An existing franchise business with excellent equity built in.

Commercial Real Estate Investing
12yFollow

An existing franchise business with excellent equity built in.

Cecil Russell
Mobile, AL · Member since 2014 · 80 posts · 13 votes

I am inquiring about an existing business (Cold Stone Creameries franchise). Records indicates an average annual income of $169,000. The owner is asking $49,000-according to the information sheet on the property. This would be my very first investment deal. I am undecided whether to hold or resell. I would appreciate any information that I should be aware of in this type of transaction specifically, any "red flags" I should look for, specific questions to ask, etc. Thank you in advance.

1Reply
98 views

Most Popular Reply

Joel OwensBusiness Member
Moderator
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
12y

You are just buying the assets of the business and not the liabilities.

Having said that Cold Stone is  a seasonal product of ice cream. If you look at the books this time of year is the slow season in most states where it is winter now.

Even if not peak season is summer.

Businesses trade at 2 times multiple. So if net was 100,000 a year profit it would sell for 200,000.I do not care how much sales a business has. I want to know net profit before taxes. A business could do 1 million a year in sales and have nothing to show for it. Conversely a business could do 500,000 in sales and have a net profit of 220,000 before taxes each year.

The biggest component when I look at buying a business is that if it's a job or an investment?? What I mean is these small businesses tend to have owner operators working 40 hours a week for nothing. Then they claim the business made 40,000 profit. If I have to put a manager in now I am at zero profit having to pay them. A big brand like that will also cause you to have to re-image every so many years inside which can be expensive. Machines will need replacing causing a lot of capex outlay eating profits. Big franchise fees and you have to make sure you are not having to take on a crappy lease with high rent increases and  a personal guarantee. I could go on and on why this is not a deal.

I look for retiring business owners with a business that has done well for decades and has management in place. These businesses cost more money but the structure is there to be hands off. Decades of experience from worker to restaurant owner before I went into commercial real estate.  

Podcast Guest on Show #47
NNN Invest53 Reviews
WebsiteView Page
2Reply
See this reply in the discussion

28 Replies

Jump to latestLatest
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    12y

    You are just buying the assets of the business and not the liabilities.

    Having said that Cold Stone is  a seasonal product of ice cream. If you look at the books this time of year is the slow season in most states where it is winter now.

    Even if not peak season is summer.

    Businesses trade at 2 times multiple. So if net was 100,000 a year profit it would sell for 200,000.I do not care how much sales a business has. I want to know net profit before taxes. A business could do 1 million a year in sales and have nothing to show for it. Conversely a business could do 500,000 in sales and have a net profit of 220,000 before taxes each year.

    The biggest component when I look at buying a business is that if it's a job or an investment?? What I mean is these small businesses tend to have owner operators working 40 hours a week for nothing. Then they claim the business made 40,000 profit. If I have to put a manager in now I am at zero profit having to pay them. A big brand like that will also cause you to have to re-image every so many years inside which can be expensive. Machines will need replacing causing a lot of capex outlay eating profits. Big franchise fees and you have to make sure you are not having to take on a crappy lease with high rent increases and  a personal guarantee. I could go on and on why this is not a deal.

    I look for retiring business owners with a business that has done well for decades and has management in place. These businesses cost more money but the structure is there to be hands off. Decades of experience from worker to restaurant owner before I went into commercial real estate.  

    Podcast Guest on Show #47
    NNN Invest53 Reviews
    WebsiteView Page
    2Reply
  • Cecil Russell
    OP
    Mobile, AL · Member since 2014 · 80 posts · 13 votes
    12y

    Thank you Mr. Owens: I will add these questions to the list I am developing. As I understand it, there is a manager in place and there is 1 year left on the lease with an option for another 5. Would I be able to get you to look at the webpage on the listing and give me your opinion. I haven't made my first transaction yet, but as this business is in my neighborhood, I was interested. I didn't intend to hold it for long unless it has a significant profit potetential which, with our weather here-its spring and summer almost all year long; Cold weather only lasts about 9 weeks a year, the ice cream business flourishes here where it wouldn't in a more northern climate.

    The website is a loopnet page.

    http://www.loopnet.com/xNet/MainSite/Listing/Profile/Profile.aspx?LID=18747782&SRID=4819353497&StepID=101

    Thank you for your time.

    Sincerely

    Lee Russell

    0Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    12y

    First off the broker has out in the wrong area. Businesses go in www.bizbuysell.com which is the business portal sister company of LoopNet.

    A corporate store doing 169,000 a year in gross sales is extremely poor.

