I am a recovering tech person (first as an engineer and then as an exec), so I get asked sometimes "how did you get started in franchising anyway?" Usually there is an "anyway" like it's almost an apologetic question.
This adventure started for me about 3 years ago, when I was a part of a publicly-traded software company that I helped pull together. I was checking in for a flight at SFO to come back to Boston, a nearly weekly occurrence for me for a while. My friend and would-be business partner called let to me know that his good friend Peter Weber, with whom I had worked for many years myself, was considering buying an area franchise for a DC-based burger and fries shop called Five Guys. Because they were sold out in Virginia (where he lives), he wanted to know if we’d be interested in investing alongside him to build it in Massachusetts (where he is from).
I think my response was something like “Peter’s a pretty smart guy, but that sounds like a dumb idea.”
But he’s someone I respect a lot, and he was telling anyone he could find about (a) how great Five Guys is and (b) how great the area franchising model is.
I’ll start with (b).
Peter is a technology CEO and investor, and despite having an MBA from Harvard is a decent business person. The beauty of the area franchising model, he explained to me, is that it’s a basically like buying a number of small businesses that all generate a lot of cash, which can then be used to buy more businesses, which then generate more cash, and so on. For example: you can spend $400,000 put up a retail store that then generates $200,000 per year in cash flow, which is a 50% dividend. Banks pay 1%.
The trick is to raise enough money to get started. Most franchisees, historically, have bought a single unit franchise of a concept that they themselves can run, and they do it by scrounging up whatever cash they have, getting an SBA loan, and almost always, taking out a second mortgage and using their house as collateral for business financing. Think “guy buying a Meineke franchise.”
For an area franchise deal, you buy the rights (development and franchise) to build not 1, but several stores. If you have the money to do this, good management, and the right concept, it is hard to avoid having good returns.
The right concept is the (a).
Marc and I had never tried Five Guys, so we drove 2 hours to the nearest one we could find, in Avon, CT, west of Hartford. It was great and we could see immediately that there was nothing like it in the Boston area. I lived in California for a while and the formula reminded me of In-N-Out: really good burgers, really good fries, and soda. Food items were made with actual food, not pre-processed semi-ingredients. And a simple buildout and operating model – a total of 15 menu items and 100 SKUs that went into them. Even we could figure out a business like this one.
Then we tried to raise the money to get started. This is a longer post for another day, but the executive summary version is: every bank except 1 said “no”, and adding investors was tough because most prospects saw it as a “restaurant” investment from a bunch of guys who had no track record. But eventually we slogged through this part of the process as well, getting a credit facility from a regional bank and attracting three more excellent investors (who at the moment are happy that they returned our phone call).
Finally back to how I got involved in running the business. In March of 2008 when we signed our paperwork with Five Guys, Marc and I had other full-time jobs. Our thought all along was that we would someday hire an “operating partner” (this is common – investors hire someone with experience to actually run the business), but our group didn’t have a store yet. So, Marc and I volunteered to do it in our spare time until we could justify it. Our logic at the time, which I remember one of us saying out loud was this:
“How much work could this possibly be?”
And that's how I became someone involved in the food business.
