S1 E5: How to Scale Your Five Guys Franchise Empire
From college dropout to multi-unit franchisee, the path of entrepreneurship isn’t always a straight one. Find out how Lucas Mitchell discovered his gift for restaurant management.
An entrepreneur from the start, Lucas made the decision early on to quit college and focus on building a web design business. To cover the bills, Lucas worked at his local Five Guys, and his experience working at his parents’ restaurant quickly shone through.
The Wolf and Lucas discuss how the business of food and hospitality is in Lucas’ blood and why working for someone else was never going to be his dream.
Lucas recalls his rapid rise from location manager to territory manager of eight locations and the moment he realized it was time to put aside his web design business and pursue a career as a franchisee.
You’ll hear how he grew from one Five Guys location to 13 and why he’s still hungry for success.
When you’re looking to scale like Lucas, you need a team on your side to smooth the path. FranShares makes it easy to build, manage and grow your portfolio from as little as $500. Find out more: franshares.com
Follow Lucas:
Twitter: @LMitchellHQ
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Episode Transcription
The Wolf of Franchises:
Welcome to Franchise Empires, where aspiring entrepreneurs learn exactly what it takes to become a successful franchise owner. From one location to 10 and beyond, I’m the wolf of franchises.
Hey guys, it’s The Wolf here. Today on the show we have Lucas Mitchell and he has one of the crazier success stories I’ve heard of in the franchise world. Lucas dropped out of college after two years to go all in on his web design business to make ends meet. He worked at a local Five guys, and despite that not being his focus, he worked his way up to managing eight restaurants. After realizing what he could be making as the owner instead of manager, he decided to flip the script and go all in on five guys instead of his web design business. While he didn’t have enough money on his own to purchase a single location with some incredible resourcefulness, he was able to put the funds together and transition to ownership just five years later. At the time of this recording, he now owns 13 Five Guys locations and Counting. Lucas offers us a lot to learn when it comes to the best ways to finance franchises, the differences between being a manager and owner and how to grow your franchise empire. I hope you enjoyed
Narrator:
The Wolf of Franchises, is the CEO of Wolf Pack franchising as well as a creator at Workweek Media. All opinions expressed by the Wolf and podcast guests are solely their own opinions and do not reflect the opinion of Pack franchising or workweek. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. The Wolf Workweek and Wolf Pack franchising may maintain positions in the franchises discussed on this podcast.
The Wolf of Franchises:
One of the big reasons I started this podcast is to teach people that franchise ownership isn’t just for the ultra wealthy, and one of the tools that makes that possible is F shares. With F Shares, you can invest anywhere between $500 and $500,000 and let the passive income roll in be the first to get access by adding your name to the wait list [email protected]. Lucas, I think a good place to start would be just a little bit of your story. What were you doing before Five Guys?
Lucas Mitchell:
Yeah, so I’ve always been an entrepreneur, the nine year old mowing lawns, taking fliers around, hiring my friend to mow lawns when I went on vacation, that kind of thing. And then I kind of lost that entrepreneurial spirit through high school. Ended up going to college started doing website design with my brother in college brought on a few clients and decided I wanted to do that as a business. Also decided at that time college wasn’t for me, so I dropped out of college after two years, went back to Nevada from school where my brother was, and we tried to make a run at the website design business and started working at Five Guys basically for just side income to support my entrepreneurial dreams. That was 20 10, 20 11, somewhere in there.
The Wolf of Franchises:
Okay. And what drew you to the web design business?
Lucas Mitchell:
I thought it was interesting. I don’t know. I’m really good with people too, so more so than myself. Being a web developer, I can write a little bit of code and I have some design and user interface experience, but aside from that, I just am really good at people and my brother was really good at it, so I saw a way to capitalize on his expertise and build a business out of it, whereas he’s the type that probably would never start a business. He’s very much like a tactician, a doer.
The Wolf of Franchises:
Okay, gotcha. So I mean, obviously five guys when web designed very different businesses. What was the moment, if you remember it, where you were running a five guys and you said, you know what, I want to own one of these.
Lucas Mitchell:
Yeah, well, I think back up a little further than that. When I was in late junior high, early high school, freshman, maybe sophomore, my parents owned a small restaurant, like a local ice cream parlor and short order grill restaurant in a really small town, a thousand people. And so starting in high school, I was working in that restaurant, was leading the team of people closing down the restaurant by myself. It’s like I had a little bit of restaurant experience for a couple years. So when I went back to and I needed to get a job, the restaurant industry seemed like a good place to start because I had experience there. I had also worked in, ran some frozen yogurt shops back in the heyday of frozen yogurt. So I had a little bit of food service experience, so that just seemed like a natural fits.