    Food and labor generally run 50% in the food business total and that's if you are doing good keeping inline.

    169,000 / 52 weeks in a year = 3,250 in sales a week / 7 = 464.29 a day.

    You aren't even building in paying the lease yet or utilities to keep the lights on etc.

    Average median income on LoopNet shows 62,000 median income which is just slightly above the national average so not an ultra great location. Good but not fantastic. I would do an analysis of ALL the frozen yogurt and ice cream shops in the area within a 1 to 2 mile ring radius to see saturation levels versus population.

    32 a sq ft is extremely high and likely is an inflated pre-recession lease rate. It's also slated to go up in an option in 1 year even higher.

    If you are even considering this you should look at having corporate keep paying for a portion of the lease for a few years or negotiate a reduction of current lease rate and extending five more years at that rate without the rate increasing. The landlord who owns the strip center will likely require Cold Stone corporate to stay on the lease because all their stores are backing as security versus a new operator entering the food business as a franchisee.

    Corporate is just trying to dump one of their dog stores with low sales and a high lease rent rate  from what I can see. This isn't even in my stratosphere to consider if it was me. Cold Stone sales have gone down in the last few years as Minchie's and a bunch of yogurt knock offs have came out where customers want something lighter. That has taken away market share from Cold Stone. I have eaten Cold Stone and it's a great tasting product but very expensive and a lot of times I just want a plain dipped cone from Dairy Queen and not all of that other stuff.

    Podcast Guest on Show #47
    NNN Invest53 Reviews
    WebsiteView Page
    2Reply
  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    12y

    Both my kids worked at Cold Stone's at various times.   Do not even fool yourself into thinking this is an investment.  Its a job.  Even with a manager you will be very involved with the day to day operations.  The store my daughter worked at ended up being taken away from the franchisee.  That may have happened with this one.  Toward the end they always cashed their paychecks out of the till because they always bounced. 

    0Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    12y

    Yes the food business can make you a lot of money but it is not for the faint of heart and like anything you have to buy right.

    I have decades of experience and I see people all the time spend 250k to build out a franchise store to make a net profit of 40k to the first year. The franchise fees eat them up and they have bought a job. They sell a few years later when the concept is no longer hot for 30 cents on the dollar.  

    Podcast Guest on Show #47
    NNN Invest53 Reviews
    WebsiteView Page
    0Reply
  • Bryce Y.
    Dallas, TX · Member since 2011 · 308 posts · 59 votes
    12y
    Originally posted by @Joel Owens:

    A big brand like that will also cause you to have to re-image every so many years inside which can be expensive.

     Hi Joel, what do you mean by this?  New tables, chairs, flooring, etc?  

    0Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    12y

    The franchises will have in their agreements that re-imaging has to be completed by a certain date and time.

    It's not only chairs but lighting, counters, and a whole bunch of other requirements. So you need to calculate and ask if there is an up and coming re-image due for a store. I want the current franchisee to take that hit and expense and not me if buying the business. Also if I check the ovens, meat cutting machines, etc. and they are entering the end of life expectancy I will take a bunch off the price to compensate.   

    Podcast Guest on Show #47
    NNN Invest53 Reviews
    WebsiteView Page
    0Reply
  • Cecil Russell
    OP
    Mobile, AL · Member since 2014 · 80 posts · 13 votes
    12y

    Thank you very much. That just saved me from making a huge mistake.

    0Reply
  • Derek W.
    Investor · Kern county Riverside County, CA · Member since 2008 · 494 posts · 261 votes
    12y

    All of the Coldstones in my area have gone out of business. There used to be 4 within a 20 mile radius of my house. Now there are none. Hmmm

    0Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    12y

    No problem Cecil glad I and others could help.

    You will find what I call a lot of FAD type food places. They are hot for a few years with huge growth and then BOOM the carpet is pulled out from under them by the next big thing. Sales start to drop like a rock and the contraction begins. They either button down the hatches and get lean and mean and survive to come back better the next few years or they end up in BK bought buy another competitor or just go out if no bidders all together and everything is liquidated.

    Quizno's is another brand that has shuttered tons of stores. I used to be sought out for restaurant consultation work but did not want to do all that traveling plus I like real estate the best.

    Another item to watch carefully is this minimum wage hike thing. If that happens it could kill returns as you can't up the food prices to equal the extra payout per hour for minimum wage employees. Some really high income areas you might get away with covering most of it but not the poor to average areas.

    The same workers that make a big noise about wanting 15 dollars an hour for filliping burgers will want that burger still for 2 dollars. It's simply not going to happen as the economics do not work.   

