food franchise vs real estate

[Fred Conway]

This is a question I have thought about lately and was wondering if anyone had any thoughts on the matter. Clearly you need cash to buy a food franchise, specifically fast food, so this question wouldn't apply to what to do with anything around 100k, most require 500k plus. Some I have had in mind are McDonalds, Sonic and Zaxbys. If you had a 1 million in cash, would you invest in a fast food franchise? The average McDonalds makes around 250k in profit per yr and 2.5 million investment. The average subway makes between 80-120k in profit per yr and around 250k investment. 

For those that say this type of business can be too time consuming, you're right but real estate can be as well. I actually know someone who owns around 65 fast food chains and he took 4 years off of work with the exception of an occasional phone call. 4 years! This while making over 5 mil a year.

So would you invest? Why or why not?

[Joel Owens]

Before I got into real estate I was in the restaurant industry for decades in all facets including management and ownership.

The NUMBER ONE failure of any business is wait for it........ UNDERCAPITALIZATION.

The second thing is being independent versus a franchisee. National Restaurant News conducted research that shows 90% of franchisees are still in business 5 years later versus about 90% of start ups who are not franchisees fail.

The reason is SYSTEMS to follow where you do the same thing over and over to get a continuous positive result. So if you constantly test and track to improve and have the right formula the success follows. If you do not have a system then you can have good results one day and bad the next.

Cash return from down payment hands down you get more from the restaurants. I looked into Steak-n-shake. They require 100 employees and also require you to do the specials as mentioned which erode margins. Some of their stores only make 100k profit a year off of 2 million sales, and then the middle does okay at 200k, and then the top stores do 400k profit etc. but is only a small percent overall. I decided for the capital outlay it didn't make sense to do that.

I do not like opening NEW STORES as a franchisee. The cost to do the build out is very expensive and you go upside down  quick as the build out ages. You do not have a history of sales over time for that location. The place could do awesome or it could tank. They all do some business in the beginning due to being new. Also you have to do heavy lifting hiring and training staff.

I find it much more desirable buying existing locations that have been established with high profit for years with a seasoned management staff. The original owner did the expensive build out, did umpteen hours to get the staff where they wanted and performing, and they have created a customer base for continuous sales over the years.

That's the business I want to buy if any. I do not buy businesses 1 to 2 years in because the track record is not there yet. The Subway's mentioned almost all of those are OWNER OPERATOR meaning you are buying yourself a job. Take the owner out and pay a FT manager and there is almost no cash flow left. This is why I am interested in larger businesses. No owner operator and there has to be seasoned managers and assistant managers on the books and it still cash flows great.

I look for motivated owners where the business is awesome they are just motivated for personal reasons. ( partnership split, other interests, another business needs more of their time where they have additional risk exposure, death, health reasons, relocating, divorce, retiring, etc.)

I want to hit price to net profit of 2 or less. Meaning if the business does 200k profit a year I do not want to pay more than 400k for it and preferably 300k so 1.5 multiple. I want to only put 1/2 down or less so I recoup the down payment quickly. I want to have an out clause on the lease so I can shut everything down and get my money back at least with liquidating the equipment etc.

Before getting into real estate people wanted me to do restaurant consulting and I am great at it. I can spot a ton of problems right away in a business but the reality is if they do not implement the plan daily after I am gone then it will revert back to the old ways. I didn't want to travel and deal with that all the time so I got into real estate over 11 years ago.

I have been looking at doing a Papa John's as I have extensive experience in pizza. I wanted to buy an existing location. I am not interested in new builds. That gives the parent company more exposure with almost no risk and the franchisee bears the brunt of everything. I found out they do not sell their corporate stores. I asked for a list of franchisee locations versus corporate so I can see if some good locations are franchisee. I am waiting to get that back. If corporate has all the good stores in my area then of course I will pass on the idea. I am not going to buy the crap hole locations in Atlanta. Pizza can do good as I have seen some for sale Papa Johns in other states doing 300k profit asking 450k price. Pizza the menu is simple and managers are in place.

The person mentioning their friend has a lot of food locations. You can make it passive IF you build in the cost structure of additional layers of management. So if you have so many stores then you need a district manager to see over them. If it gets bigger you add in a regional director. More bigger executive vice president etc. You have a hierarchy so that if part of management goes down it is not you stepping in.

The same can be said for real estate is that it can be passive with the right structure or active.

With food I get cash flow daily. With value add real estate I get equity growth on the back end but capital outlay upfront with not much cash flow coming in. I am looking at a vacant 10,000 sq ft retail strip in a great area right now to buy. The owner mismanaged it as funny enough they own a bunch of restaurants as their core business and didn't know the time or oversight needed to maintain the asset. Lot of upside on this one.

I am happy to talk more on food on the phone. You can make money but really need to know what you are doing.