Uploaded on Aug 31, 2011
1st Place winner at 2011 FBLA-PBL National Leadership Conference - Orlando, FL
Joe and Staci, a couple in their early forties, recently inherited a select piece of real estate adjacent to a mall in the midsize city in which they live. Their dream has long been to own and operate a restaurant. Both have business experience, but limited knowledge of the restaurant business. Joe is currently the manager of a successful retail store and Staci is a full time bookkeeper at the mall.
Their options are as follows. They can invest in a franchise with a sit down restaurant chain that caters to middle- and upper-class clientele. If they do this, they will be locked into a long-term lease arrangement. The franchise requires a large up-front payment, standardized menu with limited flexibility, and a supplies/foods purchase agreement is included. The décor of the interior of the restaurant will be their decision. The second option is to build an independent restaurant that will cater to middle- and upper-income clientele as does the chain.
The franchise requires a minimum of a ten-year commitment and a substantial payment up front and lease payments that will vary slightly with the success of the restaurant, starting out at a lower amount for the first six months and increase thereafter at a set amount plus a percentage of the sales, but there is a cap that kicks in once a certain sales dollar level is reached.
Separate financing will be necessary for the building construction. The property will serve as collateral for the financing necessary. The loan for this will come from a financial institution of the franchisor's choice. The financing interest rate is a fixed 5 percent with an option for renewal at a rate of 1 percent above the current prime rate at the time of renewal in 10 years.
If Joe and Staci start their own restaurant, they will borrow from a local bank. The rate for this will be 5.5 percent for 25 years at which time the mortgage will be renegotiated.
Joe and Staci have asked for your advice. They want to be sure that they have the necessary information to make an informed decision.
THINGS TO CONSIDER
• Discuss the pros and cons of the financial risks involved in owning their own restaurant as opposed to entering into a franchise agreement.
• Analyze the options Joe and Staci have regarding the financing under each option. Consider the pros and cons under each option.
• Provide Joe and Staci with issues that they should consider regarding the options they are considering.
• Analyze the effect of the current economy on these options.
• Are there other options Joe and Staci should consider?
• Determine a recommendation for your clients.