    Podcast Guest on Show #47
    NNN Invest53 Reviews
    WebsiteView Page
    0Reply
  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    12y

    well, I'd disagree with many of the assumptions but it seems you came to the right decision in spite of it all. I suggest you have a good understanding of the industry and the niche of any business before you just look at numbers and expected returns, especially since the historic numbers may or may not be relevant. Small food service and motels have the highest fall out rate that I know of......folks think...how hard can it be? They have no clue, that's how hard it can be. Either you need to know or you need to hire folks that do know and hire them and stay in a passive position, that's pretty hard to do with a small store, possible if you're buying 10 stores.  

    Why is the owner selling is my first question.....and prepare to have smoke blown your way. The owner probably isn't an idiot, there is a reason he's asking 49K. I always tell folks that if they have the money to invest they can afford expert advice locally, I'm sure there are attorneys and CPAs in town. :)  

    0Reply
  • Marylynn B.
    Investor · Frederick, MD · Member since 2012 · 160 posts · 31 votes
    12y

    @Cecil Russell . @Bill Gulley  I was a franchise broker for several years and the low resale is not uncommon.   I could give you many.  The reasons, well that is another story. They are often not listed in www.bizbuysell.com due to the franchisor's restrictions.  

    @Joel Owens  brought up  franchisor's requirements.  Everything by law is in the UFOC.  As a potential buyer you are required to be given a copy of that as well as the right to interview franchisees.  I would suggest an attorney in Franchise Law-- not a general or real estate attorney as Franchise Law is very specific.

    Yes food has the lowest markup and short shelf life, however, drinks and some yogurt/ice cream can make the numbers work.  However, I never sold a food franchise...ok a smoothie one but that is all he would look at..there are hundreds of franchises, service franchises being most broker's favorites.

    If it is a franchise, it is a whole different ball of wax. 

    1Reply
  • Cecil Russell
    OP
    Mobile, AL · Member since 2014 · 80 posts · 13 votes
    12y

    Thank you everyone for input. I don't have enough experience in any area of real estate investment so I will pass on this until I have more experience. I don't want the first one to be a flop.

    0Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    12y

    All I can say is that when you have not only transacted a certain kind of asset but also been an owner you have a deeper level of understanding from multiple angles.

    Cecil it just doesn't sound right for your first investment.

    I am very experienced and I have been looking at some of these for investments but much larger businesses. Then I think back to what a pain they can be ........ : )

    In the food business if you do not have a few hundred K to put down to buy something larger that is not hands on then I think you do not do it as you are buying yourself a job as an owner operator. These make more sense for people who are making 20k a year with their job and have some cash saved up and want to escape. They can buy a business to run and then maybe make 80k etc. It may work well for them and it's a winner even if they work 50 hours a week as they were making 20k before and they control their own destiny. 

    Podcast Guest on Show #47
    NNN Invest53 Reviews
    WebsiteView Page
    0Reply
  • Account Closed
    Investor / Developer / GC · Manassas, VA · Member since 2013 · 229 posts · 39 votes
    12y

    Might be a good decision to pass. I've heard nothing but bad stuff about owning that franchise.

    0Reply
  • Starr Ango
    willamsville, NY · Member since 2014 · 16 posts · 0 votes
    11y

    @Joel Owens Hello I came across your post and it was very helpful. I would like to know if There is there a formula for analyzing a franchise for resale? I am currently looking at a Tim Hortons or a Dollar General? Do you recommend any tools for this such as the BP calculator ?

    0Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    11y

    Hi Starr,

    Tim Horton's requires you to be an owner operator and hands on.

    For mutual success and satisfaction, we must ensure that every Franchisee possesses the necessary skills, commitment level, dedication, work ethic, character and strong people skills. There are a number of qualifications we look for in an applicant such as:

    • Leadership or Managerial Experience
    • Hospitality/Food/Retail Experience
    • Involvement in the local community
    • Customer Service Experience
    • Financial Stability
    • Passion for the brand
    • Proven track record of success
    • Business Savvy
    • Two Partners*

    *Please note Tim Hortons franchises only to individuals who will be hands-on operators, not to corporations or passive investors. We expect both applicants, if approved for a franchise, to commit to the demands of a 24/7 busy restaurant operation, and both be equally invested in time, financial investment and effort.

    http://www.timhortons.com/us/en/team/franchising-p...

    I looked at many franchises and they want owner operators. For some people making 100k a year with a franchise might be good but that would be going backwards for me. Basically you are buying yourself a job for 100k.

    The costs to build these out are expensive. If you want to stay passive just buy a retail strip center etc. and collect the checks. That is what I am moving to.

