Chapter

19

One Truck or More?

In This Chapter

To expand or not to expand? Once you have one successful truck, that question will inevitably start popping up. But expansion is serious business and brings with it some very important questions.

Is expansion the right thing for you personally? Is your business ready for expansion? Does the demand exist for multiple trucks? Do you have the infrastructure to support more than one truck? If not, how would you need to build or change your infrastructure to support this expansion? Are there enough parking spots in high-traffic areas to support the expansion of your fleet? These are only a few of the questions you need to ask yourself before considering an expansion of your food truck business.

In this chapter, I discuss the profits and pitfalls involved in an expansion of a food truck business.

Lifecycle of a Hospitality Business

Before considering expanding, you need to understand the lifecycle of a hospitality business. By grasping the stages a truck goes through, you’ll be able to make more educated decisions about a potential expansion of your truck empire.

Stage One: Market Introduction

The first stage in the life of any hospitality product is the market introduction. That’s when you’re launching your truck and making the market familiar with the product you’re offering. There are no shortcuts; you may have the most amazing concept in the history of food trucks, but you can’t avoid the introduction phase.

During this period, which can last from three months to a year, you’re performing a delicate dance with your customers and the press to create positive buzz about your truck. Every customer experience is magnified because these people are the seeds of your word of mouth, the major source of your buzz. Every mention in a local newspaper and food blog forms the public perception of your business.

The characteristics of the introduction phase are high costs, low sales volume, and minimal direct competition in your niche. In this stage, there’s little existing customer demand, and you need to create that demand. At this point you’ll most likely be making little or no money. You may actually be losing money because of all you’re spending on marketing to drive sales and operations to establish a great product.

Stage Two: Growth

The characteristics of the growth stage are reduced costs, increased sales, moderate profitability, and increased customer awareness. As the business grows, you’re becoming more efficient and shedding the costs related to launching and training. This, combined with increased sales, should lead to some level of profitability. Expect this stage to begin at the end of year one, perhaps continuing into years two and three.

As the market becomes more aware of your product, you may find you have increased competition within your niche and parking locations.

Tip

When thinking which stage your business is in, you must also consider the stage of the food truck industry in your area. The food truck business may be a mature industry in Los Angeles, but in a city like Indianapolis food trucks may still be in a growth stage. If you had the first food truck in Indianapolis, you might be in the growth stage because the overall market is growing.

Stage Three: Maturity

You’ve reached the maturity stage when your truck is a known brand and has a consistent customer flow. You may be able to go on your first vacation during this stage. The key in the hospitality business is to maximize the length of the maturity stage and rake in the profits. Your costs should be at their lowest and your sales at their highest. Your hard work is paying off and the customers are showing up with minimal money being spent on marketing. This stage should begin in year three and continue as long as possible.

If you’ve reached the maturity phase it’s because you’re successful. You should expect increased competition, which may force you to lower your prices or offer more value, cutting into your margins. Your most important initiative at this point is to be creative in implementing programs that differentiate your brand from the rest of the pack. It could mean new menu items, weekly special events, or partnering with artists to do installations on your truck’s façade. Whatever you choose, it must appeal to your audience, giving them a reason to talk about and visit your truck.

Stage Four: Decline

The final stage in the life of a hospitality business is the decline. There’s not too much to say about it, and I hope you never reach it. If your truck arrives here, I have only one good piece of advice: don’t hold on too long. Sell if you can, so you can leave gracefully and with a couple of bucks in your pocket. Shutting down a business you’ve put so much of yourself into is more painful if you build up debt while hanging on too long.

You’re in the decline phase when your costs become too prohibitive to continue operating your truck. If you’re selling corn and all of a sudden the price goes up 10 times with no signs of falling you might as well shut down unless you’re able to increase your retail price 10 times. The other way you’ll know you’re in decline is a consistent decrease in sales volume. If your sales are dropping regularly over a three- to six-month period, you have a major problem.

Making a Living from a Food Truck

Making money from your truck needs to be your main goal. It’s a simple matter of getting a reward for your hard work. Passion is important and admirable, and enjoying your work is great as well, but your excitement will disappear very quickly if you aren’t generating enough profit.

What constitutes “enough”? That’s a very personal question. Let’s define enough profit as the maximum income you can generate working in a business you enjoy. So if you love being in the food business and you can make $60,000 working in a restaurant and you’re only making $20,000 running your own food truck, you aren’t making “enough” profit. If your truck is reaching its full capacity and generating only $20,000 in profits, you need to either expand or get out of the business.