That’s why I ended up going to five guys to get a job, kind of the contrast from website designs. I knew I wanted something easy that I didn’t have to put a lot of effort into. And then as I was working there, I worked my way up through the ladder really quick and they kept wanting me to be a general manager, and I was like, I have my own business. I have no interest in being a general manager, blah, blah, blah. Eventually they made the offer to where it was hard for me to refuse, and then they wanted me to end up running the area and running all eight restaurants that they had. It was actually nine at the time. They have eight now, but nine at the time. So I started at that point, I think it was when they were basically begging me to run all of the restaurants and I was saying no, that I was kind of like, maybe there’s something here, maybe I could do this for myself. And that’s kind of where the interest started.
The Wolf of Franchises:
How much interaction did you have with the owner of those eight restaurants?
Lucas Mitchell:
Just a little more context. Once I started around the area, I did that for a while before I did my own thing. So there was two different ownership groups. So went through a sale while I was running the area for somebody else, the first ownership group, I’d say I had a lot of interaction with them, but they had zero restaurant experience, so they were really, really leaning heavily on me to do all of the restaurant side of it basically. And then the second ownership group, they had more restaurant experience, but they also had a lot more restaurants, so they really didn’t want to be involved, so I had less interaction with them. So I didn’t get a ton of exposure to the business side above running the restaurants, but I ran ’em all. I was responsible for all the cogs, labor, everything basically from financing the deal, that was the threshold above that, I didn’t do anything below that. I did pretty much everything.
The Wolf of Franchises:
So you know, pretty much got all the experience you needed from a operations standpoint. You knew how to run multiple five guys inside and now
Lucas Mitchell:
For the most part.
The Wolf of Franchises:
And so whenever you do decide, you know what, I’m not running these restaurants forever. I’m going to be the owner of ’em. What was your first course of action?
Lucas Mitchell:
So the first thing I did was I didn’t have any money at the time. I was kind of dabbling and interested in real estate investing. So I had done some real estate investing seminars, had kind of built on my network and gone through the process, well, where can I get private money? Made some connections, done that due diligence. So I was like, well, maybe I can apply this to finance or to franchising. Maybe the same concept that I’ve learned about in real estate will be easier for me in franchising because I have the operational experience. So I drew that correlation. So first on my list was like, well, I got to find a deal. I can’t raise money if I don’t find a deal. That was where I started. Sure. And a little bit of context about five guys too. The United States as far as territory goes, has been sold out for years. So the only way into the system is to buy from an existing owner
The Wolf of Franchises:
And it, let’s say theoretically, if you could have done a new build where you’re vacant territory and you get to build ’em from scratch, would you have done that or would you have, just because of the real estate correlation you brought up, would you have preferred an acquisition anyway?
Lucas Mitchell:
I don’t know. I have a really hard time thinking, and I know enough about, I knew about enough about the restaurant industry to think I could make a real living starting with unit one, and I just thought it would be easier to skip that process. <laugh> just go big.
The Wolf of Franchises:
Okay. And I would guess your management experience probably gave you some confidence where if you’re coming in new to a system, maybe it’s a different story, but you were already operationally were running eight, five guys, so you know, didn’t need much of a learning curve on that front.
Lucas Mitchell:
Exactly, yeah. And now I look at it a little differently. I’ve looked at other brands and well, maybe we start with one or maybe we do a three unit development agreement and see how it goes and build a team, but now I have a lot of infrastructure, so I don’t necessarily have to be the one in the restaurant starting with unit one, and I’m learning more about the concept, less about the business. So I look at it a little differently now, but I still love the model of buy cash flow, use the cash flow to develop and grow the business.
The Wolf of Franchises:
And so you start searching the country find and where to deal ultimately land with a deal and getting it done.
Lucas Mitchell:
I had a really good reputation with five guys. We ran really good restaurants. They loved the results that we got, and understanding the franchisor and what is important to them and figuring out how to balance that with having a business is super important because that can be your best source of deals is actually through your relationships with the franchisor. So I had a really good reputation with them. I let somebody know that I was somebody I had confidence in that wasn’t going to share the information with everybody, know that I was interested in buying, and they gave me the list of some people who they thought might be interested in selling and I just started calling him.
The Wolf of Franchises:
And what does that relationship look like with the franchisor from just being the manager of a territory essentially? Are you on the phone with them every day? How does that work?
