Five Guys Burgers and Fries

Franchise Information
Risk: Who embraces franchise lawsuits the most?
Data: 2013 Franchise Disclosure Documents

From the editor: Fast casual restaurant chain Five Guys Burgers and Fries was founded in Lorton, Virginia in 1986. It started franchising in 2003.

Five Guys franchisees and franchisor are at peace but it's grown too fast. It's bit way more than it can chew. Tha'ts bad.

LEGAL ENVIRONMENT: First the good news. The franchisor seems to be downright allergic to lawsuits. Jack in the Box is in the ballpark with Five Guys, along with Midwest-based Culver's. Dairy Queen Chill & Grill brand, owned by billionaire Warren Buffet's Hathaway, is slightly on the high side compared to the others. But the clear outlier concept, in a bad way, is new kid on the block Smashburger, which has 46 torts declared in its 2013 FDD compared to only having 117 opened franchised restaurants. In fact, Smashburger is so differentiated from the rest that it looks like suing is a way of life there. Contrast Smashburger with another better burger chain, Culver's Franchising System. Culver's is a relatively placid system for a franchisee, with only two lawsuits out of 487 franchised restaurants in 2013.

The legal metric in the top chart is meant to give a buyer a sense of how much at war a franchise system is with itself.  Equipped with this lawsuit index by brand, the buyer should investigate further into the system and its competitors to figure out the minutiae of what is going on in the legal culture of a Culver's versus a comparatively much more litigious Smashburger.

Data: 2013 Franchise Disclosure Documents

SOLD-BUT-NOT-OPENED: Five Guys has other problems. It has outrageously high numbers of sold-but-not-opened stores. You know, that's where you pay the franchisor money but don't get to open a store for your money because a suitable location can't be found in the big and secondary cities because the good spaces are already taken. Or, now that the franchisor has your money, they are just too busy to accommodate you until hell freezes over. In contrast, Culver's, Jack in the Box or Dairy Queen can set you up with prime locations.

It is strongly suggested that franchise investors use a business analysis panel to evaluate the risk and reward for a buyer. It should provide at-a-glance answers to:

  1. How much profit and salary will a Five Guy's franchise make for you? If you have to pay money to an impartial foodservice researcher to help you find this information, you should consider it. Don't just jump on the band wagon.

  2. What is the total turnover rate of its franchises (churning)?

  3. What is the legal risk? This is not only the litigation index, which is shown in the adjacent chart, but it should also include a simple grade by a legal expert from an "A" that ranks how fair the contract is to the franchisee down to a failing "F" grade of how much of a modern slave you would be if you signed the franchise contract.

  4. Is the segment, say better burgers, trending up or down or have metrics been limp as a noodle? What is the trajectory? Is the concept in a sunset industry, say like the bricks and mortar video store? Or is the segment experiencing long-term growth?

Registered members with insights and experience with Five Guys, please rank this concept from one to five stars (below) and add a written observation for other investors. If you do not think these are good stores to invest in, then please point the investor to stores of a brand that you think is comparatively better. Explain why and how you know it.