Everybody’s Gotta Eat

What prospective franchisees need to consider before investing in a food service franchise

“Everybody’s gotta eat, so it’s got to be good business – right?” It’s a rationale that franchise consultant Gary Prenevost hears often from newcomers contemplating a food service franchise. But with over 15 years of experience with the FranNet franchise consultancy, Prenevost has a measured response to that truism: “Just because everybody’s got to eat, it doesn’t mean that it’s the right business for you.”

He doesn’t mean that you shouldn’t go into food. He just means you should do your research. Here, we consult with Prenevost and other food service experts to help you gain an insider perspective on everything you need to consider before investing in a food service franchise.

The perks

Let’s look at some upsides of food services. For starters, the fact that we all need to eat means that once you build it (and market it), they will come, according to Prenevost. “You’re typically dealing with a location-based business where the customers will come to you, so it’s more about delivering a consistently good experience and build­ing up a base of repeat business than about having to go out and hunt for new custom­ers all the time,” he says.

He adds that the service aspect means it’s about building ongoing relationships. “If it’s a good customer experience, if it’s good food, people will come several times a month, sometimes a few times a week. The relation­ship with the customer is dynamic and active.”

Another perk of food service is the even­tual predictability in terms of hours. While the first year is often hectic, eventually that stabilizes, especially if you build a reliable team. Same goes for finances, provided that market conditions don’t go crazy.

The challenges

Despite many upsides, there are also chal­lenges.

A more serious challenge is the nature of the business. “A restaurant business is a manufacturing business with a perishable product and finicky customers,” says Pre­nevost. He often warns those who would enter food service that just because they love to cook, that’s not enough – they have to think about whether they have other skills like management expertise and busi­ness planning. Because food is perishable, franchisees also need to be meticulous on production, timing of delivery, proper food storage, and inventory.

Is it for you?

As you can see, these challenges are begin­ning to get personal, in terms of relying on the skills of an individual franchisee. Strengths outlined so far include being routine-oriented and a strong manager of people and operations. Because the big­gest challenge is building the business, franchisees should also excel at marketing, networking, and engaging with the commu­nity. Prenevost says a food service back­ground is not necessary, but it helps.

Perhaps the most critical aspect of find­ing out if a specific franchise is right for you is talking to others in the system. And not just one or two, says Prenevost. “I’m a really strong advocate of talking to at least eight to ten existing franchisees before you buy the business.”

Finances

Joseph Pisani, Director of Franchise Finance for North American Industry Sectors at BMO Financial Group, says your journey to franchise financing starts with knowing what you can afford. A typical range for cap­ital is 25 to 40 per cent equity. In terms of cash, usually a franchisee needs a minimum 30 per cent down payment. The bank will also ask to see their net worth to get a sense of their fallback position. Pisani adds that in today’s challenging economy, banks will be paying attention to how well franchisees can meet their numbers on a weekly basis, so they can pay their debt down.

Pisani says different franchise networks handle financing in different ways: some have their franchisees approved before they go to the bank, some will be close to approval, and then others will ask the fran­chisee to work with the bank directly. He prefers the first option. Pisani adds that bankers do keep an eye on food service trends and want franchisees to be aware of the risks of getting into an operation that’s particularly trendy.

When applying for financing, franchi­sees need to bring a business plan includ­ing resume, a description of the franchise network, financial statements, details on location and franchise operation. The banker will ask if franchisees have seen disclosure documents, and to see personal financials as well. “I explain to franchisees that their personal credit bureau is prob­ably the most important thing that they need to ensure is correct, up-to-date and very clean,” he says.

Location

Frank Lopreiato, President of full-service restaurant brand Shoeless Joe’s Sport Grill, stated that franchisees should consider several key elements when it comes to loca­tion: tenant mix (who are the additional tenants on the property?), “traffic drivers” (what is the overall mixed use of the site?), demographics, and occupancy costs.

“It’s different for every brand, but two necessary components for every brand, are locations that really capture both ‘impulse’ and ‘destination’ purchasing,” he explains. “This means the location needs to be acces­sible, and in a high-profile area. In addi­tion, destination purchases are often event driven. If we are on a location with a movie theater nearby, for example, that obviously drives traffic. Franchisees should always have a good understanding of the brand that they’re looking at, but also of the key traffic drivers for that specific brand in order to determine their location.”

