Investor · Northern, VA · Member since 2016 · 1k+ posts · 904 votes
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).
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
9y
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.
Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
9y
You're buying a business, and not an REI per se. Yeah, you may or may not have property ownership, but there's a ton of other issues that far outshadow REI scope.
You'll become an employer , have to deal with labor laws, SSI, Workman's Comp, vacations, cost of goods, employee shift scheduling - - blah blah ...
Operating a B&H rental was interesting enough for me! Good Luck
Investor · Northern, VA · Member since 2016 · 1k+ posts · 904 votes
9y
@Jeff B. - I understand all that. In fact, I will be owning nothing except the equipment and right to run the franchise. I will also be signing a lease for the property.
I was strictly looking at input for acquiring the business from lender's POV.
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
9y
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.
Investor · Northern, VA · Member since 2016 · 1k+ posts · 904 votes
9y
@Joel Owens - Thanks for the tips. Its not a brand new franchise. Its a sandwich shop called Jimmy Johns. A quick and dirty search on their website shows that there a few in your city of Canton, GA. So I am sure you are aware of the brand.
To answer your question, this would be my first time trying to own a food business.
As far as buying a resale store. That's a good idea if I was ready to pay the premium. Not a bad idea if seller financing is something that can be arranged with Franchisor's approval. There were two of them in Winchester, VA that were up for sell not to long ago.
Investor · Edwardsville, IL · Member since 2015 · 432 posts · 481 votes
9y
Chinmay J. I will try and give you some insight into financing a food franchise as well as operating the business. Besides my RE biz I also own 8 Subway restaurants.
Financing: The lender is going to want hard assets as collateral and not just fixtures, equipment, etc. If the business goes back to the lender, they are looking at getting 10 to 20 cents on the dollar. Check with the franchise development agent to see if the franchisor or other third party company will do the financing. Some lenders will specialize in a particular brand. I actually used an SBA loan on my third store years ago. The bank grabbed 300k in assets for a 115k loan. Yes, they cover their ASSets! You might want to look into a Subway as they are way under valued on the East Coast, West Coast and other areas such as Chicago due to being over built.
The Franchise itself: Go out and talk to 10-15 different franchisees - preferably in person vs the phone. If you are comfortable with one of the owners offer to work for them for a couple of weeks for free. I'm sure I'll get some comments on free labor but think about it. You will get to learn the business and see if it is actually something you want to do before plunking out the money. The owner might be willing then to be a consultant for your business.
I would also suggest that you take some basic accounting classes at a community college. This way you can do the books and have a basic understanding as to what the CPA is telling you tax wise. Start lining up your team (CPA, attorney, general contractor, etc) now while you have time. Your state will probably require you to obtain a sanitation license. Get it now while you have time.
After you open: I strongly suggest that you invest $4000 into a good camera system. You wouldn't believe the thieves that I have caught in 25 years! The system will pay for itself the first year.
Be active in your system! Go to all meeting the franchisor puts on. Sometimes you may not learn from them but the networking you will do is invaluable. Attend advertising meetings and get some ideas.
One last thought...if you are getting into business so you don't have to work 40 hours per week, stay with your current job. I still put in 60 hours a week (use to be 80). I now take a lot of time away from the biz because I have built a team to take care of it while I am away - headed to the beach for 3 weeks next Saturday. It can be very satisfying and profitable but it takes a lot of time. I'll still work 3-4 hours a day while on vacation. Good luck!
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
9y
Yes I have heard of Jimmy John's. I am a commercial principal retail broker and real estate developer so know most of the brands.
Jersey Mike's has one of the best sandwiches. So much competition in that space. You would need to check the saturation levels in your market.
Sandwich shops do not generate enough profit for me. They are all owner operator type businesses. Typical Subway might get you 60k a year gross profit to 80k before having a full time manager. So if you do not want to run day to day and pay a manager 40k now you are at 40k gross profit.
