Welcome to another episode of Atlanta Franchise Today with host Leslie Kuban, expert franchise consultant and owner of FranNet Atlanta. Atlanta Franchise Today is dedicated to bringing entrepreneurs and business owners the best practices and tips for their franchise goals. If you’ve ever wondered what kind of preparation goes into launching a successful franchise brand, you definitely want to hear what Leslie’s guest today has to share.
On today’s show, Leslie is joined Lauren Fernandez, CEO and founder of Full Course, a restaurant development and investment firm, which incubates and accelerates emerging fast-casual franchise brands. Lauren has also been a multiunit franchisee and investor serving as a strategic growth partner for brands such as Chicken Salad Chick, and she’s an attorney and previously served as the general counsel for Focus Brands.
Transcription:
Leslie Kuban:
Lauren, welcome to the show.
Lauren Fernandez:
Thanks for having me, Leslie.
Leslie Kuban:
It is so great to have you. That is quite a resume, my friend.
Lauren Fernandez:
Yeah.
Leslie Kuban:
But for our viewers who don’t know about emerging brands and restaurants and the sort of consulting work that you might do, tell us a little bit about your business and your customers and what you do for that.
Lauren Fernandez:
Yes. So I am an attorney and now after having been a restaurant operator for several years, started a company called Full Course, and it is an equity backed investment firm that focuses on developing, emerging, kind of developing, starting out fast casual brands that have usually somewhere between one and five units and they’re looking to grow. So we’re that growth partner. We provide not just the capital that they need to grow to 10 or 20 units, but also the support they need operationally on every aspect of the business, really.
Leslie Kuban:
You and I both get calls and speak with entrepreneurs all the time and lots of industries, restaurants. There’s a lot of attraction to franchising. Entrepreneurs are growth-oriented, they’re visionaries. And so they think about franchising as an avenue to do that, but as we both know, some are prepared for that and some are not. So I think this is a really important topic for our entrepreneur viewers to really pay attention to. I mean, this is what you do. This is what you see. So how do you start assessing? I guess the question is how do you know when someone is really ready to take that step into becoming a franchise?
Lauren Fernandez:
Right. So before you even consider whether or not you should franchise your brand, I think it’s really smart to look at what your end game is. So I like to spend some time with clients and really understand their why, what they really envision when they say they want to franchise, and you’d be surprised by the number of different types of answers that we get. A lot of people think that franchising is an easy way to grow their business, that is going to be very low cost to them. They don’t have to do a lot of the work. Other people can run the stores and there are a lot of hidden costs to becoming a franchisor.
Lauren Fernandez:
So one of the first things that we do is really educate people on what those costs and what it takes to set yourself up as a franchisor. I also like to educate them on the other ways that they can grow their business, whether that’s through capital investment and growing more company stores, whether that’s through brand extensions and doing product development or whether it’s a simple licensing deal that isn’t as complicated as a franchise, for example. And in some cases, those might actually be better solutions for people to grow their business as opposed to franchising, or maybe it’s a combination of those things as we often see with our clients.
Leslie Kuban:
The cost part, this is a big deal. Will you break that down? Kind of what are the categories of costs that a possible franchisor is going to be looking at and where do they get the capital for it?
Lauren Fernandez:
Right. Let’s break it down into steps, and these are things that I like to advise people to do. I think they’re smart for your business, even if you don’t become a franchisor. The first one and I cannot state this, this is probably and arguably the most important thing is get your books in order. Hire a really good accountant, if you don’t have one, one that really understands your industry and really, really clean those books. Go back and make sure things like owner distributions are properly listed out as separate from salary. So you really need to understand what your labor looks like. If you’re in the business, fine for it to stay in there. But if it’s a distribution, let’s make sure it looks like a distribution.
Lauren Fernandez:
Really making sure that the accounting is clean is also going to lead me to point number two, know and understand your key performance indicators. So for every industry is different, but let’s just use restaurants as an example. You really need to know what your percentage labor is as a relationship to your sales. You similarly need to know what your cost of goods are and your profit margin, and those are really the key three key performance indicators for restaurants and not knowing those will hurt you in the end because you need them to not only tune and fine tune and refine the performance of your business, but you also need them to be able to sell the business to somebody else, whether that’s a franchisee or another investor who’s valuating the company.
Lauren Fernandez:
I think arguably number three would be document, document, document. And I think a lot of folks get stuck in this notion they have to write it all down, but that’s not actually the case. In many cases, a training video will suffice to be a first step to documenting a recipe because we’re watching someone make the product, for example, and then we’re documenting the recipe in written format and turning that into a training tool later. Those are all things that you’re going to need to have to be able to replicate the business.