Lucas Mitchell:
I think it depends on the concept With five guys specifically, they’re pretty hands on. I would say a little less now than they used to be as they’ve gotten a little bit bigger. But I’d say I was the liaison between the corporation for the most part as far as our performance. So I talked to them at least a few times a week probably.
The Wolf of Franchises:
Yeah, I mean it definitely always varies by brand, like you said, and even you kind of intimated what stage of the growth they’re at. If it’s a newer franchise, I’m sure the franchisors most, at least the good ones, should be hands-on with all their franchisees if they’re only in their first 10 to 50 units. But things definitely change as the system grows.
Lucas Mitchell:
So yeah, I mean I started calling them and I found a guy in Arizona who had interest in selling. He kind of played the card that I’m not in a rush to sell, but yeah, I’m interested in exploring that. And I was up front with him, said, Hey, I’m running it for somebody else. I don’t have the capital, but I have a lot of confidence. I can raise the capital. If you’ll be patient with me, then we can work out a fair market deal and everybody wins, and I won’t try to nickel and dime you for every penny. It was kind of like our handshake agreement and principle.
The Wolf of Franchises:
Beautiful. Okay. So he said, I’ll give you the time to raise your money and then you come back to me and I’m not going to try to highball you on a price because he’s looking to get out to, it’s a win-win.
Lucas Mitchell:
Yep. And I knew enough, I, I guess there was definitely an education point in there where I had other contacts I had met in the franchising space and I had done some of my research to know how I should value this business a little bit. So I knew I wasn’t going to get completely taken advantage of by using that strategy because I knew what the number should be. I wanted him to know that if you’ll be patient with me, the key was like I knew it was going to take me some time to put money together and I didn’t want him to go sell to somebody else, of course. So I wanted to make sure he knew he was going to get fair market, probably a little bit more than what he would get from somebody else who has the cash ready to put in the deal right now. And it just, it worked.
The Wolf of Franchises:
All right. So you kind of have that handshake agreement. How were you trying to finance this and did you execute according to plan?
Lucas Mitchell:
My first plan was go to all my real estate buddies and raise money from them. And I found out really quick, I did not know near enough about owning a business to raise money from real estate investors. And I started to feel a little bit like an idiot <laugh> the more I would talk to ’em about it. But it was a huge educational process. I looked at how they evaluate investments and what investors are looking for and what’s a good rate of return to get private investment. And I was able to learn a lot of that stuff. And I also pulled some of my colleagues in the franchising space and I was like, Hey, you guys are raising money for deals. How are you paying your investors? How are you structuring your deals, et cetera. So my point plan literally was not a plan. It is, I had a friend who was in finance and new numbers and I was like, Hey, let’s put together a performer of what I think these restaurants can do and yeah, here’s I’m going to pay the investors back and let’s go try to raise money. Was that, that was the plan.
The Wolf of Franchises:
Beautiful. And I think a good question here was just were you trying to do this all through equity, just giving up equity or were you going to tap some debt as well?
Lucas Mitchell:
I honestly had no idea if I was going to need debt or all equity. I think I kind of approached it at the beginning of just like, I’m going to raise all equity, didn’t really even know debt was an option at the time. Again, this took me 12 months basically to pull this off of nonstop work and I learned a lot along the way. So initially I was like, let’s just raise the money and go buy it and didn’t even know debt was an option. And it wasn’t until I couldn’t raise it nearly as much money as I thought I could that I had to figure out how to utilize debt.
The Wolf of Franchises:
And so after the fact, what was the split between how much you raised and generally how much debt you took on and I guess the kind of dichotomy between those two things?
Lucas Mitchell:
So the end of the day I was able to raise about 25% plus some working capital inequity, and I coupled the rest with an SBA loan.
The Wolf of Franchises:
Wow. And that’s for five existing five guys
Lucas Mitchell:
Locations, five existing restaurants. So in, it was about all in it. I think it was 750,000 of equity and the rest was dead, something like that.
The Wolf of Franchises:
So yeah, that’s not a small amount. And how was the debt raising process? Some people have nightmares, experiences, <laugh>, others say it was once you have a relationship with a lender, it can be pretty much smooth, but for you,
Lucas Mitchell:
For me it was a nightmare. But I went with a large bank and I think that was the biggest problem is I didn’t work with somebody who specialized in financing SBA loans and franchising. And the banks have a certain way of, not all banks, but some banks I’ve found have a certain way of getting you far enough in the process to where you feel like you’re going to lose the deal before all this stuff starts to happen, that you have to work through all the problems or terms change or whatever. So you get so far down. I think I was probably three or four months into the lending process and I thought it was going to be closed in a 90 to 120 days. So I had already quit my job.
