Buying – and Building – a Food Franchise

A look at the local franchise market, what it takes to be an owner, and how one locally based company decided franchising was the right growth strategy for them.

By Lynn Geiger

TRAVERSE CITY – It took more than four years from the day Josh and Deanna Russell signed the franchise contract to the day they served their first sub.

Owners of the first Jimmy John's franchise in Traverse City, the Russells experienced some setbacks in their search to find the right location for the popular sandwich shop. The couple also had to weather the economy and a business financing lockdown.

Nevertheless, they persevered and opened in the Campus Plaza on TC's east side in June 2010.

"The location was definitely the biggest obstacle," says Josh Russell.

Today, Russell is on the hunt again. He's already been approved for another location, this one on the west side of town.

While Traverse City has several fast food corridors, finding a piece of real estate to lease or buy in a high-traffic and highly visible area – at an affordable price – is getting increasingly more difficult. Additionally, some commercial developments have building and signage restrictions that run in conflict with a particular franchise's standard design features.

The well-stocked restaurant franchise market is a telltale sign of the region's growth – where large amounts of people gather, food franchises sprout up and typically thrive.

"I think Traverse City is a good market relative to its population for a food franchise," says industry veteran Wayne Lobdell. "Not only because it's the marketing center for northern Michigan, but also because of the high volume of traffic we get in the summer."

Lobdell opened his first fast food franchise in Traverse City in the early 1970s and at one time owned 72 KFC and Taco Bells franchises around the area. He no longer owns any franchises here, but instead has upwards of 70 Taco Bell franchises in New York State and a large acquisition in the works.

"Traverse City has good fast food operations, owners that do a great job," he adds. "It's a tough business. You have to be on top of your game. The margins are quite thin after food and labor costs."

For the Russells, the decision to get into Jimmy John's ownership was as simple as being fans of the product and how the business was run. They contacted corporate headquarters to explore the possibility of opening one in Traverse City.

"We got in at just the right time," Josh Russell says. "Corporate had some 50 inquiries in Traverse City after we signed."

While some people say buying a franchise is an easier way to go into business for yourself rather than starting from scratch – extensive support system, name recognition, known product – the financial investment is significant.

For example, buying a Jimmy John's franchise is a total investment of between $325,000 and $375,000, which includes a $35,000 franchise fee, build out of the space, equipment and a requirement of $50-$60K in working capital, according to Russell. He turned to a couple of family members to help finance the buy.

Russell also pays corporate a 10.5 percent cut based on sales every week – 6 percent for royalties and a 4.5 percent advertising fee. Business in Traverse City is good, Russell says, with sales besting projections.

"I love it," he says of the work. "The money will come. We'll be successful because we worked hard to make it that way."

Success in the investment generally means one thing: buying up more franchises.

Rick and Kelli Sefton purchased the Wendy's across from Meijer in Traverse City in 2002, after owning a Wendy's in Petoskey since 2000. They added a Sault Ste. Marie location last year and are planning to build their first Wendy's franchise in Southfield this year in addition to taking over two more stores in Wixom and Union Lake.

Rick Sefton has a reputation within the Wendy's corporation of turning underperforming franchises around.

"There are so many facets to owning and running a franchise, from food safety to zoning," he says, and it's that multi-tasking and varied job responsibilities that both he and Kelli enjoy.

While franchises can get a bad rap for not being truly independent, as local owners the Seftons have done a lot of things to set themselves apart – from the employee atmosphere to community involvement.

"Seventeen percent of our employees (77) have been here 10-plus years," says Kelli Sefton. "That's unheard of in this industry. We do a lot of extras for our employees to make it a positive experience."

The Seftons are also big supporters of schools, donating more than $45,000 through fundraisers, and also support numerous charitable efforts – from gift certificates to pots of chili to sponsorships – contributing more than $60,000 over the past five years.

One of the big advantages of buying into a franchise is buying into an established brand – but what about using the franchise model to take your brand to the next level? Grand Traverse Pie Company founders Mike and Denise Busley decided that franchising was the right growth strategy for their very successful homegrown business.

"It's a hybrid approach," explains Mike Busley, "a combination of company-owned and franchise locations."

In 2004, the Busleys owned three locations – the original on West Front Street and two in Lansing. Whereas the multi-billion dollar fast food franchise industry is based on automation and duplication down to the last french fry, that was the furthest thing from the Busleys minds.

"The Pie Company didn't have that level of maturity, nor was it something we were striving for – that level of duplication," says Mike Busley. "We're like an anti-franchise franchise."

The decision to pursue the franchise route did come with a major concern, Busley says: that is, could they create something that felt homemade, that "mom and pop" feel, in a franchise setting?

Turns out, yes. "It's been people coming to us … and us making a connection with these folks to carry on the brand."

The first Grand Traverse Pie franchise opened in 2005 and now there are seven locations in Michigan and two in Indiana. The Busleys have also added two more company-owned stores, the newest location on Park Street in Traverse City and another one in the greater Lansing area.

The plan going forward, Busley says, is for there to be as many company-owned stores as franchises. Currently, a franchise location is underway in Ann Arbor and another one is in the planning stages in Grand Rapids. "We're also looking for a couple of new locations for company stores," he says.

Busley says there is plenty more room for pie shops in Michigan as well as more growth beyond the state's borders. But they will only go so far, he says.

"We will always remain an upper Midwest regional brand," says Busley. "You won't see us in Phoenix or Tampa. Chicago, however, is an intriguing location."

So how is the original location faring under all this growth and expansion? It is still one of the highest volume stores, says Busley, and has experienced minimal negative pressure on sales with the opening of the Park Street location a mile away. "People who know of the Grand Traverse Pie Co. from another location are still coming to see the original." BN