Lauren Fernandez:
The last thing I would say, and I will say just Leslie before going on to point four, is you can do a lot of these things yourself, but you should have good advice to get them done correctly. So whether that’s an accountant or someone helping you document your procedures, get the help you need, but you can do a lot of that work yourself.
Lauren Fernandez:
The fourth one, I think you do need an attorney for, and that’s a brand review and it’s not necessarily true that you’ll be able to use the same brand you’ve used on the business for years without issue. If you plan on scaling nationwide, we see this all the time with restaurant owners. So get a good trademark attorney who understands your industry to do a search called a clearance search and make sure that it’s going to be available for use, and you want to do that so that you can protect the brand. You’re going to need a federal trademark registration if you go to franchise the business. So that first step of seeing whether or not you can use the brand is very important.
Lauren Fernandez:
Good trademark searches usually run about $3,000 for clearance opinion. Another probably three to five to file the trademark, if there’s any kind of back and forth with the government, with the trademark office. I think as far as the accounting fees are concerned, it’s really hourly. I would think you could probably get away with spending about $1,000 to $2,000.
Lauren Fernandez:
Last but not least, if you do decide to franchise, you need the documents that go with that, the FDD, the disclosure document, as well as the attached franchise agreement. Really great seasoned franchise attorneys run about somewhere between 12 and $15,000 to generate those documents for you. There are companies that do them as a turnkey package, but we advise our clients to really find an attorney who can represent their interest and write a custom franchise agreement for what they’re looking to do.
Leslie Kuban:
And so this is just the starting point.
Lauren Fernandez:
Just the beginning.
Leslie Kuban:
And I would actually argue that while an entrepreneur may be able to do some of these things themselves, it is well worth the cost of whatever the consultant fees are to be going about this the right way because the reality is franchising is competitive. There’s 4,000 franchise brands out there, many very sophisticated franchise brands. And if a young entrepreneur, now young franchisor wants to compete, they better have it together. And someone who has a set of eyes that really understands what that landscape looks like is only going to help them really be in the game to win as a franchisor.
Lauren Fernandez:
Exactly. I would add to that, that they’re going to tell you what market looks like. I think that’s kind of what you’re getting at. So really great franchise attorney, for example, will say to you, 5% is a reasonable royalty rate, but market is actually more like six right now. Why don’t you go for six or maybe four would be a better number because those numbers, as you know, for both royalty and ad fund change depending on the industry and the model of the business.
Lauren Fernandez:
One of the things you have to consider as an ongoing cost as a franchisor is the support of the system, and you have to regular and routine quality control and standards control. So that means you have to either pay a vendor to do regular visits or have your own team do field visits. There’s the coaching and the counseling that goes with that so that your franchisees are successful. There’s all the accounting that goes with collecting the royalties. So you can see very quickly how the overhead for the franchisor will quickly, quickly grow.
Lauren Fernandez:
So it’s really smart in many cases, if you’re considering to franchise your business and have to grow that overhead to support your franchisees, that you strongly consider growing company stores as well, to pull in additional income and profit to the business and leverage that additional overhead you need to help support the franchise system.
Leslie Kuban:
And I would add to that as the franchisor grows its own units, it’s refining and improving. Unit two is better than unit one. Unit three is better than unit two and also in a diversified geographic environment. Just because something works in Buckhead, it might work differently down in LaGrange, Georgia. So we’re talking about proof of concept that is important.
Lauren Fernandez:
Yeah. Absolutely. Absolutely. Our general rule of thumb for our clients is we don’t even consider franchising until they have three to five units open for that exact reason because every time you open a new restaurant, using those as my key example here, but every time you open a new restaurant, the layout tweaks a little bit. You improve the kitchen. You think of things you could have done better, and it’s usually somewhere between three and five you hit that cadence, that rhythm of what the ideal looks like. Frankly, I don’t know that it’s appropriate, in my opinion, to experiment on franchisees. You as the franchisor should do that and really know and understand the best way to operate that business.
Leslie Kuban:
So you touched on the fees. I want to dig into this with you a little bit because it’s important. It can be a source of contention between franchisor and franchisees. It’s something new franchisees who are looking at different possible opportunities have a keen focus on, and the reality is everybody has to win. Everybody has to achieve a good return on investment for their capital and time put forth.
Leslie Kuban:
The franchisor has to be a worthwhile investment for the franchisor, but it also has to be a worthwhile investment for the franchisees. So there’s this kind of balancing act. What would you say about how does a franchisor think about how they start to structure their franchise fee, their royalty, there’s marketing fees, technology fees, just with your clients, any nuggets on how you help them think about that?