The Wolf of Franchises:
Oh boy.
Lucas Mitchell:
And then all of a sudden it’s like, oh my gosh, this is going to be a seven or eight or nine month process because this bank has no idea what they’re doing. But you feel kind of stuck there at that point. I didn’t know what else to do other than to try to just get the thing done.
The Wolf of Franchises:
Yeah, you’re in too deep to turn back at that point.
Lucas Mitchell:
Yeah, it’s like then I start the process over and how do I know that anyone else is going to be any better than what I’m experiencing here? Now I know better, but at that point I didn’t.
The Wolf of Franchises:
So yeah, if you’re starting over again, you’re going to a bank that’s possibly smaller than one of the bulge bracket ones, but at least they have a specialization in franchise financing.
Lucas Mitchell:
Yeah, I’ve heard good things. Just a little tip for the readers. I’ve heard good things about Stearns Bank for SBA loans with franchises. I’ve also heard good things about Live Oak. I think Live Oak has a pretty cool product too, where they can do a hybrid between SBA and Conventional. Had a few conversations with them, haven’t actually done a deal with them yet, but I’ve heard good things in the SBA space.
The Wolf of Franchises:
Yeah, no Live Inc. Live Oak, definitely. I’ve heard similar sentiments from other franchise owners. All right, so you figure it out. It sounds like the equity didn’t go as well as you thought it. You thought you could raise more and then a lot of people financing was a pain, but you got it done. I mean, could you just explain what is it like once the process is done and you are now the owner of Five Guys, does the other owner just, does he just hand you the keys and say, all right, good luck.
Lucas Mitchell:
I mean, I guess to a extent we had an agreement worked out where he was going to help us along the way, and we kind of knew there would be exchanging of bills that go to the wrong company. Cause it was an asset purchase. I didn’t purchase the entities. So we knew there was going to be some exchanging of bills and different stuff with landlords and whatever else along the way that we’d have to do. But as far as running the restaurants, if I had questions come up, Hey, who did you use for this person? Or I can’t get into the security cameras over here. There was little stuff along the way that’d help. But largely it’s like, all right, we closed, we shake hands and here you go.
The Wolf of Franchises:
Yeah, so there’s some transitionary details that you stay in touch for, but for the most part it is a clean break it sounds like.
Lucas Mitchell:
Yeah, yep. Yeah. And we had done a little stuff a couple weeks out before closing where I had been able to get on and these restaurants that I bought at the time were all remote and they were all widespread distance from each other. So I was able to, as due diligence, part of due diligence, I had gone to every restaurant and checked out the equipment and checked out all the restaurants and how they were running and whatever else. But I was able to meet all the managers a couple weeks before closing and had started getting a little bit more insight into the business a couple weeks before we closed when we had a firm closing date and we knew it was going to happen. But other than that, I was like, okay, first thing on my list was like, go to every restaurant, just start meeting. Who do we have on our team? Basically get to know everybody. And we essentially acquired 80, 85 to 90 employees.
The Wolf of Franchises:
That’s a lot. I mean, that’s a lot of relationships. And I know you can only speak to your specific experience, but would you recommend that if someone’s going to buy a franchise, they have that hands-on experience within the system already? Because I’m just thinking about it and the advantages, you have to check out the equipment, know what that means. Is it good equipment? Is it subpar? Doesn’t need to be upgraded. Just looking at the restaurants and how it’s run, you have so much knowledge of if they’re doing things the way that you would approve of. So yeah. Do you think that’s almost a prerequisite? A prerequisite? Cause there’s so many people I know who they go from corporate America and it’s a totally new arena for them to operate in.
Lucas Mitchell:
Depends on the person probably if you are going to put your life savings into something, I feel like you should really be willing to get your hands dirty and maybe you do go get a job at one, trying to figure some stuff out ahead of time, probably not a bad plan. If you’re going to buy a single unit and you’re going to spend a lot of time or build one and you’re going to spend a lot of time in it anyway, not a big deal. But yeah, if you’re going to go out and buy five, you should either have the means to bring in somebody who is an expert to help you through that due diligence process or you should have the experience yourself.
The Wolf of Franchises:
I completely agree. It’s just too much unknowns. Even if the numbers are good, it’s going to inherit a headache that you might mess up if you don’t bring in that expert to help out.