That is why I like larger businesses that generate 200k,300k or more in gross profit a year. You have built in assistant managers,managers, district managers etc. so where you as the owner do not have to be around all the time.
Building out a new restaurant is a waste of time unless you have say 50,000 people in 3 miles radius for suburban and only 1 or 2 sand which shops. If you have say 20 then you will have a long struggle to get good sales as saturation levels are high for the product type.
There is Jimmy John's, Firehouse subs, Philly connection, Which Which, Roly Poly, Jersey Mike's, Subway, Blimpie, Jason's Deli, Panera Bread, and on and on.
I know someone who waits for these people to dump retirement into opening a brand new one up and spend 250k and then 6 months later he comes in buys from them for half price when they figure out it's not what they thought.
He gets all new stuff for 50% off.
That is why every time I look at the food business I do not buy it as margins are low. I would have to get 25% plus margins to be worth my time. I can develop out a retail centers for a cap rate to cost of 10 and then refi the equity out and have double digit cash on cash returns staying passive with national tenants guaranteeing the leases.
Really go work at a store for a few weeks to a month to see if you like it first. At the training facilities these franchisors make it look easy but that is not day to day real world.
Investor · Northern, VA · Member since 2016 · 1k+ posts · 904 votes
9y
@Jim Shepard - Thanks for the tips. A while back, when I first started toying with the idea a few years ago, Subway was my first stop on this journey. I found the corporation people extremely difficult to deal with. They seem to have some policy where they don't grant franchise rights to first time franchisors who are trying to buy a brand new store. You said it correctly !. They are overbuilt. There is practically a Subway restaurant on every corner in my neighborhood. Just in my zip code, we have 4 of them. Now, that you bring up Subway (in our conversation) I wouldn't mind looking at it with fresh set of eyes and see if anyone is selling (and at what price)
I also wouldn't mind working at a Sub Shop for couple of weeks. I make pretty good money at my day job, but I don't have any inferiority complex or any such hang up. I believe in "whatever it takes" attitude. In fact, Jimmy Johns has 7 weeks of training and 3 out of those 7 is an apprenticeship at an existing JJ location.
I do have a very good CPA, but need to work on GC and a good attorney, so will be putting those pieces together. Your idea about camera is outstanding and $4k is not a big price if that's something that can pay for itself in a year's time.
Lastly, I am not doing this because I want to quit my job and sit at home. I am doing this so I can be my own boss, and rewards of business ownership are always sweeter (provided you succeed) than those of a job at least in my opinion.
Have fun at the beach sir. I hope you are going some place warm LOL
Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
9y
Chinmay if I were looking to do anything restraunt related in the DMV area, there is a business and real estate broker in the area who is the top guy for restraunts. His company only does restraunts and they pretty much operate in about a 150 to 200 mile radius from DC. He has the contacts for the lawyers, lenders, restraunt vendors, everything. Im an agent like you, and I would never attempt to put together a restraunt lease. It's incredibly complicated if you haven't done it. Feel free to shoot me an email for the contact info of the broker.
Rental Property Investor · Broken Arrow, OK · Member since 2016 · 1k+ posts · 1k+ votes
9y
@Chinmay J. Why would you want to get into a business that owns you? My family has been in the restaurant industry since the early 80's and I owned my own for a few years myself. Biggest mistake of my life. You will become a professional babysitter and will end up working 100+ hours per week and have many, many headaches. Sure, everyone runs the numbers and thinks they can do it and hire good managers, etc. Good luck with that plan.
Take your money and grow your real estate business!!
Rental Property Investor · Orange County, CA · Member since 2016 · 512 posts · 374 votes
9y
Chinmay J.
Being a fast food franchisee myself, I will strongly urge You to evaluate the numbers.
They look rosy on paper only. With $15 minimum wage on the way, payroll plus workers comp is a huge cost. Franchisors are not raising menu prices to combat the increased labor. Neither they give a break in royalty or advertising to combat slow sales.
