Where Did All The Money Go?

If you have never run a food business before, a franchise can be very attractive. Having someone set it up for you, train you in every aspect of running it, give you the systems to manage it profitably, and the support to keep you on track as you grow can be worth many times the fees you pay.

But no matter how well-known the brand and how good the support, it’s still possible to get it wrong in the hospitality sector – especially in the current climate. Here are some tips to help you get the best out of a franchise and maximise your profits.

Location, location, location

Food businesses rely on foot or road traffic to attract customers (or well-populated territories if they are mobile), and remote working has changed buying patterns in many cases. So consider site selection carefully – just because there’s a cluster of other food outlets around doesn’t automatically mean the location is good, or that there is enough business for all.

Ask the franchisor for current trends and information around site selection methods. What attributes do they use in assessing the suitability of a site? Depending on the brand, fit-out costs can vary from $200,000 to $750,000, so any location needs to work well to support that level of investment.

The right site at the right price

Rents can vary greatly and leases can be a minefield, so get your lawyer and accountant to review them before signing. Nothing eats up profits faster than bad leases, high rents or extortionate rent reviews – eg. CPI-adjusted reviews, which are especially unattractive in these inflationary times. The franchisor should know what is a reasonable rental as a percentage of turnover, so look to stay within this figure. Using franchise-specialist advisors will help, as they will have a better picture of the whole sector.

Don’t borrow too much

If you borrow more than the business can comfortably afford to repay, servicing the debt will eat up the profits you should be making. How you structure the loan can affect the interest rates you have to pay. If your accountant tells you not to borrow more than you can afford, listen to them – better to buy a smaller business that you can afford now rather than risk losing the lot by aiming too high, too soon. Don’t bite off more than you can chew. Current rising interest rates may put your business under pressure.

Watch the benchmarks

It’s a massive advantage of franchising that identical businesses can compare information for the good of all. Good franchises share information on areas where profits can be affected so that franchisees and their advisors can see where there might be a problem. Areas commonly benchmarked include Gross Profit percentages, wages as a percentage of turnover, productivity, sales by day-part, and wastage, to name but a few. Inflation makes it more critical than ever to control all these – see www.franchise.co.nz/articles/3496.

Look after people

Restaurants often operate 7 days a week and at least 12 hours a day, which takes a lot of people. Being on top of staff rostering and payroll is important to avoid labour costs running away with you. The tight labour market and increases in the minimum wage are putting margins under pressure in many hospitality businesses.

At the same time, low wages mean staff can move for another 50 cents an hour. Hiring is expensive and disruptive, so providing a good work culture, showing appreciation and having a bit of fun sometimes are essential ingredients. People count – so look after them.

Watch the cash

Cash is king for surviving in business, and food businesses tend to be cashflow positive – that is, you are usually paid by the customer before you have to pay for the food and wage costs you incurred to deliver the product.

Where there’s a strong cash element, you can be at risk from staff theft, but good processes and benchmarking can soon identify any issues. The trend towards cashless payment, accelerated by the pandemic, has also reduced risk.

Be prepared to reinvest

Almost as bad as borrowing too much is failing to reinvest when you need to. If your outlet looks shabby and tired, you won’t attract new customers and your existing ones will move to that new place down the road. This applies both to new franchisees buying an existing outlet and long-established franchisees who are too used to their surroundings to see problems. Don’t eat all the profits – put some back into your business to recoup your investment at time of sale.

Keep an eye on the competition

Know your market, know your customers, and know what’s going on. If you’re charging premium prices, you need customers prepared to pay for a premium product. If you’re competing on price, watch your margins and fixed costs. As your accountant can demonstrate, small changes can have big impacts.

Conclusion

Operating a food business isn’t just a matter of providing good food and a welcoming smile – you need to be able to manage a lot of different factors in a competitive market. But if you buy a good franchise, a lot of the guesswork will be taken out of it for you. To put it briefly:

Choose a franchise that suits your pocket and your abilities; Invest in franchise-experienced advisors to help you find the right business and the right location; Follow the franchise system – it works; Use benchmarking information to drive constant improvement; Look after your people; and Watch your cashflow.

Get these elements right and you’ll have a profitable business.   

This advice is of a general nature only and expert advice should be sought to get the right advice for your specific situation.

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