From the editor:
Founded in 2007 by Tom Ryan, the Denver-based Smashburger fast-casual franchise system thinks itself as the next best burger chain that will soon shake up America.
LITIGATION RISK: Smashburger franchisees and franchisor are at war. Compare their litigation to another newbie, Five Guys, which is way lower. (It has other issues.) Jack in the Box is in the ballpark with Five Guys and 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 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.
SOLD-BUT-NOT-OPENED STORES: Of this better burger batch, Culver's, Jack in the Box and Dairy Queen Grill & Chill look as if they can quickly help a franchise investor quickly find a prime location for a store to get your money working for you, asap. That makes sense. Founded in 1940, Dairy Queen was among the first quick service restaurant chains to stake out the best locations in cities and small townships across America. They have that locked up. On the other hand, Five Guys 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.
Blue MauMau registered members with insights and experience on Smashburger, please rank this concept from one to five stars and add a written observation for other investors. If you don't think this is a good concept, then please point the investor to a brand that you think is at least comparatively better. Explain why and how you know it.
A simple business analysis panel to evaluate risk and reward for a buyer should consist of:
- How much profit does a Smashburger's franchise make? (If you have to pay money to an impartial foodservice researcher to help you find this information, you should consider it.)
- What is the total turnover rate of its franchises (churning)?
- 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 A to F that ranks how fair the contract is to the franchisee down to a failing grade of how much of a modern slave you would be if you signed the franchise contract.
- 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?