Lucas Mitchell:
And as I’ve looked at other deals too, in other brands know having all the restaurant background and knowing I’m going to manage the team the same way and we’re going to run the same systems in the same payroll company and the leadership’s going to be similar regardless of what the restaurant is, then that part of the diligence process is a little bit easier. But still talking to franchisees in the other concept and figuring out, okay, what can you actually run labor at? Not just what this guy’s running labor at, but what’s realistic? What’s realistic food cost for the brand? What should I expect as far as g a or what are typical repair maintenance expenses? Because those are all brand, very brand specific. I could go in the restaurants and meet the people and look at the equipment and get a pretty good sense in any brand of if the restaurants are well maintained or not. But I don’t know a lot about the actual, what I’m looking for in the financial reports other than what the brand will tell me unless I’m talking to other franchisees or lenders. Lending relationships can be great in that sense too, because a lot of lenders will have insight into a bunch of different brands. Oh, you’ll
The Wolf of Franchises:
Share that
Lucas Mitchell:
If you build the right relationships, right It, it’s all about relationships. I have a bunch of lenders who I would consider friends, and so we share stuff and bounce stuff off each other all the time, and I know how they underwrite deals and I know how they look at different aspects of the business. So pulling on those relationships can be valuable.
The Wolf of Franchises:
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Lucas Mitchell:
I pretty much knew I just took what I was doing for somebody else and for the most part replicated into this. The other thing that’s cool about acquiring too is there are good things you can learn from acquiring new businesses. I learned a lot through buying these five restaurants too. And I did some things differently than when I was just running the other restaurants because some of the processes that they were already used to using and some of their structure was actually better than what I had done before. So I learned a few things too. In addition to bringing my own stuff to the table, I kind of knew how I wanted to run it. And then I served as the operator of those five restaurants completely. I was me and then the gm. So I was managing the GMs and they were managing their employees that a restaurant manager in each store.
The Wolf of Franchises:
Okay. Yeah, let’s dive into that because I think people hear about all these owners who have tons of stores, in your case now 13, which we’ll get to. But I think the question is how do you even run that organization? So it sounds like on a store level you have a GM for each store and you are just managing the five GMs
Lucas Mitchell:
At that point? Yes. Okay. And because I was rural and my locations were so spread out, I was really focused on just having the best restaurant managers I could.
The Wolf of Franchises:
And at a certain point, when does that change where you have too many GMs to manage and maybe you have another layer where, let’s call it area director, I think is the term you may be.
Lucas Mitchell:
Yeah, area manager, area director. That was when I started looking to buy more restaurants and I needed more time. So I was, I had built up really good restaurant managers at the time, so I was kind of able to make that transition a little easier to where I didn’t have to really step out of day-to-day operations until I was finishing the acquisition of the new restaurants. I think it really depends more on priorities more so than growth or more so than number of managers. I could probably manage all of my restaurants right now as the sole operator or maybe with one other person, but I have two just because I choose to focus on the growth of the company, if that makes sense. I would say in my experience, a good multi-unit manager who’s going to be hands-on and spend enough time with the team can run no more than eight restaurants by themselves. Once you get more than eight general managers to manage, it starts to become too much for one person to manage.
The Wolf of Franchises:
What does your day look like? Just an average day. Are you going to each store and sitting with each of them or is there a Zoom call? How does that work? So I’m trying to, I think what a lot of people want to know probably is if I’m you, Lucas, what does my life look like as the owner of five guys with those managers?
Lucas Mitchell:
And when I was serving as the operator, my day was in the, especially because they were spread out, it was 12 hour days, lots of driving. I think I put 40,000 miles in my car the first year. Lots of time in the restaurant with the managers, turned over, a couple managers, hired better managers. Most of my focus was on training those restaurant managers to be the absolute best restaurant managers in the company. I knew that 40,000 miles a year on my car wasn’t sustainable. And the only way to not do that was to have really, really awesome restaurant managers. So that’s what my day looked like. It was. And we did, we had a Zoom call once a week where we reviewed our KPIs from the week before and had our targets and how are we doing against Target? And we looked at our cost of goods and all that stuff on a weekly basis. But other than that, my time was spent in the restaurants with the managers. And then when I got home at night, keeping up on the bookkeeping and making sure our books were right and handling any HR issues that came up and whatever else had to be done, which is a whole nother conversation. The business side of business.