Location, Lopreiato adds, can be a fran­chise’s single biggest asset. He explains that if a restaurant is located in a well-main­tained, aesthetically pleasing building, cus­tomers will naturally gravitate towards it. This, should always be “top of mind” for all franchisees.

As franchisors, Shoeless Joe’s does pro­vide comprehensive support, including detailed tenant mix analysis, demograph­ics reports, and competition summaries. Ultimately, however, it’s up to the franchi­see to find a location that they are emotion­ally connected to.

“We always urge our franchise pros­pects to really do their due diligence. They should be scouting locations, visiting res­taurants in the area over different days, and different meal periods, to ensure that the franchisee feels comfortable and confi­dent with the location they are choosing,” Lopreiato says. “Location is critical. Fran­chisees need to not only go through the practical steps, but they really need to be emotionally connected to the site. It needs to feel right for them.”

Guy Gallant, vice-president of franchis­ing and development for Grinner’s Food Systems Ltd, which owns Capt. Submarine, FROZU, and Greco Pizza, the largest pizza franchisor in Atlantic Canada, says fran­chisees should consider several key ele­ments when it comes to location: visibility, distance from customer’s homes, daytime sales potential, and accessibility.

The location also needs to be set at a price the franchisee is willing to pay and at a reno­vation cost you can afford too, since this is a serious start-up cost. “All these factors will affect your sales volume all the way down to your bottom line. The right answer is not always the most or least expensive location,” says Gallant, adding that in Atlantic Canada where public transit is scarce, and driving is predominant, they tend to choose central locations with lots of parking.

Staffing, training, and support

Anyone who has been a customer in a res­taurant knows how much staff can contrib­ute to the overall dining experience. While franchisees have made the news with their reactions to recent minimum wage increase legislation, some think the change could make staff less transient, one of the major long standing challenges in this industry.

“Now food service is going to be paying about the same as a lot of distribution and manufacturing jobs, and that might open up a candidate pool for them because if the wage is the same, they might actually prefer to work in a QSR (Quick Service Restaurant) or something like that, for better shifts or more flexibility,” says Jessica Culo, owner of three Express Employment Professionals staffing franchises in Edmonton, Alberta. She also recommends exploring options like the temporary foreign worker program.

In terms of the hiring process, Culo rec­ommends having a recruitment plan and talking to other franchisees about their best practices, and particularly what moti­vates employees in terms of retention. In interviews, she focuses on character and values. “When we interview candidates I’m a real big believer in hiring the character and training the skill,” says Culo. She adds how offering to accommodate employees with perks like scheduling flexibility and a relaxed dress code may also be attractive in the food service sector.

Prenevost says finding a franchise with a strong approach to training can be a great start. He adds how the best ones cover everything, including training at head-office, in-stores, and with the entire team on-site.

In terms of ongoing support, Prenevost is a fan of franchises that provide metrics and do regular reviews of key performance indi­cators, helping franchisees to boost opera­tions if they lag behind the system average.

Having peer support in place where the franchisor encourages an open culture of sharing can also help. Culo says ongoing training is also helpful. “Training should not stop once the franchisee opens their doors. Regular training, coaching and accountabil­ity sessions, while they are hard to find time for, I believe are imperative.”

Equipment

Equipment is yet another important ele­ment for the new franchisee. Robert Phelps, president of Silver Chef, an organi­zation that funds equipment for hospital­ity businesses, says his top advice in this realm is really paying attention to what the franchisor requires.

“The key element would be to just con­sult with the franchisor, rather than thinking they could purchase a piece of equipment that they feel is in line with the franchise’s standards. If they do that and realize it’s not sufficient, then they’ve outlaid capital and need to replace them,” he says.

While he says there are a few common­alities required by most food services fran­chises, like cooktops and refrigeration, spe­cific requirements tend to vary widely. For example, a sandwich shop might need far less equipment than a full-service restau­rant, or a patisserie might have a require­ment for specialized ovens where a noodle house would need boilers and fryers.

Regardless of operation, Phelps says some common requirements for financing equipment are the right working capital mix, a strong relationship with the fran­chisor, and an awareness of trends in the marketplace.

Back at the bank, Pisani says he identi­fies one trend in successful food service franchisees that stands out: drive. “The number one thing is that they are driven to make it a success. They have a vision that today they want the one location, but come tomorrow they want three, they want five. Those are the ones that are going to be suc­cessful.”


By Suzanne Bowness