Franchising · 15 September 2015

Quick service restaurant funding models in the franchise space

Tossed is a prime example of a fast-moving QSR brand
Tossed is a prime example of a fast-moving QSR brand

The quick service restaurant (QSR) market is increasingly becoming one of the most sought after sectors for investment. Recently, two younger players in the market – Wrap It Up (a burritos-based model) and Tossed (a salad bar-based concept) – have met with extraordinary success in obtaining large slices of investment capital through crowd funding. Another QSR brand making a big splash is Creams (a dessert-based concept), which has seen remarkable growth through operating via a franchising model.

The start

Generally, the biggest bar to a new QSR concept is the high level of initial investment required – particularly in obtaining a lease and carrying out the initial fit out – versus the very real risk that the business will fail. This means that many new concepts appear and disappear quickly, usually triggered by the date on which the initial rent free period of any lease expires. So, a QSR restaurant needs to get off the ground and profitable quickly or face a very early demise.

However, if a QSR concept works, the question the business owner then faces is how to best replicate and grow that concept. However, this requires a whole new investment cycle that the business may not be in a position to afford.

So, what are the funding options for a QSR concept?

Funding models

The reality is that many QSR businesses flirt with various funding models before deciding on the most appropriate.

Franchising offers the most low-cost model. It allows an operator to maintain 100 per cent ownership of its company by licensing individual third party business owners to set up and fund the growth. It allows the QSR owner to have guaranteed revenues (by way of license fees from franchisees and sales of products to them) whilst minimising cash outlay and risk. In essence, the business loses the ability to make greater profits from each restaurant in return for faster and more cost effective growth. It also loses some level of control in that operationally it is the franchisees who own and operate each restaurant.

Crowdfunding: Pooled individual investors seeking a small stake in the business is more appropriate for early growth. This type of funding generally provides seed capital to allow short term growth in return for a small stake in the business. It usually offers the level of cash to open up a few more stores to increasingly “prove” the model.

Venture capital: Usually investors seeking higher levels of control and shareholding for larger investments of cash – it allows for a more proven model to grow far more quickly in the hope of large medium-term returns. It can provide the cash injection for ambitious growth plans but comes at the cost of having a third party as a major influencer in the business. Inevitably, it also significantly increases the pressure on the owners to deliver on a pre-agreed plan in that failure to do so can have dire consequences. Generally, this investment is focused on an exit delivering the returns required in a 2-5 year window by way of a trade sale or float.

Private equity investors are usually more cautious investors. They are looking for safer options – more modest returns from a more proven and robust business

So, what is the right funding model for a QSR business?

Growth stages

The first growth challenge is moving from a single to a multi-site local operation – from say one to three or more outlets. It is at that stage where the QSR begins to build the foundations for its future; ideally beginning to invest more heavily in its systems, efficiencies and branding to allow the business to be rolled out and replicated more easily. If the money is not available personally, this may be a stage to consider franchising or looking for increased bank funding or “friendly” investors.

The next stage – say five to ten or more outlets – is where the underlying asset becomes increasingly attractive to external investors. The business is at a stage where it can demonstrate historical growth and use that to create asset value based on future potential. Systems and processes should now be honed and toned and well documented. It is the stage at which faster and more accelerated growth can begin as the business is rolled out regionally or even internationally. Franchising becomes increasingly attractive to investor operators. Crowd funding or even venture capital begins to become s increasingly available to fund growth.

A more maturing business (say 15 to 20+ outlets) begins to open the doors for private equity investment or even a trade sale. This is the stage at which the underlying asset will have grown into something of far greater value and a “safer” bet. The focus now is on beginning to put in place the resources to become a major national or international operator.

Conclusion

In theory, there may be a perfect funding strategy for growing a QSR business from scratch to a major international player. However, in practice the right model will very much depend on the skills and ambition of the initial owner; their appetite for risk and access to their own or bank funding. The key is to understand your business, skills and options sufficiently to plan ahead so that you are well placed to use the most appropriate model at the right chronological time to suit the growth of your business. One thing is for certain, if you get it right the rewards can be extra-ordinary.

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ABOUT THE EXPERT

Andrew Pena is a commercial litigator who has worked at well-known City practices. Having acted for major international companies and many recognisable high street brands, he now heads up Cubism Law’s franchise law practice.

Business development