Taco Bell is a social media maven, promoting things like this Taco Bell-themed wedding.
Winner: Taco Bell
Many prospective franchisees assume it’s impossible to break into a legacy brand like Taco Bell, with 7,000 stores and a current hot streak in menu innovation and social media marketing, without already being a Taco Bell owner. For certain it’s not easy, but it also is not impossible.
Just ask Elie Khoury, an operator of hotels, TGI Fridays and other restaurants in New Orleans, who purchased eight stores two years ago as a first-time Taco Bell man, through his company Southeast Restaurant Group, and then in December 2017 added 18, with an obligation to develop an undisclosed number of new stores.
A big part of Khoury’s win was his group’s intimate knowledge of the market, and the happenstance that Taco Bell had stores for sale there. “There are so many franchisees that want to buy all the Taco Bells. We were fortunate to fit the box as far as background restaurant experience, financial means, and we’re in New Orleans, which is a quirky market,” he said.
“It’s super hard to get into these concepts,” he added, noting that a group of stores in the Northeast had more than 40 bidders recently. “They have franchisees that want to take everything.”
Once Khoury’s group had done the due diligence to know Taco Bell was their preferred brand, Khoury joined forces with the Cypress Group, whom he calls a sophisticated broker and recommends others to make a similar arrangement. He also asked his bankers for advice, another recommendation because “banks have long memories.”
“A lot of people don’t ask bankers stuff, they just ask to borrow money,” he said. “But if you have conversations, they have long memories. So I talked to my bankers, and they were like, 'Are you kidding? Taco Bell is a no-brainer.'”
Khoury is an experienced dealmaker and operator with a deep resume and an impressive organizational structure. But even he was surprised by the “extreme vetting” his operation underwent at the hands of Taco Bell, which took “maybe a year.” There were financial reviews, criminal background checks, interviews in Irvine, California, headquarters with numerous executives, visits from corporate to SRG’s New Orleans stores, conversations with other franchisees who knew Khoury, he assumes. “It was impressive,” he says mildly, indicating that is an understatement.
Dean Zuccarello, founder of The Cypress Group, points out the idea that no one can get into legacy systems is false, especially as many operators look to retire or lose their appetite for new-store development. “We’ve seen an increase in the median age of franchisees. People have a lot of investment for a long time and they’re not growing as fast and that creates opportunities for others,” he said.
In the case of Taco Bell and its eventual deal with Khoury, he said, “Taco Bell reached out and said, 'Hey, we want to see some fresh blood.' Eventually the brands get uncomfortable with a few franchisees getting too large. With a lot of franchisors, they’re really pushing for new-store growth,” and “new franchisees tend to be more interested in getting into a system by developing new stores.”
J.B. Hewetson, the Cypress Group executive who put the Khoury/Taco Bell deals together, echoed the point not only with Taco Bell but other legacy brands. “For the most part we find them to be rigorous in their diligence, but very interested in balancing a portfolio in new and old, large and small” operators. “Franchisors are also focused on the local attribute. Elie, for example, knows one of the most difficult markets in the United States like the back of his hand. Knowing New Orleans added arrows in his quiver.”
Hewetson said it’s important for prospective franchisees to truly understand what the franchisor’s development requirements are going to be, and that the operator’s view of what makes sense, and how much it will cost, aligns with the franchisor’s. That can be determined by face-to-face discussions and aided by input from consultants like Cypress, who have brokered many deals with many brands and know the franchisor’s operating mode. Of course, if brands change ownership as so many do, those assumptions can go out the window. (Many Tim Hortons franchisees are suing their new owner since 2014, 3G Capital and Restaurant Brands International, for example, claiming they aren’t getting the support they need to develop stores and the requirements for development schedules are increasing.)
Khoury, to close, said he believes in choosing legacy brands for investment, however hard they may be to enter. “We’ve gone all over the board with our franchise selection. I would go with the institutional guys,” he said. Sure, you might miss out on the next Panera Bread, like the person who bought when it had 30 stores and now is a ka-zillionaire. “But for every one of those, there’s nine that don’t work,” he said. “At the end of the day, the big players are going to make it through some ups and downs.”
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