Lauren Fernandez:
So I think at the heart of this, there’s one key principle to franchising, which is why as a staunch proponent of it, I’m also a huge defender and will frankly tell people all the time that franchising’s not right for them at a certain time. The reason is it’s a long-term partnership. Some of these franchise agreements are 15 to 20 years. So it’s extremely important that for whatever the fees are, the value is delivered.
Lauren Fernandez:
Often I see that fees are delivered at market. It’s a competitive offer or maybe even a little bit below market if it’s a newer franchise, fair enough, but the value’s not there. So you could get a deal on a franchise, but I think if you’re a prospective franchisee for any brand or any type of concept, really speak to existing franchisees in the system, really understand in depth what the support for you as a franchisee looks like and understand that that’s largely what those fees are going towards.
Lauren Fernandez:
I have worked in extremely large franchise systems with multiple brands, and I can tell you that a lot of those royalty fees actually go to supporting the franchise system, especially when they’re in a period of rapid growth. And so I think it is give and take, but I think that the fees typically are pretty reasonable because as you said, the market’s fairly competitive. I think the real question is what’s the value that you’re going to get as a franchisee for those fees?
Leslie Kuban:
And I think what’s good and what’s coming out in our conversation, the franchisees, prospective franchisees need to hear is that it is expensive to be a franchisor and the investment that franchise companies, I mean, it can get seven figures very quickly.
Lauren Fernandez:
Absolutely. Absolutely. We budget for at least a $2 million overhead for the franchisor at the point that the system is between 15 and 20 units. So just sit with that for a second. That’s a lot of salaries, that’s a lot of IT systems, that’s a lot of legal. There’s a lot of things that go into becoming a franchisor, and you may not see a lot of those fees up front, but you’re going to start accumulating them, especially as you get between kind of units eight and 12 is usually the pinch point for the franchisor, and that kind of investment is necessary.
Lauren Fernandez:
The longer term play is where the revenue is seen for a franchisor because the valuation of those royalty streams are treated at a higher multiple when the company is valued. And so what that means is if you’re a franchisor you might be seeing pennies on the dollar compared to when the company as a whole with those royalty streams is valued, you’ll see the return on investment there. So it’s not uncommon for multiunit franchisees in a system to actually have better profit margins and better returns on an annual basis than the franchisor themselves.
Leslie Kuban:
Let’s talk about time, kind of the timeline of all of this. So there’s preparation work to be done. You’ve kind of talked about how people need to get their books in order. They need to start systematizing. When you start engaging a client to the time that they’re ready to launch, is there a typical timeline? How long does this preparation take for an entrepreneur to then be ready to start recruiting franchisees?
Lauren Fernandez:
I will tell you that that initial work, those first four to five steps before you even get to a workable franchise agreement, easily 12 months, easily, because that’s a lot. It’s a lot of work to get your books in order and to get all your training practices documented, your standards, your procedures, all of the things and your policies on certain issues. Who’s going to control the social media for the franchisees? Are you going to provide marketing? What depth of marketing? Is it just retail POP for next to the register and the window? Or is it a full kit, social media, all the things? There’s a lot of things to think of.
Lauren Fernandez:
I think it’s fair to say that it’s a good year’s worth of groundwork and planning. Can you rush that? Sure. I mean, there are our clients we work with who are super buttoned up and don’t have to spend a lot of time on their books and it’s a little easier, but I think the more important question is, is the organization ready? So there’s a lot of things you can do to build your organization up and make the right hiring choices to support operations, to support marketing, et cetera, and build that team up in support of the initiative to launch a franchise system. In that case, I think the people piece of this is arguably the part that takes the longest, finding the right folks for the job, getting them trained up in the brand and making sure that you’ve got it all together so the wheels don’t come off the bus.
Leslie Kuban:
And last question about timing. Is there a line of coaching that you give your clients just as a franchisor their return on investment expectations? Is it five years, seven years, 10 years to where it’s worth it to be a franchisor because it’s not on the short term.
Lauren Fernandez:
Right. No, it’s a long-term play for us. Absolutely. With all of our clients, when we do funding, we do a growth plan. The franchising usually turns on around year three of our five-year growth plan with them, but the franchising has an eye to a 10 or 20 year investment. It’s a longer play. When we are building those systems out, we’re building runway for the future of the brand unequivocally. So it is not a short-term return. In fact, it’s probably more expensive for us. We don’t actually see the immediate return. The value to us as an investor is we’re creating that runway for the next series of funding for the next investor, and that’s what’s important to us.
