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Investing in sweat equity

Investing in sweat equity

Looking to add franchisees and reopen some shuttered sites, Quiznos is now willing to loan experienced restaurant managers all but $5,000 of the funds needed to acquire and run a sandwich shop.

According to the Denver-based sandwich chain, the startup loans issued through its new Operating Partner Program will be repaid—with interest—from the profit of restaurants operated by such partners. While working off their loans, participants will earn salaries and benefits and share in profits, officials said. Quiznos franchises more than 4,000 Quiznos Sub restaurants to others.

Because participants will work to own the franchised businesses they run, Quiznos’ program differs from so-called “fraction-of-the-action” arrangements under which managers, for an investment, can share in their restaurant’s profits. It also differs from Chick-fil-A’s much-discussed “franchise” program calling for participants to invest $5,000 for a license to run a restaurant built by the chain where it deems appropriate in exchange for an even split of profits.

The pitch to potential “sweat-equity” franchisees by Quiznos comes as many chains struggle to regain franchise sales momentum slowed, if not halted, by the recent recession. It also coincides with efforts by the company and many of its franchisees to rebuild their relationships or move on following preliminary approval late last year of a settlement in four class-action lawsuits filed by franchisees.

Those cases alleged violations of U.S. racketeering and corruption statutes by Quiznos, and revolved around Quiznos’ supply chain and food costs, marketing and advertising funds, and disputes among franchisees who agreed to but did not open locations and whether royalties were owed.

Quiznos denied all claims in the class-action suits, and there is no finding or admission of liability in the settlement agreement, which is still subject to hearings in U.S. District Court and could cost the franchisor payments, waived fees, and penalties and credits with an estimated value of up to $114 million. The settlement was expected by attorneys for the franchisees to impact more than 6,900 individuals now associated with the Quiznos system and several thousand who have closed their franchises.

Nation’s Restaurant News recently talked with John Fitchett, president of Quiznos’ Operating Partner Program, about the fledgling initiative.

Do you have operating partners in place, and, if so, where?

Yes. Four are in Denver, one in Cypress, Texas, and one in Birch Run, Mich.

Is this program a response to a downturn in interest among potential franchisees tied to the economy or the franchisee-franchisor relationship challenges addressed in last year’s court settlement?

The Operating Partner Program was developed in response to a successful pool of qualified, interested entrepreneurs with restaurant experience who would make great franchise owners, but lack access to the necessary financing in this difficult economic environment.

About how much will Quiznos be loaning operating partners to cover startup costs and at what interest rate?

Quiznos’ investment will range from $40,000 to $65,000; the interest rate is 15 percent.

Will Quiznos be receiving sales royalties or any other top-line-based payments at operating partner restaurants that do not count toward paying off the startup stake?

The operating partner runs a P&L [or profit-and-loss model] that replicates a traditional franchise owner’s P&L, which does include royalties. The difference is that operating partners earn a salary and benefits as they work toward full ownership of the restaurant, with 80 percent of the restaurant’s profits paying down Quiznos’ contribution on a monthly basis.

What salary will be paid to your operating partners?

The salary is $23,660 a year. In addition, the operating partner receives benefits and 20 percent of the restaurant’s profits.

What benefits are available to operating partners, and are they being asked to help pay for them?

Benefits include health, dental and vision—the cost of which will come from operating income, comparable to a traditional franchise owner’s P&L.

What happens if an operating partner’s restaurant is not generating sufficient profits to pay down the up-front loan in a reasonable period of time?

While this is a new program, we believe an operating partner that successfully operates the restaurant can reach the point of being able to acquire full ownership of the restaurant in two to five years. The Operating Partner Program includes provisions to protect both sides of the partnership.

What provisions?

For the first year, Quiznos will cover any losses, and the amount will be added to the loan value. After 12 months, if the restaurant has not reached profitability, Quiznos and the operator will determine whether the operator is running his or her restaurant in the most effective way, or if there are other circumstances that may influence the profitability of the restaurant. [We will then] evaluate whether to put a new operator in the restaurant.

What if success seems unlikely?

In the event the partnership ends, the operator will forfeit his or her initial $5,000 investment and any profit that may have accrued to ownership during that time, and Quiznos will bear the balance.

What commitments will operating partners be required to make contractually?

The commitments and requirements of Quiznos’ operating partners include the $5,000 minimum initial up-front payment, solid restaurant experience and successful completion of the program’s stringent screening process. [That process includes] references, one-on-one interviews, cognitive and personality assessments, and in-store instruction and evaluation.

What will you look for in operating partners?

Operators will need to demonstrate experience and proficiency with hiring, training and local-store marketing and live within 30 minutes of the restaurant location. As with all Quiznos franchise owners, the operating partner will be expected to comply with Quiznos’ 30-year proven operating standards.

What percentage of restaurants to be used for this program will be new? What percentage will be recycled sites?

Locations will be determined on an individual basis with operators. Quiznos wants to ensure the best probability for success, and proximity to operator is a major consideration. Initially, Quiznos expects the majority of restaurants to be reopening in response to consumer demand for Quiznos in an area.—[email protected]

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