Look at any QSR and they are running a promotion all days of the month. There are value plays in every restaurant which are least profitable.
Either you scale to five or more stores (invest 1.5 to 2 million ), hire a general manager and u will have a comfortable life.
But you will be still involved every day. There is no hands off in restaurant mgt.
I have seen enough people try to run a fast food franchise through their family members while doing their day job. It's not the best scenario.
Good luck.
Investor · San Diego CA · Member since 2014 · 341 posts · 139 votes
9y
Wow, good information in this thread. I haven't really looked too closely into owning one of these franchises but I love Jimmy Johns, ( Winchester Location actually) and I see that as the future not subway. I'm not saying Subway is done, its just there is a reason why you can buy one on the cheap.
Agree with most of what is said above, I know a few people that own some of these stores, and unless you can scale it up quickly and hire someone to manage the whole deal than it will take over your life. Even still, you will have to manage the manager. A buddy of mine owned a 5 or 6 pizza chains in the NOVA area, and the person who was managing it for him had actually been stealing from him for years.
Investor · Northern, VA · Member since 2016 · 1k+ posts · 904 votes
9y
After reading responses from everyone and some self reflection, I came to the conclusion that I am in a much better position right now (almost envious) with plenty of time at hand. I will focus on developing real estate investing business over a traditional brick and mortar business. Thanks to all those who contributed. If at all, it makes more sense to invest in franchise as an investor rather than hands on manager.
Investor · Sunnyside, Queens, NY · Member since 2015 · 213 posts · 159 votes
9y
A buddy of mine owned a 5 or 6 pizza chains in the NOVA area, and the person who was managing it for him had actually been stealing from him for years.
Isn't that just a cost of doing business? I have friends who run these businesses and they know that their employees will steal (for example) $1000/month. They know it, and they know that it's not worth the killing mental stress or time to spend an extra 20 hours a week in the store for that $1000.
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
9y
You put in cameras to try and keep them honest. On rising wages many companies are going to automate processes.
National median income average is about 54,000. In areas of say 100,000 to 200,000 median income 15 bucks an hour to flip a burger might be doable because the affluent can pay 15 to 20 for a burger. It's a wash really because it will be more expensive for them to live in those areas anyways.
In lower income to medium areas this is just not possible and still be profitable.
Restaurants are automating down to say 4 workers in the whole QSR place. Per the retail convention I attended recently about 60% of jobs will be automated within 10 years.
While trying to find some off market retail centers for clients I ran across a family trust. They were not selling that center because they 1031 exchanged about 50 million 4 years ago into various properties from selling their national chain QSR concept. Now they simply cash flow seven figures a month from the portfolio and keep adding a few new retail centers a year to the mix.
As I said in an earlier post the restaurant would have to have scale for minimum oversight and throw off larger returns than i could get with my other investments to make it worthwhile. That takes out 80% of these small national chain operators like sandwich places. They just do not turn enough profit once you take out owner operator and have to pay a manager. Those can work great for retirees or those wanting to quit their job making 80k a year and replace it with a restaurant.
Those making 300, 500k, 1 million a year it doesn't work as an investment.
Lender · Morrisville, NC · Member since 2015 · 610 posts · 131 votes
9y
@Chinmay J. - You have thought about a lot of good things. The lender will be conserned with your probability of success more than anything else. Some things to think about are:
- Is this an existing franchise business or is it new? Meaning are you buying from another owner or are you setting it up from scratch?
- Is it a "High Flag" franchise? (ie McDonald's, KFC, H&R Block, etc.)
- What support will the franchiser be providing
- What do you have to put down? Plan for 10%, plus a reserve for post close liquidity
These are just a few considerations off of the top of my head. If it would help you out I would not mind going over things with you in more detail. Feel free to reach out.
Get a franchise consultant who cares more about you than the opportunity you represent. My guy is Daniel Hayes from 100 Acre Consulting (www.hundredacreconsulting.com).