The Wolf of Franchises:
Yeah, I mean that’s kind of what you got as an owner. You got to have the ops figured out, but then there’s all, like you said, the business side that comes with it. But as far as just making sure the training of the restaurant managers, you’re setting the groundwork there and you did set the groundwork there to be able to scare yourself out of that a bit. And even just giving those restaurant managers a lot of FaceTime, I think is a big value add. So you’re not just that mythical owner that’s absentee and nobody sees them and they have no connection to their work if you do that
Lucas Mitchell:
Lot of FaceTime, a lot of training, and then setting that groundwork so that eventually I could kind of pull myself out and it wasn’t taking so much of my time. So I’d say starting in the second year, maybe two years, 12 months, 18 months is where I started being able to, I would still go to the restaurants, but I wasn’t hitting at that point. I wasn’t hitting every restaurant every week. And again, I’ve got four hours in between some of those restaurants, so I wasn’t hitting every single restaurant every week. I was hitting them maybe every other week and started to pull myself out of the day-to-day a little bit.
The Wolf of Franchises:
And so fast forward to just today on those first five restaurants that you acquired, it’s been about five years since the acquisition, and we don’t have to talk specifics, but just on far as debt servicing, which just for anyone who doesn’t know what that is, just paying off the debts from the loans that you took to acquire those businesses, what was your schedule generally? How far are you to being free of that? And the point here is to understand, to do this, what is the mindset and the time horizon that someone should be going into this with?
Lucas Mitchell:
The first loan was 10 year, it’s sba, so it was 10-year term, 10-year amortization. And I would say we’d be about halfway done right now on schedule, except for I chose not to pay it off and I chose to refinance, buy more restaurants.
The Wolf of Franchises:
Okay. Okay. All right. So
Lucas Mitchell:
It took on more debt.
The Wolf of Franchises:
Yeah. So that leads us to, you own 13 restaurants, how how’d you get from five to 13
Lucas Mitchell:
Off market deal in the system? I guess it was technically listed with a investment bank group that doesn’t do a lot of franchise stuff, but they did wealth management for the owners of the eight restaurants and they were just looking for franchisees internally inside of the five guy system. So that’s how I got that deal in front of me and gave us in-network. And then, yeah, looked at the deal. I had looked at some other stuff. I had looked at some Popeye’s and some other brands. It was kind looking around, but this one came a across and looked at it and said, Hey, this would be more than double our size and one transaction and let’s
The Wolf of Franchises:
Do it and the business already. So
Lucas Mitchell:
Yeah, know the business already,
The Wolf of Franchises:
But it’s not within Arizona, right? It’s totally
Lucas Mitchell:
Different. No, it’s in, it’s in California.
The Wolf of Franchises:
Yeah. Okay.
Lucas Mitchell:
So totally different market
The Wolf of Franchises:
Based on what we learned from your first five where you’re spending quite a bit of time in year one in that system with the GMs, or sorry, the restaurant managers, did you spend some in-market time in California for those next locations? Oh
Lucas Mitchell:
Yeah. Yeah. I think that especially within the first six months or so. 70, I think the first year, maybe it was like 75 or 80 hotel nights up there, just in California, not including any of the visits I did in Arizona cause I still wanted to keep FaceTime there. But at that point I hired an area manager to run in Arizona, the Arizona stores. And it was someone that I had worked with for a long time, knew him in the restaurant business for, we had worked together probably seven years or something like that.
The Wolf of Franchises:
And you’re doing all this right while you know have a family at home, correct?
Lucas Mitchell:
Yeah. So it’s kind of funny, this just little, I think I’ve heard business owners say that every time something in their life happens, it all happens at once. So for me, when I bought the first five restaurants, Soma House in Nevada, moved to Arizona and had a kid and closed on the restaurants all within three months of each other. So it was like my first, so when I bought the Arizona restaurants, my daughter, I closed on the restaurants in July and my daughter had been born in March, so she was like brand new baby. And I was like brand
The Wolf of Franchises:
New
Lucas Mitchell:
Baby,
The Wolf of Franchises:
Brand new business.
Lucas Mitchell:
So fast forward two years later, I bought the restaurants in California, I close on those in November. And my daughter was born in July, so she was like five months old at that point, my second daughter. So I had a two year old and a second daughter and the most amazing wife in the world and I bought the other restaurants. Yeah,
The Wolf of Franchises:
I think there’s a correlation here, man, you got to have more cake and new deals are going to pop up within five guys.
Lucas Mitchell:
I keep joking about that with my wife. She’s not necessarily in agreement with that as being our process forever, but it’s worked out so far. Yeah,
The Wolf of Franchises:
That’s hilarious. And so any moment though, right? There’s a geographical challenge there from an operations perspective and that you live in one place and you have to take a go on a plane to get to your other eight guys locations. So was there any moment after that acquisition of the California five guys where you kind of have an oh oh shit moment, this was a mistake? Or for the most part you knew what you were signing up for?
