There comes a time for many young limited-service restaurant entities to choose whether—and when—to grow their businesses beyond one, two, or even a handful of units.

At about the same time, another important determination must be made: Whether to expand via company-owned stores or by taking the franchising route.

“It’s one of the fundamental decisions you have to make as a brand,” says Clay Dover, chief executive of Dallas-based Mexican chain Velvet Taco, which has about 40 company-owned units. “It reverberates throughout” the enterprise and is critical to the way the business operates.

Both growth directions have their advocates.

For some operators, the beauty of owning their stores is that it provides a stronger means of control—in everything from real estate to hiring to the supply chain.

“It allows you to create a guest experience that can be hard when you have franchisees,” states Matt Copenhaver, chief development officer at Salad and Go. As a farm-to-fork entity, having that control is key to vertical integration that creates leverage and pricing power over time.

Others, however, see faster growth possibilities and other benefits in franchising, which has “a proven playbook,” explains Chris Ives, chief financial officer at Bubbakoo’s Burritos, based in Wall, New Jersey. “The overhead is much less, and you don’t take on all the liability.”

“At a very high level, there is no doubt that control is much higher by a company” that owns its stores, notes Michael Keller, chief executive of Jeremiah’s Italian Ice, which operated its own units for the first two decades in business before deciding to begin franchising.

“In franchising, you are adding a third party and that makes it more challenging,” he adds. “But that’s why a good franchising agreement needs to be in place.” Making sure the franchisees have strong controls gives great command over the product quality.

At Velvet Taco, company officials had a meeting about its growth potential and decided to expand by owning its restaurants.

As an upscale, chef-driven chain, the steps Velvet Taco can take and the flexibility it has—with the menu, food quality, technology, real estate, hiring, and equipment—means “we control all those elements and keep our hands around the brand,” Dover says.

“Obviously, the biggest benefit is we are getting 20 percent vs. 6 percent” royalty a restaurant franchising company receives on average, he adds.

Currently, the company operates in six states and is growing its restaurant count at a 25 percent annual clip. “We have a lot of unique items with specific ingredients,” including components for just one menu item, Dover says. “We think that is important for the brand. It doesn’t allow us to open 100 restaurants a year, but that is what makes Velvet Taco unique.”

At Phoenix, Arizona-based Salad and Go, which has soared to more than 105 units in four Southwest states, “franchising has never been part of the strategy,” says Copenhaver. He points out that the private company is nearly doubling its number of eateries every year.

Overseeing all phases of restaurant operations and growth—from forming relationships with a variety of farmers to choosing ideal real estate locations—“gives us the most flexibility” for the best guest experience and profitability, the chief development officer states.

In terms of logistics, for instance, “we know where every piece of lettuce came from, who touched it and how many times it was touched,” from fields to Salad and Go’s production facilities to the stores where it’s served, he explains. “We own that end-to-end supply chain.”

As a drive-thru and grab-and-go operation—stores are small with no seating—real estate is important to the company’s vertical integration strategy. The company gains a mass presence in existing markets before moving on to the next one. 

Of course, most restaurant entities that have chosen to franchise began as company-only businesses. That’s what happened at Bubbakoo’s Burritos, which was launched on the Jersey Shore in 2008 by two Johnny Rockets veterans.

The beach-themed chain had grown to nine units when its first franchised store opened in 2016 by established, locally-based restaurant owners. It’s a strategy that continues, as Bubbakoo’s has expanded to over 100 eateries in 16 states.

“They chose to do that for growth and financing,” says Ives, who joined the company last year. In addition to having a revenue stream from franchise fees and royalties, and letting franchisees make all the capital outlays, “the big benefit is we have stores in areas where those franchisees have much better knowledge of their markets. “

The challenge is finding the right operators, “It is critical. Forget about the money,” he states, “It is more the operational background,” ranging from knowing how to run a business to hiring good people. The parent maintains control through precise franchisee pacts and strenuous monitoring.

Many companies begin franchising after a few years, but Orlando, Florida-based Jeremiah’s Italian Ice went more than two decades before selecting that expansion route, teaming up in 2018 with growth and development consultant Pivotal Growth Partners.

As Jeremiah’s “closed in on a quarter-century, there were increased discussions on how to accelerate growth” beyond the company’s then 20 or so stores, mostly in Central Florida, Keller says. In the past four years, the chain has grown to six times that number in 11 states.

Unlike Bubbakoo’s, which has an extensive menu, Jeremiah’s offerings are simple—over 40 flavors of Italian ice, three ice creams, and a gelati layering of ice and ice cream. That lessens the need for franchisees to have an operational background if training and oversight are good.

“We put great care in quality training,” benchmarking, and providing feedback, Keller says. “Franchisors need to be protectors of the brand,” but issues like product development will remain in-house to maintain brand control.

While franchised chains typically have corporate restaurants, company-owned ones usually don’t have franchises, although there are ways for company-owned enterprises to branch out a bit.

Velvet Taco, for example, has licensed units in two food halls owned by the chain’s founders and is adding a spot inside Houston’s Hobby Airport with a concessionaire. “These are one-offs,” Dover states. “They’re more of a hybrid at this point.”

Emerging Concepts, Fast Casual, Fast Food, Franchising, Restaurant Operations, Story, Bubbakoo's Burritos, Jeremiah's Italian Ice, Velvet Taco