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    The Debt-Free Debate

  • Firehouse Subs did it. So did Tin Drum. Is going debt-free right for your brand?

    Robin (right) and Chris Sorensen have built Firehouse Subs into a powerful fast-casual player with no debt.

    The past few years have not been the kindest to the $660.5 billion restaurant industry. Faced with frugal consumers, scarce credit, and rising food prices, operators suffered through lower sales and tighter margins.

    Adding to the pressure was last summer’s drought (the largest in the U.S. since the 1950s), which spiked the cost of meat and dairy products and will likely increase food prices between 3 and 4 percent, according to the USDA. These challenges have applied more pressure on companies already struggling to get back in the black.

    But not Firehouse Subs. Last year, the fast-casual sub sandwich franchise clocked in a record year in sales, bringing in $385 million in revenue in its 589 restaurants spread across 35 states and Puerto Rico. And for the last two years, Franchise Business Review has ranked the company tops in franchisee satisfaction.

    Robin Sorensen, cofounder of Firehouse Subs, says the business’s frugality has been key to its success. The company has been debt-free since 2001, an uncommon practice at a time when the economy is in shambles.

    “The funny thing is, I was the furthest from frugal before we started Firehouse Subs,” Sorensen says. “The magnitude of signing the lease, creation of Firehouse Subs, and buying the food and equipment really helped to tighten our wallet.”

    “If you control your numbers, you control what is left at the end of the month. If you control what is left at the end of the month, you control cash flow.”

    Eighteen years after opening their first Firehouse Subs restaurant in Jacksonville, Florida, Sorensen and his brother, cofounder Chris Sorensen, say the decision to be debt free wasn’t just on a whim. Rather, it was the end result of their commitment to build a brand, not their personal lifestyles.

    “Chris and I drew a minimal salary and didn’t take a distribution of profits until the day of our 10-year anniversary,” Sorensen says. “Investing in the infrastructure and building the business yielded zero debt. We didn’t focus on it; it happened organically.”

    The advantages of debt-free

    Christopher Wells, founder of Restaurant Building Blocks, a company that specializes in restaurant management and training to help owners and operators maximize profits, believes that one of the advantages of being debt-free is you’re not dependent on the economy.

    “If you incur some debt and then the economy takes a turn for the worse and your sales are down from the previous year, you could be facing some hard decisions if you are not able to repay that debt,” he says. “Also, some of the capital you need to help your brand might be going toward interest and fees—not an attractive situation if you are in a make-or-break situation.”

    Firehouse Subs’ ability to prosper while the economy tanked can largely be credited to the tight grip the Sorensen brothers maintain on the company’s strategy and vision. Being debt-free helped tremendously when the company experienced a downturn in sales in 2008 and 2009.

    “Because we had a cash surplus and no debt, we didn’t make any kneejerk decisions and we weren’t in a position where our personal lifestyle was driving decisions at the office,” Sorensen says. “We were able to sit back, take our time, and make good decisions on how to turn the ship around.”

    Wells says that without debt, all the capital can be put into growing the business, a strategic decision the Sorensens made when the company started turning a profit. Once they paid off their initial debt, Sorensen says they accumulated cash and then reinvested their profits back into the business by lending it to franchisees, a practice they still do to this day.

    “Along with our franchisees, we’ve invested millions of dollars of our own money in our marketing campaigns,” Sorensen says. “It’s worked wonderfully and serves as another example of how important it is to put your business first.”

    Firehouse Subs estimates opening around 400–500 new franchises in the coming years, with an ultimate goal of 2,000 restaurants by 2020. Wells says it makes sense for a company at that stage to remain debt free.

    “The infrastructure to attract franchisees, train them, and support them in opening their restaurant is well in place,” he says. “Their numbers are a great sign of a positive investment opportunity for someone looking at dropping a few hundred thousand [dollars] in a brand that is debt free and that has the infrastructure and the objective to grow by 70 percent in the next decade.”