This is the second in a series of seven stories exploring the growth cycles of some of the industry’s hottest concepts. Each report will look at a different facet of the evolution of an emerging chain, from conception to financing to expansion into new territories. Future stories in the series also will investigate pitfalls to avoid, ways to stay hot and The Next Big Thing.
Stephen Silverstein kept his day job for nearly four years after he opened the first Not Your Average Joe’s in Dartmouth, Mass., in 1994.
“I was running back and forth between running the family business and two restaurants,” says Silverstein, who ran his family’s upscale-clothing business. “Our first three stores were all home runs with no infrastructure. We just got lucky. I don’t know what else to say.”
Before the luck could run out, as Not Your Average Joe’s opened its third unit, Silverstein hired an experienced restaurant veteran as chief operating officer. The restaurants really took off, but so did the infrastructure. The concept added three stores in 11 months and more central-office positions.
But soon there was almost too much internal support, Silverstein says.
“I brought in a CFO and an R&D chef and began to fill the positions that normally get filled, and then I realized this was kind of crazy,” Silverstein says. “We had so much overhead.”
One of the trickiest aspects of growing a fledgling concept into a multiunit chain is balancing the internal growth with the unit growth, entrepreneurs say. Too much infrastructure too early can drain a business; too little too late can hamper expansion. Entrepreneurs also must recognize when to start sharing responsibility for the business and delegating duties to others.
“You need to be walking the fine line of having team building in place, ahead of growth, ideally, rather than being behind the eight ball,” says venture capitalist Edward “Ned” Grace III, an investor in Not Your Average Joe’s, which received its Hot Concepts! award in 2000.
Sales are the best indicator of when to expand internally, says Grace, who is a managing partner with Grace Venture Partners LLC in Orlando, Fla. Grace founded and later sold two other successful restaurant concepts, The Capital Grille and Bugaboo Creek Steak House.
Say a company with two units, each doing about $3 million in volume, wants to add two more stores in the next year and add another $6 million to the business, Grace says. Usually overhead, or general and accounting costs, in restaurants should average between 5 percent and 7 percent of sales, he says.
“With a younger company, you have to make that percentage larger, say 10 [percent] to 12 percent,” he says. “If you are adding $6 million in volume, that means you can use 10 percent of sales, or $600,000, for overhead.”
Not Your Average Joe’s had gotten ahead of the eight ball and had to slow down administrative hiring, Silverstein says.
“We were like a dot-com at some point: We were not worried about the bottom line,” he says. “But cash is king. If you don’t believe that, you won’t be in business for long. Be very careful to differentiate between what’s nice to have and what’s necessary.”
When Jeff Sinelli opened Which Wich, a Dallas-based sandwich chain, in 2003, he had a ratio in mind for the number of support staff to number of franchised units. Currently, Which Wich, a 2007 Hot Concepts! award winner, has 14 people on its corporate staff to help support 56 franchised units. The company owns and operates just one store. Sinelli hopes to add 20 more stores by the end of the year. By the time the concept gets to 100 stores, he expects to have a 20-person corporate staff.
“Twenty people can cover the array of needs that a franchise support system would need,” says Sinelli, who is also founder of Genghis Grill, a 2002 Hot Concepts! award winner.
Genghis Grill had at least one support person for every five stores that opened, Sinelli says.
“You want to make sure you’re not shortcutting your franchisees,” he says. “You are always trying to balance the scales to make sure you have enough support.”
With time and experience, it becomes easier to predict with some accuracy what a company needs, he adds.
Sinelli held off on franchising Which Wich for about 18 months, until the concept had proven itself viable. Only after a support team was in place along with documentation manuals, did they open the “franchise floodgates,” he says.
Entrepreneurs also must learn when to begin delegating duties and responsibilities to employees, operators say.
Marc Geman, who had sold the snack concept Pretzelmaker to Mrs. Fields in 1998, bought into Denver-based Spicy Pickle after meeting its founders, Kevin Morrison and Tony Walker, in 2002. But even as a managing partner, it took time for Morrison and Walker to trust him, Geman says.
The entrepreneurs, who had worked together at a high-end Italian restaurant, had about four stores when they were approached by a potential buyer represented by Geman. A deal couldn’t be worked out. While the buyer bowed out, Geman became very intrigued with the Spicy Pickle brand. The 2006 Hot Concepts! award winner offers a menu of sandwiches and paninis that can be customized with 10 cheeses, 21 toppings and 15 proprietary spreads, as well as salads and soups.
“There’s no democracy in the restaurant business,” Geman says. “It’s always difficult for entrepreneurs to delegate things they know like the back of their hand. They have very high expectations.”
Concept founders say that because it is difficult to hand others responsibility in their companies, hiring the right people is crucial.
“I’m a control freak, but I’ve learned to let go,” Sinelli says. “One thing I’ve learned about Which Wich is to hire talent. When you hire talented people, you don’t need to babysit them. They know what to do, and you can grow your company faster with talent than with nontalented people.”