David Farkas
Sometimes becoming a franchise owner boils down to this: "Because I can." It’s not a bad reason to launch a business.
Consider Ben Massimino, 38, a self-described entrepreneur who signed a deal a year ago to develop 14 Togo’s sandwich shops in Utah. It’s the first multi-unit agreement in the affluent and tourist-laden state for the San Jose, California-based franchisor.
"I looked at other brands, but Togo’s was the one that offered the chance to purchase the entire state," says Massimino, who also owns apartment buildings in Greater Salt Lake. "I like owning multiples because they’re easier to operate."
A Southern California native who grew up eating Togo’s, he is also an avid skier, making Utah a good spot for combining business and pleasure, he says. To get a grasp of Togo’s business model, he visited franchisees in Northern California as well as headquarters.
Greater Salt Lake is also a good spot considering household income is high. The median figure for suburban Sandy, where Massimino opened his first store in March, is $76,807 vs. a statewide median of $58,164. Sandy’s website boasts the town (pop. 90,213) "is well established as a synergistic commercial center with prime locations for future growth."
Massimino’s unit began as a 1,600-sqare-foot vanilla shell in a new retail center a short distance from a busy exit ramp. His second Togo’s will open early next year a few miles away, in South Jordan (median household income: $91,548).
Massimino, who negotiated the lease for the first site himself, concedes finding "A" sites is difficult given the competition for retail and foodservice spaces. He declines to describe the demographics for a Togo’s location fearing competitors may read this column.
Funding growth, apparently, won’t be a problem. Massimino, whose father is a successful businessman, mentions "family financing" for the first several units before turning to banks. "But we can always use cash," he says.
Values-sharing deal
When push turned to shove, MOD Pizza won out among the fast-casual chains Kevin Embree and partner Bob Merullo wanted to franchise. Two things influenced their decision: The fact that MOD’s founders didn’t jump into franchising right away and the way the company managed its workforce.
"They celebrated their people, paying a higher-than-minimum wage and offering medical benefits for folks," Embree says. "So it came down to aligning our values around offering a great experience to guests and team members."
The pair, who have agreed to open 25 MOD Pizzas in Colorado, will open the first units in Greater Denver, in high-traffic areas with nearby rooftops and, if possible, a high school. Families are important to the concept.
Embree says Denver-area rents range from $25 per square foot for suburban locations to $55 per square foot for downtown spots. Despite heavy competition, he adds, landlords are partial to new concepts—and they especially like fast-casual pizza. "They want newer and fresher, and this puts us in a good place right now," he claims.
Of course, the pair considered MOD’s unit economics before inking the deal. Embree and Merullo, after all, are successful owners of the largest Red Robin franchisee (34 restaurants in several western states and in Canada). Merullo oversees operations and Embree leads financial, real estate and development efforts. The pair recently hired Red Robin veteran Scott Schooler as their COO.
The soft-spoken Embree says unit economics among the fast-casual brands they looked at were similar; all, for example, could boast of a 3-to-1 sales-to-investment ratio. MOD Pizza build-outs run from $400,000 to $450,000 per store and are capable of producing an estimated $1.2 million in annual sales.
The partners intend to deploy their own capital to open the first four units this year, Embree said, and they will likely seek debt financing afterward if the concept proves itself in their locations.
When I joked that the build-out cost, combined with its sales-to-investment ratio, made fast casual the best thing to ever happen to the restaurant business, Embree laughed. "It seems like that to me. There are a lot fewer moving parts," he says. "MOD looks like it will be a much simpler operation than what we’ve done in the casual-dining space."
A legacy brand grows
United States Beef Corp. President John Davis appears to have made one of the best deals of his life late last year when he acquired a family-owned Arby’s franchise that closely mirrored his own. "Geoff Baily has operated those stores just like my brother and I have," Davis says, referring to his brother Jeff, the company’s CEO. The 47 Arby’s restaurants U.S. Beef acquired in December—in Colorado, Idaho and Wyoming—were in decent shape, he adds.
"That was a big plus going into this. I’ve taken over other markets where I had to put a lot of capital into the restaurants. This isn’t the case," he says.
Instead, the franchise will deploy capital by adding more restaurants to the 323 U.S. Beef now operates under the Arby’s banner. Most will be in Greater Denver where the Baily Co. owned 36—yet hadn’t added a new unit since 2008. By contrast, U.S. Beef has been opening about a half-dozen new Arby’s each year in the same time frame.
Davis’s goal is to double the number of Arby’s in Denver within seven years, becoming so media efficient that TV commercials run 12 months a year. "Rates are good and lenders are eager. We have a great financial team headed up by the Bank of Oklahoma," he adds.
Given its size and back-office systems, Davis reckons U.S. Beef can increase the operating profits of the newly acquired units by 2 to 3 percent, ensuring a good return. Although terms were not disclosed, Davis suggested that 5 times EBITDA was roughly a good valuation for an Arby’s that didn’t require remodeling.
Today, the franchisor is heading in the right direction, Davis claims, and franchisees are confident sales volumes will climb to a $1 million in 2015.
Baily Co., by the way, began with a single franchise unit in Denver in 1968 and grew to be among the quick-service chain’s largest franchises—a distinction U.S. Beef currently holds. Geoff Baily inherited the business from his father. Last year, he told the Denver Business Journal the family’s third generation hadn’t shown any desire to operate the franchise.
Davis and his brother also assumed the helm from their dad, Bob, who opened his first Arby’s in Tulsa in 1969. But there is a difference: U.S. Beef Corp. has a third generation now managing various departments of the company.
David Farkas has covered the restaurant industry for 25 years as a reporter and food writer. Submit your company’s development agreements to him at [email protected].
