A Restaurant Franchise Strategy: Buy & Convert

by FMS Franchise | Articles
3 minutes
A Restaurant

A recent Business Insiders article noted that around one thousand restaurants opened last year in New York City. Eight hundred of them will go out of business within the next five years.

A recent study in Dallas found that the first year failure rate for restaurant startups averaged 23 percent over four years in that market. Based on the study, you could say that there is a one in four chance a new startup will fail.

In other words, another person’s misfortune, could become your fortune.

Reasons for failure include

  • Bad location
  • No Business systems
  • No operating manuals/process
  • No marketing ability
  • Poorly prepared food/food with no appeal/taste
  • Death, retirement, divorce

 

What is Buy and Convert?

A hybrid development process that combines: a business purchase with a franchise conversion.

 

Here’s how it works:

  1. Candidate purchases existing business that provides existing customer base, equipment, inventory, employees and cash flow
  1. Franchise Conversion provides brand, operating systems and ongoing support.
  1. Together they provide franchise candidate with reduced risk which offsets getting a job objection and makes closing easier.
  1. Buying a franchise system, cures lot of “failure issues”

 

WHY not just focus on pure conversions?

Conversion prospects are not often best of breed.

  • Independent owners are less willing to follow a system – Entrepreneurial Demise
  • Bad location cannot be overcome, as well as bad management style.
  • Owners will not want to pay 6% royalty on existing business revenue- want advantage of the brand and support, do not want to pay for it.
  • Current owners could just be BAD CHEFS 

 

Benefits of A Restaurant Franchise Buy and Convert:

  • New Owner has to follow franchise system- improved likelihood of success.
  • Less friction to change.
  • Brand transition often increases business as former owner transitions leadership.
  • Operating systems can increase cash flow = easier to find $1 of profit through efficiency than to grow $1 through increased sales.
  • Support reduces risk of failure of business purchase.
  • No fear of previous owner disappearing or competing for account base.

 

Who benefits:

Franchisor: Purchase of existing business means immediate royalties on conversion. Expedited royalty stream should be greater than typical start up. Uniqueness is a selling point that differentiates A Restaurant Franchisor from others in the space. A Restaurant Franchisor can also implement a growth via acquisition strategy for A potential franchisee’s.

Franchisee: Replaced income. Reduced Risk. Potential for seller financing.

Business/Commercial Real Estate Broker: Completes two transactions, gets compensated on both, gets relationship with current buyer to find other locations for same program.

Buy and Convert is a tested, successful development strategy not a theory. It is not for every business model. It does have more working parts than a simple franchise sale but can rapidly develop a franchise system by differentiation of offering and enhanced royalty stream.

 

How a Franchisor can help:

  1. Find business for sale that fits program success profile
  1. Access the viability of continued operation
  1. Access build out costs
  1. Help with build out cost negotiation with landlord

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