Buying a food franchise. (Need some Insight)

[Chinmay J.]

I have been toying with the idea of buying a food franchise, and have been working towards it for last couple of years. I calculated my current debt to income ration at 37%. It does take into account my current salary though. If I do get the right to run the franchise; however, that will be replaced by income that will be generated from the operations of the franchise. No money coming in from my job takes my DTI to 93%. It doesn't take a genius to figure out that I currently make most of my income through my day job.

I do have all the requirements like down payment to qualify for the loan, as well as total asset requirements (around $300K) taken care of. Also FWIW, my credit score is over 800 (FICO 815 as of last month).

So my question to you guys who are experienced in lending/finance is how am I looked at by a potential lender. I will be seeking out SBA lender. What are the things to be considered (from a newbie's POV) that I could be missing. Its one thing the franchisor giving OK to me, but its a completely different ball game for me to get the loan. My target date  for applying is Oct 2017. So I basically have 10 more months to take care of anything I might have missed out on. 

So fire away guys and gals.. Don't hold back. ( I despise political correctness. So tell me I am an IDIOT if you must, as long as you can justify it with proper reasoning).

[Joel Owens]

Have you EVER owned a food business??

I was in it for decades before going into commercial real estate. I know a ton about the industry. Whether you will get a loan or not is the least of your concerns.

Becoming a new franchisee with a new store is very risky. Anytime a restaurant opens  you have the (newness) factor. Basically any idiot could run it and because it is new for the first month or two that owner could generate decent sales with almost any food concept. A few months in (tells the tale) with positive customer reviews and if call and foot traffic is the same or better from when you opened.

Equipment for build out is worthless. New the franchisor company charges a mint for the stuff to make profit. If your business fails that equipment sells for 10 to 15 cents on the dollar to an equipment warehouse buyer for resale or other owners you might squeeze 20%  selling directly. Generally if you fail there is also language in the lease where the landlord will try to attach or keep those assets as collateral with UCC filings.

There are some SBA loans where for instance you can own 50% of a building with your food concept and then rent out the other 50% of space to other tenants. There are caveats to doing this so need to go over those with your attorney and the SBA lender.

Alternatively you could forego the SBA lender and do what many do and buy an existing business that is established and has been profitable for years and years or even decades. Those can be the best kind because someone else paid for the exiting build out, training employees and weeding through the duds, stabilizing and creating a history of sales over time you can track,etc.

Those businesses have already created multi-generational customers from the grandfather,father,and son to eat there.

Great business opportunity is generally where the owner is wanting to retire, has to relocate, health problems, partnership split, divorce causes division of assets, bankruptcy sale, etc.

You want the business to throw off great cash flow on it's own and be established but get the discount because of external operator issues. This way you come in and spruce up the place for cheap and have great cash flow going in.

I don't buy any business where I have to be a manager or there. That is buying yourself a job and you never will grow scale with systems that way for multiple locations. Businesses that make 100k gross profit after expense including already paying a manager,assistant manager,etc.

Typical is to try to put say 25% down and then get the current owner to finance a 75% note due in say 5 years at favorable terms ( say 30 year amortization with a 4 to 5% fixed interest rate). If the lease is coming due soon or has a large rental increase coming up go ahead and negotiate with the landlord now for long term low rents and an out clause to terminate lease with no recourse if annual sales do not go above XX by year 3 etc.

No legal advice given and this post is talking not about a specific person but in generalities.