In the year following graduation from college, Aaron and I looked into opening several Dairy Queen franchises in Kansas City, Missouri and the surrounding suburbs near where we had grown up before leaving for the east coast. Even though we figured we’d end up in a no-income-tax state such as Texas, Washington, or Nevada (paying an extra 6% to 7% of your income in state income taxes per year starts to add up over time), we really liked the idea of owning local businesses that hired local employees and generated local sales tax and property tax for a community that we held in high regard.
It also didn’t help that we despised the Dairy Queen franchises in the town where we grew up because they didn’t offer food, still operated from the same edifices that had been built long before our parents were born, and even the most recent upgrade consisted of a larger building on the outskirts of town that only offered hot dogs and chicken. It made us angry that someone wouldn’t pour the money the brand deserved back into operations, especially since this particular family had owned the rights for several generations. Part of this was no doubt influenced by the fact that such a large portion of our net worth, as well as our family’s net worth, was invested in shares of Berkshire Hathaway, the parent company of Dairy Queen.As I read the business news, it was deja vu all over again when I read about a revolt stirring in the ranks of the Diary Queen franchise owners. Apparently, a law suit is brewing …
Dairy Queen has developed a new franchise concept called DQ Grill & Chill. It offers wraps, flame grilled cheeseburgers, french fries, chicken baskets, fresh panini sandwiches, premium salads, popcorn shrimp, and more. The interiors were also substantially upgraded, making it comparable to a nicer fast food concept that you would enjoy sitting in for an actual meal.
As part of the Dairy Queen franchise contract, Dairy Queen can require franchise owners to upgrade their restaurant to protect the brand and keep it relevant. The Dairy Queen company has capped the required investment at $75,000 for 2008, $85,000 for 2009, and $95,000 in 2010, giving the Dairy Queen franchise owners plenty of time to generate the earnings necessary to fund the expansion into the new Grill & Chill concept.
Most of the Dairy Queen franchise owners seem really excited about it (as I would be). A few, however, are … how do I put this without coming across as mean? … whining, entitled, and lazy. They are throwing an absolute fit over the fact that Dairy Queen is – horror of horrors – requiring them to reinvest in their stores!
Let me enlighten you as to what is really going on with the Diary Queen franchise system based on my perspective as an investor. You have a minority of the franchisee owners, who have likely drained a substantial portion of the profit from their Dairy Queen restaurants over years of ownership in the form of cash dividends and salaries, who are balking at the idea of coming up with $400,000 to improve the customer experience, offer actual food, and provide expanded capacity.
These are small-town, small-minded folks who, in many cases, either stepped into the role as a Dairy Queen franchiser through family ownership or who have been with the system since time eternal. As they see it, they have a good life and their Dairy Queen franchise provides them with a stream of earnings they use to live in a nice home, drive a nice car, and maybe even take a vacation or two each year.
They have, in other words, bought themselves a job and not a business. Instead of focusing on growing their assets so it is a business (I define a business as a “system that generates profit for its owners without the owners ever stepping foot in it or having any day-to-day involvement), they are angry that the big-bad executives at Dairy Queen and the parent company, Berkshire Hathaway, are actually making them do something and invest money to keep the brand relevant.Frankly, I don’t like the idea of living out of your business. I’ve never taken a salary from any of my companies. I like earnings to get plowed back into more assets that provide more cash earnings. If I were to suddenly develop an interest in franchising Dairy Queen restaurants, I can tell you that my nature is that within ten years, I’d want to own a dozen of them in a tight geographic area. It’s just my personality. I also wouldn’t be involved personally. Instead, I would find an honest, hardworking restaurant manager who had been in the industry for 20 years and was willing to take a minority stake by investing their own money along with mine. They take care of the company, and I expand the store count under their control. We both prosper as our shares of whichever limited liability company that owns the Dairy Queen franchise increase in value.
Maybe it’s because I follow Charlie Munger’s advice and keep a lot of “silly needs” out of my life. I avoid debt, I pay my taxes, and I try and live on a modest amount taken from my writing royalties, advertising earnings, and other comparable sources. In fact, the odds are very good that I live on less than many of the people reading this blog. I’d rather the money go into my businesses or investments. Is it really that difficult to live on, say, $65,000 or $100,000 per year and reinvest your profit? Really?