Yum! Brands, the parent company of KFC, Taco Bell, and Pizza Hut is acquiring the niche restaurant, Habit Burger for $375 million. The acquisition is poised to take Habit Burger to new heights, far beyond their 300 locations in the United States (company-owned) and China (franchises). Already the largest restaurant company on the planet, Yum! is poised to give Habit Burger access to resources they would be hard-pressed to secure operating alone. Here are some of the ways that Habit Burger with benefit from being acquired by Yum! Brands.

Money
With the right combination of capital and strategy from Yum!, Habit Burger can potentially improve their customer offerings, expand locations, invest in quality personnel and grow their business from a niche operator to an international powerhouse.

Infrastructure
Yum! Brands knows the restaurant business. They are the parent company of international brands such as KFC and Taco Bell so they already have the infrastructure to quickly scale Habit Burger from a few hundred locations to thousands. They have the experience, tools and connections necessary to successfully expand Habit Burger globally. Small niche restaurants may have a deep understanding of local markets but once they go beyond that they may be limited. They either don’t have access to accurate information about national and international markets or they can’t afford to hire the people who are experienced enough to pull off expansions. If Habit Burger wants to expand rapidly, they have access to Yum! resources and know-how to make that possible.

Branding
Yum! Brands has a track-record of taking brands to difficult markets.  Habit Burger will have access to Yum! branding resources that will help them position their marketing messages in the best way for specific locations. Because Yum! has such a deeply resourced marketing system, they can quickly create, test, and deploy marketing campaigns across global markets and get quick and accurate feedback about their effectiveness. This type of strong feedback loop is rare for niche restaurants who are trying to go it alone in the international market.

Franchising
Right now, most of Habit Burger’s locations are company-owned. Yum! has 49,000 stores in 145 countries which comes with a franchise network with which to partner for expansion. Expansion is already on the table as Habit Burger has announced they plan to expand to 2,000 locations globally. This simply wouldn’t be possible without the Yum! franchise network and their access to credit and financing.

Growth
While Habit Burger is small relative to Yum!, the acquisition does offer some long-term growth opportunity for the large restaurant company. This is Yum’s first foray into the burger business and it could offer more opportunities for growth nationally and internationally.

Deepening The Brand
As Yum! continues its global expansion, building its burger franchise brand will deepen its connection to consumers as “burgers” are closely connected to the idea of what is “American.” And the American brand is still very popular globally. Many global consumers want to have a taste of American foods, eating burgers is one popular way to do that.

Good For Investors
Habit Burger is a strong brand. Buying into that strong brand is good businesses for investors who will benefit as Habit Burger expands and increases its customer base.

Potentially Challenging For Franchisees
Yum! franchisees wanting to diversify into hamburger concepts are now probably confined to Habit. Because Habit has so few locations, the opportunity to own multiple locations will only exist if the franchise is willing to invest significant resources and capital to development. This comes at a time when Yum!, like many large brands, is requiring a lot of development from its franchisees.

Ghost kitchens are fast becoming the new frontier for restaurants wanting to expand their market share. Low costs for real estate and staffing are attractive features of a ghost kitchen but so too is the “delivery only” business model. As food delivery apps become more popular with diners, brick-and-mortar restaurants can find it difficult to keep up with demand especially during busy times during the day. But since ghost kitchens don’t have any dine-in capacity, they’re the perfect model for doing a delivery-only restaurant. However, there are some legal and practical considerations you need to make when you’re opening a ghost kitchen franchise and/or dealing with a third-party delivery service.

Serve Sturdy Meals

If you’re running a ghost kitchen with a delivery-only menu, make sure the items you sell can survive the delivery trip. You don’t want to sell delicate dishes that will arrive smashed or crushed. And you don’t want to sell items that can easily spoil.  If your menu isn’t filled with items that are a good fit for this delivery-only model you could find your business quickly overwhelmed with customer complaints or even lawsuits if spoiled food makes customers sick.

Get Customer Data

If you’re looking to open a ghost kitchen franchise, you should only work with experienced franchisors who have customer data that will tell you what works and what doesn’t. Ghost kitchen franchisors should have a solid track record of profits and be connected to food delivery apps that will continue to collect pertinent customer data as the business grows. This data will help you forecast what customers really want and how they are responding to your product. Remember, the ghost kitchen industry, just like the traditional restaurant industry is subject to the changing tastes of customers—you need to have the right data to forecast and respond to those changing tastes.

Choose A Good Location

If you’re opening a ghost kitchen franchise, you’re at an advantage when it comes to leasing a space. Leases are typically shorter for ghost kitchens (10-15 years) and more affordable. Just make sure that you’re in a location that is close enough to your target market that food can be delivered quickly.  Try to get a location that is close to lucrative areas such as office parks, college campuses, and wealthy neighborhoods.  Also, be sure that you understand historical traffic patterns and sports or cultural events that could impact sales and access. You don’t want to open a ghost kitchen on the outskirts of town only to discover that it takes you an hour to deliver food every week because of the traffic from sports events.

