INTRODUCTION
Currently there is a substantial market trend for EB-5 investors to invest in franchise or operator managed restaurants.
The investors like the idea of investing in individual locations of branded restaurants, and possibly having more of a say-so in the management of the location.
The franchisors or operator managers like the fact they may only need one or a few investors for a successful EB-5 compliant project in one location. Of course, the low cost to obtain the investment also may lead to financial stability of the EB-5 location.
The Brokers are attracted to brand names of the restaurants as the branded restaurants and there US success is recognized by the investors. The investors will usually follow the advice, direction and due diligence of the brokers but the branded restaurants make it easier for the investors to make a decision and for the Brokers to quickly attract the required number of the investors for the EB-5 project locations.
IN THE SHARK TANK: WHO’S WHO ?
The Shark Tank is the EB-5 practice area bound by legal and market parameters, USCIS and SEC regulations and policies, and in the Shark Tank there are periods of rough waters ( changing policies ) and times of tranquility ( updates and policies formulated and now known).
In the franchise project the Tiger sharks can be the franchisors or operator managers, while the Great White Sharks can be the Brokers.
The prey is the investors. The prey is in a limited market and highly prized and sought after by the Sharks. The prey can be in the form of smaller fish, shell fish or vegetation.
There are some basic facts we need to know about the Shark Tank and the Sharks and Prey.
Sharks are not usually suitable for the Aquaria or Tank as they are difficult to care for and get too large (too demanding or greedy) for the tanks. That is, they outgrow their housing (as the projects get larger their growth us required to attract more prey or investors).There is a substantial cost (marketing, legal, brokers fees) to ensure the proper housing or parameters (legal and marketing compliance) of the tank which represents considerable spatial and financial investment as they approach adult length.
The Sharks come in different species. Sharks are carnivorous hunters, searching for, attacking, and feeding on food, the prey. They are diversified into 470 species, and the well-known ones are the great white shark, tiger shark, blue shark, and mako shark. In some waters, as an example Australian waters, there is a docile shark named Flake or commonly known as the “gummy shark”. It is a shark without teeth and will not bite, in fact it only eats vegetation.
The speed of Sharks (searching for the investors and viable projects) can be very fast, reaching average speeds of 31 mph depending on the prey. There digestion can take a long time, as food (investors) moves from the mouth (the new commercial enterprise, the Fund) to a J shaped stomach (the job creating entity), then stored and initial digestion occurs (the funds are committed). The Sharks have uniquely capacity to smell and can detect a blood drop from a substantial distance (most of the prey is in China). There sight is limited and only seeing shades of grey and green, they are color blind (the color of money is green and grey suitable color for the Sharks). Therefore, they can smell and hear prey from miles away.
FRANCHISORS AND OPERATOR MANAGERS ARE SUBSTANTIALLY INTERESTED IN THE BRANDED RESTAURANT LOCATIONS.
There are well known reasons why branded franchise restaurants have failed.
The Sharks, franchisors or operator managers, are interested in the EB-5 investors in order to overcome the grounds for known failures in the franchise restaurant industry.
Why Restaurant Franchises Fail and Succeed.
Franchise operations are usually privately held companies.
By determining what makes certain franchises or food operations fail, the franchisors, or owner/managers, and investors can better understand and appreciate what makes a successful operation in the highly competitive restaurant franchise industry.
For instance, some branded franchise operations failed because of its unhealthy debt-load. As long as its operations (the integrity of the Shark Tank) remained healthy (strong and viable) it could manage the debt (the cost of the prey or investors).
A large and growing debt problem gives a company less flexibility during tough (rough waters) times.
A restaurant franchise may aim to remain in high growth mode. Therefore, an effective management and operations team (The Sharks) which has a long track record of taking cash flows and turning them into higher revenues and profits will be required. As a result, the Sharks do not need to worry about the other Sharks (Great White Sharks or the Brokers) or prey or the investors/creditors, as the company (the Franchisors or owner managers, Tiger Sharks) has more money to invest in the business ( the Shark Tank parameters) and grow value of the job creating entity
Some restaurant franchises use higher cost ingredients (the prey or investors) which cut into profits. However, the customers ( the project and all the Sharks) demand higher quantity and quality food during a short period of time. Therefore, the higher cost is inevitable.
The basic fact is that investing in, opening and operating a restaurant franchise costs money and not everyone (the investors or prey) has the expertise or management experiences.
One of the reasons for failure of certain franchises is that they brought in new franchisees (investors) at an extremely high rate. For instance, one well known food franchise had 5,000 locations i.e., they opened more than one new location per day for the past 11 years. At this unbelievable expansion rate (the Shark Tank parameters were compromised) the franchisor had less than quality control in criterion for choosing (through the Brokers, the Great White Sharks the investors, the Prey) who should invest as a franchisee and who should not.
Solutions For the Tiger Sharks, Franchisors and Operator Managers and the Prey, the Investors.
One discussed and implemented solution is for the Tiger Sharks, the franchise company, to expand through company owned locations.
Those investors or prey who wish to open a franchise have a high financial bar to clear as the investment will have to be at least $500,000. This will keep inexperienced or less sophisticated entrepreneurs away from this type of franchise.
However, an additional solution is for the inexperienced franchisees (the prey or investors) to rely on the franchiser managers to run the business.
Therefore, the goal is to attract the most highly motivated (willing to invest at least $500,000) and experienced or adaptable business entrepreneurs to join the project and swim in the Shark Tank without being eaten.
THE GOAL IS TO AVOID THE FRENZY
In the Shark Tank, the Sharks, Tiger, Great White, the Gummy Shark, the Prey, vegetation, the glass or parameters can all work in harmony to maintain the integrity and quality of the life in the tank.