Lucas Mitchell:
I knew what I was signing up for. Full confidence. I know now too, my wife and I talk about this sometimes. I’m like, it’s 12 months of really hard work and then we can get it to the point where largely somebody else can do most of the work. And in this case it was like instead of, I did have a lot of FaceTime with the GMs, but in this case it was more, I had an area manager there. Fortunately one of the people that we brought on through the acquisition that transferred us worked out to be a really good area manager. Otherwise maybe we would’ve had some more issues. But I had a pretty good sense before we closed on the deal that he was going to be really good. I had spent some time with him, had ridden around with him and seen the restaurants and I had a pretty good sense he was going to be good. So in this case, instead of me focusing so much of my time on the restaurant managers, I was focusing most of my time on making that area manager the best area manager he could be so that he could run the area. And that’s where most of my time was spent.
The Wolf of Franchises:
Okay. Yeah, and I mean I’m just thinking of through this and the evolution is pretty textbook if I can. I mean started as a manager, you learn the operations, then you acquire five locations, which from an ops perspective was well within the realm of what you were already capable of cause you were already doing it. And so you took that first few years there to learn the business side and the nuances there. But then you’re you, you’re kind of ready to go and to start acquiring more. So if you have one, what’s the long-term plan?
Lucas Mitchell:
So I have a goal to provide jobs that will pay a good lifestyle for a hundred families. And so I view that in the restaurant space as you have one area manager per call it six to eight locations, which is that’s a job that can support a family really well. And then we pay our restaurant managers well too. So most of our restaurant managers can also support their families depending on their lifestyle. Some of them choose to have their spouse’s work, but they could on their income alone support their families. So I view that as 80 to a hundred restaurants and we’ll see what happens after that.
The Wolf of Franchises:
That’s a big number. I love the ambition though. Let’s say someone’s listening to this and to them that’s maybe out of a reach or they don’t want that for whatever reason. Let’s go back to your five locations. I think that’s a good number because with a lot of franchises, especially we’re talking brick and mortar retail franchises, if you have five of any of a lot of them, you’re going to be doing decent and possibly very well. Let’s say you stopped there and you were happy from a financial perspective and the impact you were having on your community and all that with just your original five. What does it look like with the debt at this point? And again, it doesn’t have to be specific to you, but just from your knowledge of the five guys system, how much could someone potentially be making on a per location basis?
Lucas Mitchell:
It depends on geographic location. Obviously rent’s a big factor in your bottom line, but I’d say if we’re looking at an average unit, you’re probably making 15% store level margins managed. So that’s with a man, general manager running the restaurant most of the time. And average unit volume at a five guys is about, it’s gone up so much in the past few years but I’d say it’s one and a half million, probably something like that. So you can make a couple hundred thousand dollars managed in a traditional location.
The Wolf of Franchises:
So five locations then I, that’s a very, I didn’t realize it was that high for five guys, but you’re high six figures at five stores once you clear all your debt and whatever else is out there.
Lucas Mitchell:
And obviously I have investors so that money is being spread amongst different people after the debt service. But yeah, if you buy with debt, you can figure your debt’s going to cost you hopefully not half of the income, but your debt service is going to be a third maybe a little bit more of what the total income is. So yeah, that’s how the math works.
The Wolf of Franchises:
That’s great insight. And what would you say is the timeline someone should come in into this with, if they’re going to say, I want to build five own five, and at some point I’m going to look for the exit, the owner that you bought from, is it 10 years, is it a 15 year journey? And obviously sometimes things happened that could delay cause problems, et cetera, but H how long term do people need to think if they’re going to try to get into this multi-unit franchise ownership game
Lucas Mitchell:
Really depends on a couple of factors. Geography is a big part of it. Franchisor is a big part of it because again, the franchisor is incentivized to develop units. So they’re always going to be like, you’re going to get that little, if you’re an acquisitions guy like me, you’re going to get that top on the shoulder like, Hey, you got to build some restaurants, which we’re doing right now. But if you’re coming in straight as a new franchisee and you’re developing, the timeline is going to be pre-negotiated. If you’re buying ’em one at a time, you’ll have a time you have to execute within to open the first location. If you’re buying a three or five unit development package, there’s going to be an expectation for when you get to those certain thresholds. But I would say a new franchisee, I would be very cautious doing more than one restaurant a year, especially if you’re brand new to it.