Gain Online Visibility

When you have a brick-and-mortar restaurant, you can rely on foot traffic as a way to advertise your business. But ghost kitchens will need to rely on online visibility. This type of visibility won’t come cheap and there will be a lot of competition. Before you sign a franchise agreement for a ghost kitchen, make sure that there is a solid and sufficient marketing plan. You don’t want your business to be buried by the competition just because they’re more marketing savvy than you. You must have an online presence on the most popular third-party delivery apps available and you must have a plan to protect your reputation.

Negotiate Third-Party Delivery Agreements

When you open a ghost kitchen, third-party delivery agreements are just part of the process. But you will need to consider a few legal and logistical questions:

• Who will be ultimately liable for food that arrives extremely late (and cold)?
• Who is liable if food safety hasn’t been maintained during delivery and a customer gets sick?
• Do you have tamper-proof packaging to ensure that your food is delivered the way you intended?
• Does the third-party delivery service charge the customer a service fee? If so, how will this impact the royalties you pay the franchisor?
• Does the third-party delivery service charge more for your food on their platform? If so, how does this impact your franchise agreement?
• What is the service area of the third-party delivery service? Does that service area conflict in any way with territorial boundaries in your franchise agreement?

As you explore their-party delivery options, make sure that you negotiate menu prices, delivery methods, routes, prices and the use of your trademarks and logos. You should also consider negotiating an exclusivity agreement where the third-party delivery service provider does not deliver food for restaurants that are in direct competition with your business.

If your business is a franchised restaurant, legal and contractual constraints exist around whether you can open a ghost kitchen.  Those constraints vary depending on the terms of your franchise agreement, the franchise systems policies with respect to whether you can open a ghost kitchen and the franchise system’s policies. Please consult with us right away if this is your situation and this is something you are considering!

When considering the purchase of a franchise business, the Franchise Disclosure Document (FDD) is one of the key documents you should review before making a decision. FDDs contain essential information about the franchise business that will give clues about whether it is a good (or bad) investment. But you need to know what to look for and how to interpret the information you find. Let’s take a look at how to read a Franchise Disclosure Document.

Overview

A Franchise Disclosure Document is broken into 23 sections with information that will give you insights into the most important aspects of the investment worthiness of a franchise. In this guide, we will cover the most important information and where you will find it in the FDD.

Franchise History

If you want to know the future of a franchise, you must look at the history and ownership.  Sections 1 (franchisor and any parents, predecessors, and affiliates) and Section 2 (business experience) will let you know how many times a franchise has been sold, who really owns it, and the business experience of key people. This is especially important if you’re buying a franchise that is new or that has had a turbulent history. These first two sections of the FDD will allow you to dig deeper and see the details behind the business’ past and present.

Franchise Outlets

Before purchasing a franchise you need to make sure that there is a track record of franchise outlets opening, staying open, and thriving in the system. You will need to look at the number of outlets and their financial health. Go to Section 20 (outlets and franchisee information) where you will find how many outlets opened and closed over the past three years as well as how many were terminated or didn’t renew their contracts. Obviously, if you notice that the majority of outlets fail to renew their lease after a year or two, it’s a red flag that the system may not work for the majority of people.

Litigation and Bankruptcy

While it is true that even the best and healthiest franchises will eventually have litigation issues, too much litigation especially for a small system is usually a red flag. All franchisors are required to disclose on their FDD any litigation that happened in the past five years.  You can find that information in Section 3 (litigation).  Of course, you should always get the story behind the numbers as there are situations where litigation is just a natural part of a franchise’s recovery from hard times. Once you have the litigation story sorted, you should go directly to Section 4 (bankruptcy) to find out if a franchise or one of its key owners has needed to restructure their debts. If the bankruptcy is more than 10 years old, it’s probably nothing to worry about. But if President of the franchise has filed personal bankruptcy in the past few years, it is probably worth having a discussion about why. Even if the business is financially healthy, the personal financial problems of key people in the business could bleed over if not managed correctly.

Franchise Financials

In Section 21 (financial statements) of the FDD, you will find the franchisor’s financial statements. Healthy franchises will make a good percentage of their income from ongoing royalties and a smaller percentage from the sale of new franchises. The exception to this rule is when a franchise is fairly young. Any established franchise that makes the bulk of their money from selling new franchises not royalties is probably not in a healthy financial state.  And while you’re reviewing the franchisor’s financial health, take a look at Section 19 where you should find financial performance representations that will give you a good idea of what you can expect in terms of sales and profits if you decide to buy a franchise. Be forewarned that Section 19 is not required by law but if you buy a franchise without this information you are going in at least partially blind about past sales and profit performance.

Estimated Initial Investment

In Section 7 of the FDD you will find information on the estimated costs you will need to take on to become a franchisee. This estimate will not include the initial franchise fee but will include other costs such as equipment, real estate, signage and marketing. This is really important because it will help you determine if you have enough capital to invest or if you will need to raise additional capital to move forward.

Fees and Expenses

Royalties paid to the franchisor will be one of the biggest ongoing expenses you will have as a franchisee. This is why Section 6 of the FDD is critical so review this section carefully. How much are the royalties and other fees and expenses? And how close are these fees and expenses to the industry standard? How much profit will you take home AFER you’ve paid the franchisor their due? These are critical questions to answer carefully and honestly as this will help determine just how profitable your business is after all expenses are paid.

