Illegal Pete's: Cash vs. control eats at eateries eyeing franchises

By Jennifer Alsever

February 18, 2004

Pete Turner created every recipe used at his three Illegal Pete's burrito restaurants. He picked out the aged yellow paint for his restaurants and traveled to Mexico City to find dining chairs.

The artwork in his restaurants - made to look like the Mexican Bingo-style game La Loteria - bears the digits of his father's birthday, a secret tribute to his dad and former business partner, who passed away in 1997.

Now the Colorado-born restaurateur faces a risky choice: Keep control of his stores, which each posted $1.4 million in sales last year, or make even bigger bucks by franchising.

"Franchising is a great way to grow. I see a lot success stories, but I hear a lot of horror stories too," said Turner, 32. "Illegal Pete's culture is very important to us. Losing that is my biggest fear. This business means a hell of a lot to me."

Franchising offers businesses the chance to expand quickly because franchisees pay the upfront costs to get started.

When a company sells a franchise, the buyer typically pays a $35,000 fee and 5 percent royalties on sales and also covers the average $300,000 costs of opening a new restaurant, said Don Boroian, chief executive of Francorp Inc., an Olympia Fields, Ill.,-based consulting group.

However, parent companies sometimes battle franchise owners over everything from finances to dirty silverware.

"The end result of having a bad franchisee is you have to litigate," said Denver restaurant consultant John Imbergamo. "You have to go to court."

San Francisco-based Jamba Juice Co.'s franchise operations ran into trouble in 2000 after expanding into 20 states in just 18 months.

"As a result, we were making mistakes," said Jamba chief executive Paul Clayton, who shut down 50 of Jamba's 310 stores four years ago. Most of the closures were franchise operations.

Aaron Kennedy, chief executive of Boulder-based Noodles & Co., also worried about compromising the integrity of his funky noodle shops before he decided in May to sell franchises.

"My biggest concern was that we would lose control and customers would not have the same experience," Kennedy recently told Inc. magazine. "That would tarnish the whole organization."

Noodles has 80 company-owned stores and recently sold 67 franchises. The company only considers operators who have already run several restaurants and are interested in opening 10 or more locations. They also screen potential franchisees by giving them psychology tests.

Corporate officials help select new locations, provide franchisees with a how-to manual called "The Noodles Brain," and connect them with a mentor, a corporate executive dubbed a "Noodle Buddy."

Many companies don't view franchisees as partners, which can be a big mistake, said Robert Justis, director of the International Franchise Forum at the Louisiana State University.

"They view it as a parent-child relationship," he said.

Illegal Pete's Turner is preparing to take the risk. He opened his first restaurant on The Hill in Boulder just two years after graduating from the University of Colorado with a degree in English. One restaurant is in downtown Denver.

He plans to open three company-owned Illegal Pete's locations, in Cherry Creek, the Denver Tech Center and outside Colorado. By year's end the company will double employment to 220 people, he said.

To prepare for the growth, he recently hired a full-time bookkeeper, a regional manager and a public relations firm. Soon, he'll move his headquarters to an office building from his Washington Park home.

He's also developing a handbook of Illegal Pete's systems and operations, and must create financial statement templates and training programs for franchisees.

"I'm in an identity crisis," Turner said. "It's going to get to the point where it's a big business. It's scary.

"This business is very much me. I don't want to just open up a shop in a strip mall."

Colorado-based franchises

Homegrown Colorado fast-casual eateries have followed several paths to growth, typically by franchising or being acquired by a chain with marketing might.

McDonald's-owned Chipotle has six franchise stores and 300 company-owned units in its giant-burrito kingdom. The company will add another 100 company-owned units but is done with franchising, at least for now. The first Chipotle opened in 1993 near the University of Denver. Boulder-based Noodles & Co. recently sold 67 franchises in Southern California and in the Kansas City, Mo., area. Founded in 1996, Noodles has more than 80 company-operated restaurants.

The Spicy Pickle, a Denver sandwich joint, has expanded beyond its two company-owned stores with franchises in Lone Tree, Fort Collins and Littleton. Five-year-old Spicy Pickle has plans for five more franchise stores this year.

Wheat Ridge-based Qdoba Mexican Grill, owned by Jack-In-The-Box Inc., has 100 company-owned stores and 84 franchise stores. The first unit opened in 1995 in Denver under the Zuma nameplate.

Quiznos, a Denver sandwich chain founded in 1981, has grown quickly to 3,100 franchised stores but is mired in litigation related to its 2001 transition from publicly traded operation to privately held corporation.

Boston Market grew quickly through franchising but filed for bankruptcy in 1998. The restaurant was acquired by McDonald's and now has 630 company-owned stores in 28 states.