    Podcast Guest on Show #47
    NNN Invest53 Reviews
    WebsiteView Page
    0Reply
  • Starr Ango
    willamsville, NY · Member since 2014 · 16 posts · 0 votes
    11y

    @Joel 

    @Joel Owens Thank you. The investor is very hands on and he would like to own a Tim Hortons. He would like to purchase a existing one. I am trying yo find the best way to get the contact information to the owners of the franchise ( besides cold calling the store) Do you have any suggestions?

    0Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    11y

    Hi Starr,

    Your post is confusing. You say you were looking to be a franchisee. Now you are saying you have an investor looking to be a franchisee.

    Either you have an investor wanting to be a franchisee and you are working as a franchise consultant or a business broker or you have an investment partner that wants to buy this with you.

    The FDD ( franchise disclosure document) generally spells out all fees and costs from the parent company selling the franchises.

    There are new stores and then there are existing stores that are for sale or they might want to sell but do not have actively on the market. The franchise director generally has the inside scoop on off market locations wanting to sell due to partnership splits, owners retiring, franchises being taken away for franchise violations etc.

    In the FDD sometimes the parent company will list percentage of sales for corporate or franchise and what percentage they fall into.

    Example 400 corporate stores and 30% average 100k a year gross profit, 40% make 200k gross profit, and the top 30% make 350k. ( I do not know Tim Horton's numbers and this is just an example). In the discovery phase the franchise director usually gives names and the phone of local franchisees you can call to hear the good and bad of owning one.      

    Podcast Guest on Show #47
    NNN Invest53 Reviews
    WebsiteView Page
    0Reply
  • Starr Ango
    willamsville, NY · Member since 2014 · 16 posts · 0 votes
    11y

    @Joel Owens I am sorry Joe for not making myself clear from the start. I have someone who wants to buy a existing Tim Horton's  franchise. I have agreed to help them find a franchise owner who would like to sell. 

    I hope that is clear ;)

    0Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    11y

    Look on bizbuysell.com.

    Contact the franchise director from corporate for off market restaurants for sale for Tim Horton's.

    Do not approach the restaurant and ask managers for franchisee info etc.  

    Podcast Guest on Show #47
    NNN Invest53 Reviews
    WebsiteView Page
    0Reply
  • Starr Ango
    willamsville, NY · Member since 2014 · 16 posts · 0 votes
    11y

    @Joel Owens I will contact the franchise director asap. Why is it not a good idea to contact the manager for the owners information?

    0Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    11y

    Because you do not want to alert employees or management in the early stages that the owner has a possible interest in selling.

    Rumors get started and it can cause problems for the existing franchisee with employees and management.

    Announcements  and being made aware of a sale comes much later close to closing and with parent company franchisee approval.

    Podcast Guest on Show #47
    NNN Invest53 Reviews
    WebsiteView Page
    0Reply
  • Marylynn B.
    Investor · Frederick, MD · Member since 2012 · 160 posts · 31 votes
    11y

    @Starr Ango Hi Starr, there seems to be some confusion on how franchising works.  I was a franchise broker for several years and still have my license- although I do not practice at this time.  I am happy to walk you through...he also may be better off talking to a franchise consultant in conjunction with you.   

    He could contact the owner, and say he is considering a TIm Hortons and would like to interview him-this is a common practice and always done (if they are expanding which they may or not be) -however, as @Joel Owens  said the best place to start is corporate and discuss resales with them to see if any possibility exists. There are many reasons it could and could not  be possible and none having to do with the owner.    Each franchise company has different rules and regs for transfer and sale.  You just do not know. Until you know that it is almost pointless to focus on one company. 

    Another consideration is if it really makes sense for him from an investment stand point.

    I would see this all the time. People would see their favorite store and want to own one. Allowing their emotion run their logic. (head shaking) 

    All franchises have a life cycle and although he "wants" a Tim Horton, it may not be the investment at this time. Imagine all the quiznos owners that had to have a quiznos at the end of their life cycle or TCBY.  The best time to buy a franchise is in growth phase for many many reasons: expansion, growth, return, lifecycle the list goes on and on. He will most like pay high and have less return than expected.  

    I suspect a "newer and better" tim horton's is out there and the returns could be amazing as well as expansion.  

    Just food for thought.  Let me know how it goes :)

    0Reply
  • Marylynn B.
    Investor · Frederick, MD · Member since 2012 · 160 posts · 31 votes
    11y

    @Starr Ango  I just saw a TIm Horton's for sale in NY!!

    1Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free