'No limit’ for Schlotzsky’s owner; McAlister’s ‘zee enjoys ‘no veto vote’
Illustration by Jonathan Hankin
J.J. Ramsey is on a quest to open as many restaurants as his considerable talents allow. “There’s no limit. We could have 50 Schlotzsky’s or more,” said the 39-year-old franchisee, who with his wife, Hortencia, now operates 10 units throughout northwest Arkansas, as well as in Wichita, Kansas, and Springfield, Missouri. The couple has been on a tear lately, acquiring six existing Schlotzsky’s restaurants this year alone.
His operational expertise stretches back to his teen years, when a 14-year-old Ramsey bussed tables and rang the cash register in his parents’ first Schlotzsky’s cafe, in Tulsa, Oklahoma. “That store was unbelievable. The system AUV at the time was about $600,000. We did $1.2 million,” he recalled.
The success of their first unit prompted his mom and dad to build and acquire more units in Tulsa and Oklahoma City, eventually overseeing 15 Schlotzsky’s while Ramsey and his siblings ran them day-to-day.
Trouble hit the entire system in the late 1990s. By August 2004, after reporting net losses of about $13 million over the past two years, the Austin, Texas-based franchisor filed for bankruptcy. “The initial plan was to build an empire,” Ramsey said of his family’s investment. “Things didn’t go exactly as planned.”
Fast-forward to 2015. His folks had sold their restaurants and Ramsey was a franchisee and married to Hortencia, herself a former Schlotzsky’s corporate employee. Another four years and 10 acquired Schlotzsky’s stores later, the Ramseys are embarking on the opening of their first ground-up restaurant, in Wichita, Kansas (population 389,255). They expect to open it later this year, in the northeast section of the city.
“It’s an endcap with a drive-thru in front of retail. We have an LOI on it. But things have to fall in place,” said Ramsey as he noted acquiring existing Schlotzsky’s units remains the thrust of their business.
So far, the couple has financed the acquisitions with traditional bank loans and owner financing. As for valuations, “We do it ourselves. I’ll also ask my CPA what they think of future cash flows, and we do a pro forma,” Ramsey noted, declining to offer the multiple of EBITDA he has paid for the restaurants. Despite his track record and relationships with banks, he said borrowing money for a new unit or to remodel one is still difficult. “There are lots of hoops,” he noted.
Another challenge is employee retention given unemployment rates in, for instance, Wichita and Fayetteville of 3.7 percent and 2.7 percent, respectively. While the Ramseys depend largely on longtime “core employees,” he acknowledged even his experience at running good restaurants doesn’t stop night and weekend workers from looking elsewhere for work: “It’s a revolving door, unfortunately.”
Yet another deli
By the time you read this, McAlister’s Deli franchisee David Blackburn may well have traded in his $200,000 motor coach for a more nimble (and less expensive) Mercedes Sprinter van. The motor coach (nicknamed “Jet”) has been quite handy for getting from one of his 82 restaurants to another, trainers often in tow. But it costs a bundle to operate and Blackburn is a frugal man. In fact, he trimmed his own salary by the amount it takes to pay the driver.
The vehicle’s nickname, painted on its side, stems from the veteran operator’s heyday as an O’Charley’s Restaurants regional vice president.
“We were 60 percent of the company’s profits due to the sales were growing,” said Blackburn, in reference to the crop of eateries he oversaw. “My last five years there I had an airplane at my disposal.”
Blackburn left O’Charley’s in 2005. After stints operating a steakhouse and consulting on restaurants he founded Southern Rock Restaurants in 2011. Today, the Franklin, Tennessee-based company is McAlister’s Deli’s largest franchisee.
McAlister’s large menu and brand strength were main attractions. “I found comfort in the large menu coming from casual-theme,” he said. “We have four different assembly lines. So we can grow any direction. And there’s no veto vote when going to McAlister’s Deli.”
A profitable unit economics model also proved tempting.
“I was impressed with how much the restaurants could make at their low volumes,” Blackburn recalled of the 23 under-performing units (in Memphis, Mississippi and Missouri) he was considering back in 2011. He figured if he could raise weekly sales to $25,000 from their then $19,000 average they would be “unbelievably profitable.” Today, eight years later, he said his restaurants average $35,000 a week.
Southern Rock remains focused on growth. Last year the company opened 10 new locations. This year, Blackburn has seven units under development and when we talked was about to ink an agreement to open 31 new McAlister’s, 21 of which will be in new markets that he declined to identify. The remainder will backfill existing markets.
Blackburn has financed all growth by way of Capital Spring. The lender has structured his company’s debt in a way that is “very healthy and beneficial” for companies with solid track records and a growth agenda.
“You can certainly outpace the higher interest [rate] with the leverage that you have with a good brand and you’re managing that business effectively,” he added.
Blackburn, however, noted the company was nearing a point when it would finance expansion through a “traditional type” of debt service. Southern Rock could now lower its leverage given the growing number of McAlister’s Delis in its fold. “We have several folks talking to us about that,” he said.
David Farkas has covered the restaurant business for 25 years as a reporter and food writer, and writes about development deals in The Pipeline in each issue. Send your franchise’s development agreements to him at email@example.com.