Potbelly bets on restaurant newbie, plus more deals
Illustration by Jonathan Hankin
It’s an age-old story in the world of franchising. A person falls in love with a product or service, discovers he or she can buy a franchise, and dives in. In Todd Stimson’s case the product was the sandwich he often consumed while visiting his personal-loan outpost in Chicago’s Loop.
And as these stories typically go, Stimson’s wife, Angie, wondered what the heck he was doing launching a second business — and a restaurant, at that, given zero experience operating one.
The Stimsons opened their first Potbelly Sandwich Shop in 2012, in St. Louis, Missouri, where they live. That first site, in a sprawling office, retail, medical and residential space called City Place, proved eventful.
Stimson claims it was the chain’s biggest opening ever. “We had a crush of over 1,400 people,” he recalled, adding the restaurant went through all the food that had been stocked for the next three days. “It’s been a home run.”
Since then, the couple along with two partners have added three more in or near the Gateway City. The 400-plus-unit chain, founded in 1977, only began franchising in 2009. St. Louis was its fifth franchise market.
Stimson, by the way, earned his business chops working for a family-run outfit that loaned small amounts to people with troubled credit histories. He later bought the business and now operates four Midwest branches that advance up to $4,000.
He believes his lack of restaurant experience has made him the ideal franchisee — in contrast with foodservice veterans who may have their own ideas. Potbelly “was leery of me, looking at my other business,” he admitted. “But I said, ‘Look guys, you give me a plan, show me the ins-and-outs, and we will be excellent operators.’”
To finance the first location, the partners hired a firm specializing in helping business owners use 401(k) plans to fund their ventures. “We just said banks were a pain in the ass for new businesses,” Stimson recalled. “They push you towards an SBA loan.”
Their goal was to self-fund the first unit and then depend on cash-flow to continue to open three more. Explained Stimson: “We were able to start a C corp and roll over our 401(k)s into our own 401(k)s. That helped self-start one of our locations.”
HWY 55 master franchisee Chris LaCoe didn’t have much luck at Mount Olive College or the University of North Caroline at Wilmington. “I wasn’t doing as well as I could,” he recently conceded. But that doesn’t mean he was lazy. He just desired to work, make some money and eventually own a business. Academics were a diversion.
LaCoe, meanwhile, met Kenny Moore, the inspirational founder of a growing burger chain then called Andy’s Burgers, Shakes & Fries. LaCoe liked Moore’s business philosophy. “Kenny was talking about giving people an opportunity to own their business. He wanted to reward people who would bust their butt and make good decisions. It seemed to resonate with me,” he said.
LaCoe joined the company as a fry cook and loved it. Within a year he was managing a unit; within a couple more, he was a franchisee owner on his way to buying more than a dozen units. He was 24 years old.
The full-service concept, which changed its name to avoid a trademark dispute, emphasizes small-town America values. “You’re trying to make that customer feel way more appreciated than the average business,” LaCoe says, alluding to his fast-food competitors. “Our food is cooked when you order it, and nothing is ever frozen.”
Now 19 years later, having sold a number of his franchised restaurants to former employees (whom he helped finance) LaCoe and business partner J.R. Cottle (also an employee-turned-franchisee) own development rights for South Carolina and Texas. Over the last four years, sub-franchisees have opened 16 units in the Palmetto State and one in Texas.
LaCoe and Cottle, who receive a 4 percent royalty, devote time to newcomers. “When a franchisee comes to us, we check out the location, try to help negotiate leases, and go through construction and blueprints with them,” LaCoe explained. The partners believe there’s room for 100 HWY 55s in South Carolina while Texas may hold as many as 300. The partners, who own four restaurants, don’t expect to open more of their own anytime soon.
In fact, they’re likely to sell them eventually to their current general managers, financing the deal themselves. “So they have an opportunity to own through sweat equity. Now they can go to a bank for their second or third unit because they have established themselves,” LaCoe said.
A HWY 55 (renamed for the highway on which company headquarters sits) generates about $850,000 on an investment of $300,000 to $350,000 when properly sited and operated. “What I have found,” LaCoe said, “is if you are in a location that’s a suburb of a town with a population of 5,000 to 15,000—and a Walmart is fixing to come in—those places are unbelievable as far as volume and overhead.”
Overtime & burnout
A final word about the new federally mandated overtime rule going into effect December 1. Briefly, the rule increases the standard salary level for employees from $455 to $913 per week (or $47,476 annually for a full-year worker).
Denny’s franchisee John Metz surprised me by claiming he was in favor of it. In fact, he’d switched salaried assistant managers in his 24 restaurants to hourly almost two years earlier. He said he “wanted to get ahead of the curve.”
Yet he had also learned an important lesson from a former employer: “The problem with salaried assistant managers is the GMs work them to death. So we used to burn people out, and when we wanted to promote someone from within the surviving assistant managers were not necessarily the people we wanted to hire.”
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.