Lauren Fernandez:
When we are explaining this to our clients, we’re very clear with them that that is why we do it. We choose to do a balance of company stores as well as franchising. Truthfully Leslie, it’s not for everybody. And when we explain that to them, there’s several clients who have pushed back and said, I think I’ll wait on the franchising then. We choose instead to push more towards traditional and nontraditional company stores and that’s okay too. That’s okay too, but you know what? We’ll have all the systems in place and have it all buttoned up so they can turn on the franchising whenever they need to.
Leslie Kuban:
Another type of consulting that you offer, particularly in restaurants is how to drive revenue outside of the four walls and that’s really important. Will you speak to that? What does that look like and why is it so important?
Lauren Fernandez:
I will get on my soapbox about this for a minute. So I came to restaurants and franchising from a product development background. One of the things I immediately realized at my time at focus in particular was that adding those brand moments outside of the four walls of the restaurant was a way to not only create additional loyalty and awareness amongst the consuming public, but also additional revenue for the brand.
Lauren Fernandez:
And so those types of extensions of the restaurant brand into retail, into retail within the restaurant itself, create opportunities for brands in ways that no one had really ever anticipated would be helpful. So there’s of course financial benefit, but there’s enormous marketing benefit as well. So it should be no surprise then with my nearly two decades in product dev that we do a lot of product commercialization for our clients and look at it as a double reward, if you will, with both the awareness for the marketing and the ability to seed markets with that brand awareness before we even put a unit there and also to generate revenue for the business.
Leslie Kuban:
We like to end with success stories, Lauren. So does any of your clients, any brands that you’ve worked with, just any of your experience, what comes to mind as a success story for our viewers?
Lauren Fernandez:
Yeah. So we were really honored to be a part of Chicken Salad Chick’s early growth cycle. My partners and I through Origin Development Group bought three units and turned them into 11 units in about a two and a half three-year period and ended up selling them back to the parent company in December of ’18 and was a phenomenal experience for me to put on the franchisee hat after having been a franchisor for a large company like Focus Brands.
Lauren Fernandez:
To have been a part of that company’s growth, rapid growth and to really be a part of Stacey, the founder’s story was phenomenal for me and initially was attracted to it because her story really resonated with me. She was single mom, started the business out of as a catering kind of delivery service and opened her first unit in Auburn in her hometown and what a great story. If you know her, what a phenomenal human, just a great person.
Lauren Fernandez:
And so being on the other side of the equation as a multiunit franchisee really taught me a lot and I’ll have to share. It was humbling in the sense that we were enormously successful, had a phenomenal team around us, great brand, wonderful support, but what was exhausting for me despite all of that success, managing the daily operations and the development at the same time was exhausting and I don’t recommend it. It was in the time after we sold our units that I realized that’s the reason a lot of independently owned restaurants don’t grow. It’s not just that they can’t get the funding. It’s also that it’s really difficult to operate at levels where you feel are acceptable, high levels of operational excellence and execute development in a way that gets you to the value you deserve as an owner operator.
Lauren Fernandez:
In so many ways that time for me at Chicken Salad Chick was a success story because I don’t know that I would have come up with the same purpose and mission for Full Course had I not walked that walk.
Leslie Kuban:
Been in the trenches?
Lauren Fernandez:
Absolutely. And it resonates with our clients now. They know that we understand, and we built the entire company by operators for operators. Every member of my team has operated a restaurant and that is extremely important to us. So you’re going to see some brands coming up soon when we can talk about them that have signed and that will be funded by the end of the year.
Leslie Kuban:
I was just going to ask you kind of what’s on deck for you rest of this year, next year?
Lauren Fernandez:
I am really excited to share that at least half of the clients that we’ve signed are either minority or female owned concepts, and I am really, really proud of that. We make no bones about the fact that we want to give those kinds of opportunities to other women and minorities, and that’s something I’m really, really proud of. We are bringing some really unique and different flavors to the table. Stay tuned.
Leslie Kuban:
Oh, I can’t wait. That’s exciting. Lauren, how can viewers get in touch with you?
Lauren Fernandez:
Yeah. We’re at Fullcourse.com where you can log onto the site, learn all about how we operate and how we help independent restaurants grow, and you can even book a call directly with me on the website.
Leslie Kuban:
Well, it’s been so great to have you. It’s great to see you again.
Lauren Fernandez:
Likewise.
Leslie Kuban:
We’ve known each other a long time, and I can’t wait to see what’s on deck before your next year. So thanks so much for joining and sharing today.
Lauren Fernandez:
Thanks. It’s a pleasure to be here. It’s great to see you again too. Thank you.
Leslie Kuban:
Folks, I hope you’ve enjoyed this episode of Atlanta Franchise Today. I know I have, and I really hope to see you next week. Thanks very much.
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