisee than other franchisees,” says the veteran operator, citing his M.B.A. from Cornell University’s Johnson School.

Metz, founder and president of RREMC Restaurants in West Palm Beach, Fla., believes he should have been elected to Denny’s board of directors last year, largely because he’s done “a variety of innovative things” and because current management isn’t entrepreneurial enough to solve the chain’s looming problems. “McDonald’s has taken big chunk out of breakfast business, and Starbucks out of coffee,” Metz declares. “And a lot of chains have taken it out of the late-night business.”

Tim Flemming, Denny’s general counsel, says there were too many potential conflicts of interest to make a franchisee a director. One is whether Metz would be an independent or an inside director. Public companies are required to have a specified number of independent board members. Metz believes he is one; management disagrees.

“I think franchisors that don’t consult or don’t listen to franchisees, and especially large successful franchisees, are making a grave mistake,” says Metz, who is testing Denny’s Fresh Express concept in one of his restaurants. The concept, which debuted at California State University, San Bernardino, features Denny’s menu and espresso beverages in a quick-casual format.

Read More at: Chain Leader

Multi Concept Franchise Owners

Todd Owen, Qdoba’s vice president of franchise development, tells QSR about how the more-than-500-unit Mexican chain uses multi-concept franchisees to grow its business and what the chain’s strategy is to attract the best franchisees.

How does having multi-concept franchisees play into Qdoba’s growth strategy?

A franchisee we have in North Carolina who has 22 Qdobas is a former COO at Hardee’s and a former president at Bojangles’. This story is somewhat rare, to have that level of senior executives come over to the franchise side.

He’d never, to my understanding, been really involved as a franchisee in any other system, but decided that instead of pursuing life on the corporate side of the restaurant business, that he would become a multiunit franchisee in the Qdoba system.

That kind of speaks very clearly to our overall development strategy, that while you’re fishing in certainly a smaller pool of applicants, because of their experience and capital, we believe that it’s the healthiest strategic way in which to grow our franchisee base.

How does Qdoba attract franchisees who own other brands?

I don’t know that it’s intentional that they’re from so many different brands. We have a restriction basically that you can’t be in a Mexican or wrap-type competitor. But other than that there’s no restriction in our franchise agreement.

There are probably three reasons that a franchisee is looking at us. One is, perhaps they’ve built out their market. We’ll use as example Papa John’s. They’ve saturated their market in Cincinnati and they don’t want to go to Columbus. They just assume to do something in Cincinnati where they know real estate, they’ve got people, they’ve got banking relationships.

Maybe it’s diversification. As we know in our economy, especially in restaurants, casual dining has been hit harder than fast casual or fast food. It kind of allows them to diversify [by franchising a quick serve].

And, of course, we like to believe that we have a very competitive economic model, that for the risk that anybody takes in starting a business, that they would find perhaps a better return at Qdoba than, say, a Burger King.

With any investment it’s, “OK, if I’m going to take a risk with an investment, where is the best return for the risk I’m taking?” We’re getting large enough now, to some of these franchisees, we’ve become a pretty substantial part of their business portfolio.

What’s the advantage of having multi-concept franchisees?

The restaurant business isn’t necessarily rocket science; however, we do believe it takes a special type of person to be successful in it, and we believe that one of the greatest indicators of that is past performance in other restaurant systems.

It can be indicative of future success in Qdoba. Having restaurant experience and a track record of success doesn’t guarantee that they’ll be successful at Qdoba, it just increases the odds.

How is Qdoba attracting franchisees, especially in the recession?

We’re certainly not the Golden Arches, but we are building a brand and have a good amount of runway ahead of us to continue to expand and build upon our credible name.

So there’s a strong future ahead for the category and especially for Qdoba as one of the top leaders in that fast-casual category. And lastly, we’ve not made headcount reductions here. We continue to invest in the future of our business.
What is the perfect franchisee?

An entrepreneur that follows the rules. I didn’t create that phrase, but I do like it. An entrepreneur is somebody that obviously wants to make up their own rules, is a visionary who can come up with all of these ideas, but in the franchising world, you have to follow the rules, you have to follow the system.

They’re entrepreneurially minded but are willing to acquiesce to the company, the marketing plan that we’ve got out there, the store design, and the spec we make on our chicken. They’ve got a million other things to think about every week to make their business successful and are willing to give up some of the control. Ideally, somebody can have the business experience, they can have the restaurant experience, they can have boat loads of money, but boy if that relationship between franchisee and franchisor is not good, it’s going to be a long and painful marriage, and God hope you don’t get a divorce.