Restrictions On Products and Services

In Section 8 of the FDD, you will find any kind of operating standards and restrictions you will be required to follow. Read this section carefully because there may be restrictions on what vendors you can do business with or other controls that impact how you do business in unexpected ways.

Renewals, Termination, and Disputes

Section 17 of you FDD will let you know under what circumstances a franchisor can terminate your contract and how disputes are resolved. Does the franchisor require arbitration? What is process for appealing a decision? Just how fair are the dispute resolution terms? How a franchisor handles problems with a franchisee is a good sign of whether or not they will play fair with you overall so take a good look at this section.

Centralized marketing programs are powerful tools for franchisees. Not only do they provide a streamlined way to market, they make it easy for franchisees to reach a wide audience at a reasonable cost. But if you want to get the most out of a franchise’s marketing program, you must make sure that they have a strong and effective system. Here’s what you need to know.

Centralized Marketing Program Benefits

The biggest benefit of any franchise’s centralized marketing program is the economies of scale. By pooling their ongoing financial contributions, a collection of franchisees can run marketing campaigns they couldn’t afford if they were working as individual entities. For example, television advertisements, national radio ads, and massive online ad campaigns can quickly become too costly for a single franchisee. By working together, franchisees can reach a larger market share by using powerful and expensive marketing tools for a reasonable fee. Here are some other benefits:

• Centralized administration.
  Hiring vendors, buying space, and tackling design and branding can all be handled by one entity instead of each individual franchisee.
• Lowered expenses.
  By purchasing large printed quantities of materials or services in bulk, the franchise can secure lower prices than an individual franchisee.
• Unified brand.
  When one entity controls the branding for the franchise, all marketing sends a uniformed and more powerful message about what the company offers customers.
• Access to more data.
  When the franchise runs campaigns they can see all data collected from customers from across all regions. This allows the franchise to see customer trends and understand what’s working or not working. It can even give insights into what products or services they should offer in the future.

While there are some solid benefits of a centralized marketing program there are some drawbacks potential franchisees should think about.

• Failure to meet local needs.
  Sometimes centralized marketing programs fail to create marketing materials/campaigns that speak to local needs. This is usually the case with marketing programs that have been poorly implemented.
• Top-down strategizing.
  All centralized marketing programs usually have one department that makes the final decision on marketing strategies. But well-run programs listen to franchisees. However, the potential drawback of this type of marketing system is that sometimes the “top-dog” in the administrative office fails to take seriously the suggestions or needs of the franchisees that are depending on them.

Best Practices

When you’re looking to buy a franchise, you need to make sure that their centralized marketing program is following best practices. Here’s what you should look for:

• Campaigns drive customers.
  When it comes to marketing “building it” doesn’t guarantee that customers will knock on your door. Make sure that the franchise’s past marketing campaigns have been effective in delivering customers to franchisees.
• Listens to franchisees.
  No one is better qualified to strategize about marketing than those who understand the customers. Smart franchises understand that franchisees are the people who are closest to the customers not someone in headquarters. That’s why some franchises have systems set up to receive franchisee feedback and suggestions about marketing campaigns, branding, and marketing materials. And many franchises have “franchisee advisory boards” in place so that there is a standing committee that will speak on behalf of franchisees when marketing strategies are being created. If a franchise has no system for receiving franchisee feedback and suggestions for their marketing, this is a serious red flag that the centralized marketing program may be failing to meet franchisee needs.
• Makes good investments.
  The trick to marketing is putting your money in the right place so that you get the type of results you need. Some franchise marketing programs get this right while others fail miserably. There are three main areas of investment where marketing dollars must go:
  • Administrative.
    Paying salaries, agency fees, and other expenses related to administering the marketing program.
  • Advertising materials.
    Paying for the creation of all marketing materials such as printed ads, brochures, radio ads, television ads, and online ads.
  • Placement.
    Paying for the spots where materials will go such as magazines, websites, television or radio stations.

There is no magical number for getting this investment split right. The investment portioning that works is the right one at the time. However, there are some investment splits that are so lopsided that you know immediately that it’s off. So, for example, if you notice that 80% of all marketing investments go into administrative expenses, it’s probably an ill-managed program. In any case, don’t be afraid to ask questions when something seems off.

• Franchisee satisfaction. Pick up the phone and ask existing franchisees how they feel about the marketing program. Are campaigns delivering the results they expect? Are they listened to? How do they feel about the marketing investment split? Many franchisees will be quite upfront with you about their experiences. If you notice that the majority of the franchisees are dissatisfied with the marketing plan, it’s a bad sign.

While no franchise is going to let you pore over the details of their marketing system document, you should ask them about it and ask to see the table of contents. How long have they had a written marketing system? How extensive is it? Do they have effective systems set up to support franchisees? The most important thing is that this document exists and that the franchise has a proven system for marketing their brand. If they don’t have a written document for their marketing system this is a huge red flag.

If you’re looking for a franchise that has a strong marketing program, take the time to investigate and ask the right questions.