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The Pipeline

These franchisees count on partnerships to fuel expansion


Published:

David Farkas

Many if not most business partnerships are born of convenience and a mutual desire to make money. That’s just part of it with close friends Joseph Ruggeroli and Mike Kelesis, native Nevadans who attended high school together, were roommates in college and currently reside in the same neighborhood.

“Mike lives a half mile from me. We see each other often,” says Ruggeroli, a former real estate broker who with new business partner Kelesis will break new ground for Moe’s Southwest Grill in, fittingly enough, the Southwest.

The 500-unit burrito chain has just one unit in Las Vegas, in a food court at McCarran Airport. However, some reviews of the unit on Yelp.com rate the outlet poorly, which bothers the partners because they recently inked an eight-store deal  with the Atlanta-based franchisor Focus Brands. That Moe’s, Ruggeroli fears, could reflect badly on them.

That seems unlikely nonetheless, though locals do travel and some may stop at Moe’s to grab a burrito.

The partners’ first unit will open this fall in a strip center anchored by a grocery store in the southwest corner of the city. A second, in an upscale lifestyle center called The District, may open by Christmas if a construction project at the center is completed by then.

Of the center’s 16 foodservice outlets, none serves burritos, Moe’s signature menu item.

Getting into any site with the right traffic generators has been problematic despite Ruggeroli’s real estate experience. He names several national and regional Mexican chains, explaining that each has an exclusive lease keeping direct competitors at bay, i.e., outside the center.

He cites a well-known fast-feeder that typically signs a long-term, exclusionary ground lease the moment its officials hear of development plans. “Because they are first,” he says, “they can command that.”

The partners intend to follow suit. “Unfortunately, we will take the same strategy. That’s the way the business is done here,” he laments.

They will “self-fund” their first two outlets before seeking financing or an equity partner. The duo, incidentally, has restaurant backgrounds. Kelesis’s father ran a string of small cafes in and around Las Vegas. Ruggeroli has worked as a server in a dozen eateries, from fast food to fine-dining.

He’s also counting on a newly minted MBA to give him the necessary skills to successfully operate a fast-food business.

The partners also may get a boost from the area’s improving employment picture. A recent jobs report in USA Today, for instance, showed the number of unemployed job seekers in Las Vegas dropped by 19 percent between February 2012 and February 2013.

Construction employment rolls grew by more than 7.5 percent during the same period. Could a recovery be looming in the beleaguered Las Vegas housing market? If so, it will be very good news for restaurant operators.

Candyland

Buying an existing business for its cash flow is usually a good strategy when intended to use the capital to boost the size of the business.

Meet an equal partnership among three successful businessmen who last summer inked a franchise agreement with Fannie May Confections Brands. The ambitious deal included the acquisition of 17 existing candy stores and a contract to open 45 more by 2014. The purchase price was not disclosed.

Cash flow from the existing units has funded five new store openings as of March.

According to the franchisor’s Financial Disclosure Document, the all-in cost to open a new Fannie May unit ranges from $210,800 to $389,000. The company’s own stores ring up $418,885 on average and cash-flow $90,576, or 22 percent.

Partners Michael Givens and Ulysses Lee “Junior” Bridgeman are longtime Wendy’s franchisees; partner Rod Burwell is a veteran entrepreneur who operates John Deere dealerships and hotels. Burwell and Bridgeman are contributing expertise in the area of real estate and finance.

Givens, who’s based in Oakdale, Minnesota, is the operating partner. Why Givens and not Milwaukee-based Bridgeman, a former NBA star who operates hundreds of franchised restaurants?

The chips, apparently, fell that way. “We offered to operate the stores and everyone agreed with that,” says Dan Turnquist, CFO for both GB Chocolates and FourCrown (Givens’ Wendy’s franchise company).

Turnquist concedes acquiring 17 existing Fannie May stores over five states was difficult at first. “It’s a challenge to be that spread out. Getting the right district managers in the right places and not overshoot labor was an issue,” he recalls.

Although Turnquist understands the burger business, he and his boss didn’t know much about selling candy. They have since discovered that people buy candy – chiefly the gift-box kind, not individual items -- during Christmas, Easter, and Valentine’s Day, he explains. The stores rake in the bulk of their revenue then. Sales spiral downward during mid-summer before picking up again in the fall. Predictable seasonality allows the new owners to control store-labor efficiently. 

That’s one advantage of a simple model. Another, perhaps more compelling advantage, is that Fannie Mays are less expensive to operate and cheaper to open. Says Turnquist: “It’s no small task to grow and develop a Wendy’s. The cost is significant. What was intriguing about these bricks and mortar stores, they’re not nearly the risk.”

Lubricated

Fast-lube industry veterans Steve Allison and Al Chance became partners in 2008 to execute an aggressive expansion strategy for Lube Stop, the industry’s largest franchisor. The Houston-based company franchises and operates about 2,000 outlets.

“We purchased 43 Jiffy Lubes in Myrtle Beach, Tampa and South Florida in June in 2008,” explains Allison, who began his career in “the pit and worked my way up.”

Five years later, the partners, who purposely do not have a defined growth strategy, prefer to remain opportunistic, acquiring if the price is right. “There is a lot of consolidation going on and not a lot of shovels in the ground,” he adds. “No one is building them ground up.”

What’s the going rate for a fast-lube business? The partners would like to pay three times cash-flow, though perhaps more if they can own the real estate. This year, however, they’re purchasing an existing Jiffy Lube in Stuart, Florida, from a franchisee who will become the partners’ landlord.

Financing an acquisition isn’t an issue, Allison claims. “We have a good banking relationship.” 

 David Farkas has covered the restaurant industry for 25 years as a reporter and food writer. Submit your company’s development agreements to him  at dfarkas99@gmail.com.

 
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