Anything more aggressive than that is you got to give time for that first location to get a foothold and get a handle on the operations. I’ve seen guys come in and put up five units really fast and they end up having problems because they cannibalize the marketplace or they didn’t just give time for the new restaurant to settle in before they built another one or whatever. So I’d say one a year is realistic. So five restaurants maybe on a five year journey. The guy I bought from, I think he was in, he had been in for six or seven years, that’s how long it took him to build the fi. And then he hadn’t built anything in a year, so he was probably about five years, about one a year.
The Wolf of Franchises:
And I mean, if we just used the numbers, and this is why I picking the right brand, I mean, that’s just the biggest determining factor in anyone’s success in this game. So five guys, well done a great brand, tons of longevity there, but I mean you can see where you build up the five locations, you’re making great money at that point, and you can live off of it for as long as you want. And at a certain point, hopefully you get an acquisition and you’re sitting on an even bigger pile of money.
Lucas Mitchell:
Well, and the other way to look at it too is when you develop, as long as you build restaurants that generate enough income, you can sell those for way more than it cost to build them. At the time this guy was building restaurants, were costing four to 500,000 to build. Now it’s going to cost six to 700,000 just with increased cost. But if you think about how franchises are valued on a multiple of ebitda, five guys, I don’t know what it’s trading at for today, when I was acquiring, was trading between four and five times ebitda. So if it costs you $500,000 to build and you’re generating 150 to $200,000 in ebitda, your instant equity. So if you build them all, that’s the risk with building those is that they all come out of the ground doing the income they need to do to have the equity built in. But if you build them all, then you could turn around after you build the five and slap some debt on it and pull out a bunch of money tax free on the debt side, you don’t even need to sell ’em like your exit is putting debt on ’em and then having cash liquidity to work with to either build more, pay yourself and live off it or whatever you want to do. Then there’s options or you can just live off the cash flow forever. So liquidity event doesn’t necessarily have to be a sale.
The Wolf of Franchises:
Yeah, no, that’s incredibly true, and I feel like I’ve talked about this with every guest is the optionality that just being the owner and you know what that brings you, whether it’s live off the cash sell, some type of refinance play, that’s what you want is just to be in a position where you have the optionality, which as a W2 or in other situations, you typically don’t get those options.
Lucas Mitchell:
Yeah, yeah.
The Wolf of Franchises:
Awesome, man. Well, this has been a great conversation. I think my last question, and I try to ask folks this, if you could own one brand, this is forget financials, forget everything, just one franchise out there that you think would be fun to own, what would it be?
Lucas Mitchell:
I can’t remember what it’s called. You might know. One of my friends pitched me the idea, there’s a franchise out there that’s a gym focused on basketball.
The Wolf of Franchises:
There’s someone on Twitter who, I think he’s the founder of a similar, I don’t know if it’s a franchise, his might be a chain, but I
Lucas Mitchell:
Will look it up.
The Wolf of Franchises:
Okay,
Lucas Mitchell:
I’ll look it up and flip it to you for the show notes or whatever.
The Wolf of Franchises:
Yeah, we can do that. You’re a basketball
Lucas Mitchell:
Fan. It’s so niche that I grew up playing basketball. I love basketball, so I’m like, yeah, owning a gym completely focused on basketball. That’d be super fun.
The Wolf of Franchises:
Yeah, that’s cool. I like that.
I think I, yeah, right. They just integrate basketball into all the workouts to make it more fun. And I think you can play games obviously too, three on three or whatever, but yeah, I wonder if we’re talking about the same one. But yeah, we will link to that in the show notes for sure. But All right, man, well, hey, this has been awesome. I think people are going to get a ton out of this and just hearing your insights from manager to owner to multi-unit owner if people want to reach out to you, where can they find you on the internet?
Lucas Mitchell:
Al Mitchell, m i t c h e l l. HQ is my handle on Twitter. Instagram, I think Facebook too. Yeah, reach out to me. Cool. That way. That’s the best way. Yeah.
The Wolf of Franchises:
Yeah. And we’ll link to that in the show notes as well just to at least on Twitter, because we’re big Twitter people here at Wolf hq so I’m
Lucas Mitchell:
Becoming more and more that way. Way. Yeah. I
The Wolf of Franchises:
Love Twitter’s the best. I highly recommend it to anyone. Twitter is what LinkedIn wishes they could have been is the way I look at it. So, all right, man, well we’ll catch up soon, and thanks again for coming on.
Lucas Mitchell:
Cool. Thanks for having me.
The Wolf of Franchises:
Thanks for listening to Franchise Empires. We’re coming to you soon with actionable insights to take the next step on your franchise journey. So make sure to subscribe on Apple, Spotify, Google, or wherever you listen.