Wednesday, March 6, 2013

Business and Franchise Tips

Over the past month, our office has gathered some basic information that relates to businesses and franchising, and more specifically to franchises in the restaurant industry. The basic information below is meant to help franchisors plan for the year and future growth and expenses. While some of the information has been taken from various publications and resources, some of the information is our opinion. The below is not legal advice or our promotion of any products or services and should not be construed as such.

1.    Bernstein Research in New York expects a 4% growth in restaurant sales in 2013—assuming the economy remains about where it is now.

   2.  OBAMACARE –the below are some statistics that are meant to help you understand the possible impact of the health care mandate.

a.    The Hudson Institute (for IFA) estimates the health care mandate will cost the franchise industry $6.4 billion dollars.
b.    McDonald’s estimates that it will cost $10,000 to $30,000 per store.
c.    Jack in the Box estimates the cost to be $10,000 per employee, but that the cost can be covered by a 1% increase in menu prices.
d.    Most sources and experts are recommending a price increase over cutting working hours, but that is in flux. Each franchise system needs to balance the fear of backlash relating to cutting working hours versus the fear of backlash relating to increased menu prices and/or loss of menu items.
e.    GE Capital believes the restaurant sector will ultimately weather this and will be able to cover the increase in costs through price increases alone. However, the amount of price increases and the public perception of an increase as the economy remains slow was not specifically addressed.

This book may be a helpful read to franchisors and business owners in all sectors. We have not read the book but several articles have referenced both John Mackey and his book in recent publications. John Mackey is the founder of Whole Foods. His basic theory is that the owners of a corporation should view the business as an opportunity to create value for the owners, employees and the communities where they do business. Value is defined in many different ways. In the long run a company that creates value will do far better because doing so changes the way the managers and other employees view what they are doing. However, it is important that the value created needs to become a central part of the corporate culture if this Whole Foods model is to succeed.  The book questions the traditional “profits and all costs” model as being often counterproductive and one that can readily create enemies.

4  4.  RULE OF THUMB FOR EQUITY CAPITAL –For Investors in a restaurant system
As a typical rule of thumb for restaurant acquisitions, the equity capital investor is looking for:
a.         $750 per square foot in sales;
b.         $300 per foot cost to build;
c.         18-20 percent unit level cash flow;
d.         Cash-on-cash return on investment of at least 40%
The above points and tips hopefully will help you in your business whether it is in creating growth, in creating a new corporate culture or in preparing your business for acquisition by another individual, company or investment firm.