However, there are reasons or conditions that will create a frenzy in the tank, and once the conditions are known or anticipated it is essential for the Sharks and Prey to agree on a solution to avoid the frenzy.
Shark Fin soup, status symbol in Asian countries, considered healthy and full of nutrients.
In the feeding frenzy in the Shark Tank, who is eating who? The Franchisors, owner/ managers, or the Agents Brokers or the investors (the prey fish or vegetation ). In the frenzy it is survival of the fittest or biggest it is wild and frantic, an outburst of action, and excitement.
That is a frenzy can occur when the predators Sharks are overwhelmed by the amount of prey available. In addition, the Sharks are usually fighting for the same prey.
Sharks are usually solitary diners, but in a shark frenzy especially in the tank, a defined area, the sharks will lose their mind by biting at anything that is in their way in an uncontrollable rage. The Sharks and prey will thrash around, sometimes the Sharks attack and eat each other, while the sharks continue to feed even after they have been attacked and injured by the other sharks.
As the prey or number of investors in the market or tank is limited, the demand by the Sharks is greater than the supply.
To attract the prey the Sharks may make signals or make representations that are not totally accurate about their true intent or the interest returns on the investment or loan amounts and inaccurate representations on the exit strategies. In these instances of a frenzy the Sharks are not being choosy who they are dealing with or who they let in as investors. While the investors are not being careful as to the quality of the branded restaurants ( that is, the prey or investors are in a survival mode so that they can exist in the Shark Tank).
In fact, the Sharks may be so competitive they will take bites or chunks out of the competitor’s promises, and make their own to try to attract the prey.
The Brokers or the Great White Sharks are now in the frenzy by only dealing with the Tiger Sharks who are willing to pay for the prey which now is becoming expensive. The Brokers have an upper hand because of their access to the investors, the prey.
But now we have the Sharks preying on the investors, sharks preying on each other and the Brokers as Sharks preying on the Sharks who are the franchise operators.
Therefore, in the Frenzy, we see a resurgence of the reasons or conditions why franchise restaurants fail, that is, the high cost of debt (the higher cost of the prey or investors).
Despite the frenzy there is a species of shark that is not a killer. The Shark is known as Flake, a “gummy shark,” without teeth. These sharks will not bite or prey upon the investors or other sharks. The prey for these sharks is the high quality vegetation with nutrients.
There are opportunities for the Tiger and Great White Sharks to follow the actions of the “Gummy Sharks” by making realistic representations, to have their arrangements with the brokers transparent and clear, and there arrangements having clarity and predictability.
The adaptation of the “Gummy Shark” makeup in the Shark Tank will result in every species surviving, growing and prospering until there is an exit from the tank.
THE EB-5 MODEL INFRASTRUCTURES FOR BRANDED RESTAURANTS
Branded Restaurants can be offered by the Tiger Sharks, franchisors or owner/ managers to investors, the Prey, who becomes franchisees.
In very rare instances, will the investor (the prey) desire to completely take over ownership and management of the restaurant (the Shark Tank) especially when the investors have no experience in managing a business in the US.
The preferred method is for the investor to play a minor management role while the operator/manager will play a major role in management and directing the restaurant.
In this instance, there is an understanding that the prey (the investors) will not be ethically or legally eaten by the Sharks.
The various models may include the following structures:
1. Direct investment in a branded franchise restaurant.
The investor will invest all the required investment amount in the restaurant be a 100% owner and take over all the management.
The franchisors will have a set of requirements for the investor to follow, while the investor franchisee will control the entire management.
2. Direct investment in a branded franchise restaurant.
The investor or investors will invest in the restaurant and may receive minor interest in ownership, and may only have a minor management role. The majority owners and managers may be the operators/managers.
3. Direct investment in a holding company.
The investor (s) may invest in a holding company which wholly owns 100% subsidiary companies. Each of these subsidiary companies may be individual restaurant locations.
The holding company will transfer all the investments funds amongst the different restaurant subsidiary locations. The model becomes important when there are a number of investors and number of different locations which need to be funded concurrently.
4. The Direct investment in an EB-5 regional center project.
The investor(s) invest in a new commercial enterprise called the fund. The fund then loans the funds invested to the job creating entity. The JCE owns the restaurant franchise and the JCE will be responsible for management.
This model will be attached to an EB-5 Regional Center infrastructure so that the JCE can show indirect employment creation and this may be easier to prove than showing the hiring of 10 direct full time employees.
Furthermore the franchisors or operators/managers may not want the investors to be owners of the JCE, and therefore the RC model is attractive.
Alternatively, direct investments into the restaurant can be attached to an RC and therefore jobs are easier to prove than under the direct EB-5 model.
CONCLUSION
The Shark Tank has a space that is limited in size. The EB-5 market or Shark Tank has a number of species with a limited prey within the EB-5 space of the tank.
For the Sharks and Prey to grow healthy there will need to be expenditures on ensuring the integrity of the glass and the EB-5 space. The stabilized growth will allow there to be a legal exit from the tank. The integrity of the glass and the parameters of the EB-5 space can be reinforced by the Sharks compliance with the USCUS and SEC regulations and policies, and taking a more equitable and healthy approach as the “Gummy Shark” would.
The integrity of the EB-5 space will have an influence on the sharks which will allow the prey to be protected and not eaten.
Let us avoid the frenzy which will cause cracks in the glass. Once there is a crack in the glass it cannot be fixed.
We need to let the Sharks and Prey out of the Tank as there is a bigger world out there.