Let’s assume you want to expand. One truck is never going to make you rich. A food truck business at its most profitable will generate $500,000 in gross revenues annually. With that kind of revenue you’d be considered an extremely successful operation. At that level your profit margin would be no greater than 15 percent (I’m being generous here). That means you’d be making about $75,000 before paying taxes, so your take home would be around $60,000. It’s a respectable income, but after paying back the initial investment, and especially if you’re sharing that money with partners or investors, is that enough? You can increase your income by working the truck and paying yourself a salary, but that isn’t a strategy for expansion, which requires delegating authority effectively to your employees. Trying to do everything yourself is a recipe for disaster.

Assuming you live a middle-class lifestyle—or aspire to—and you’re planning to support yourself from your food truck business, you’ll almost definitely have to expand your operation. But if your truck is an investment or passion project, expansion probably isn’t the best option for you. It will quickly make this more of a grind and less about pursuing your dream. The stakes will go up, and so will the stress.

The key to deciding whether you should expand is to determine whether expansion is in line with your goals as an individual and a business owner. There’s no way to expand without increased stress and responsibility.

Tip

Some people aren’t motivated by material wealth. Anthony Mangieri, the owner of Una Pizza Napoletana, was noted for his obsession with his craft, his high-quality product, and his dedication to classic Neapolitan pizza. After reaching the height of his popularity in New York, Mangieri abruptly shut down his parlor and moved to San Francisco. He could have stayed and reigned supreme over pizza in the biggest city in the world or expanded to multiple locations, but Anthony walked away because he had different goals for himself. He opened a small pizzeria in California and followed his desire to spend more time with nature. Mangieri’s personal plan didn’t call for a multi-unit expansion.

Am I Ready to Expand?

If you’ve decided that expansion is right for you and your business, the next thing to determine is whether you’re ready. Every truck you add will require more staff, inventory, prep time, maintenance, gas, cooking fuels, insurance, and the list goes on.

Demand

The first issue that you need to consider is demand. Is there enough demand to support an expansion of your product? You can find out the answer to this question pretty easily by answering some follow-up questions:

If the answer to all of these questions is yes, then there’s enough demand for you to expand. If it’s not, think twice about it and thoroughly analyze your business. If you’re not operating your first truck perfectly, what makes you think you can operate two?

Beep! Beep!

Look at the macro environment before seriously considering an expansion. If the economy is in recession or local businesses are closing, it may not be a good time to expand. Speak to local businesspeople about their performance for more insight into the general marketplace.

Capital Resources

The first question you need to ask yourself is whether you have the capital resources to support an expansion. As a rule of thumb, you should have a minimum of two months’ operating capital in the bank to support your business. That can be hard for many people, but if you want to expand it’s an absolute necessity. You should have that capital in addition to the fixed costs related to expanding, including an additional truck, commissary, insurance, and other costs that don’t vary with consumer demand.

Let’s say a second truck costs you $50,000 plus an additional $10,000 to operate it for a month. You’d need $20,000 a month to operate both trucks, so that means you need $40,000 in the bank at launch to cover the introduction of the second truck and the operation of both trucks for the two months after expansion. And that assumes you’ll be generating positive cash flow within the first couple of weeks of the new truck’s operation.

Staff

Once you know the capital requirements of expansion, you need to make sure you have enough great people to expand your operation without negatively affecting the original or expansion product. An expanding enterprise immediately comes under the watchful eye of consumers and the media. Your competition and critics will be waiting for you to make a mistake, so you need to be entirely confident that you, your management, and your facilities can handle the increased capacity.

Beep! Beep!

During an expansion you’ll be putting much more stress on your business, staff, and systems. A poorly planned expansion can end up ruining a thriving enterprise. Make sure you protect your core with a strong capital and talent base before thinking about any growth.

Systems

In addition to great people, you also need foolproof systems. As you expand, you’ll have less time to oversee the day-to-day operations of the truck; the only way to make sure your customers’ experience is the same every time is to implement systems for all aspects of your trucks’ operation. Systems will also protect the costs of goods sold and transportation, keep waste at manageable levels, and protect you from employee theft.

Adding a Bricks-and-Mortar Location

Expansion doesn’t necessarily refer to additional trucks; it can also mean a bricks-and-mortar location. One of the best parts of being in the truck business is that you have a chance to showcase your talents with a minimal initial investment, something that’s never been available in the food business before. Right now the media loves food trucks, so it’s an optimal way for you to build your brand. Once the public recognizes your name, it has value and can be used for expansion. Opening an actual restaurant can be an optimal way to expand.

Tip

Other potential expansion opportunities could include licensing/franchising, packaged food products, and catering services.

A bricks-and-mortar expansion is complementary to your food truck business. You’re already paying for a commissary, storage, and staff, as well as infrastructure costs like an accountant and a lawyer. A bricks-and-mortar location would share those costs, and in many cases, absorb them. Excess food could be used in the restaurant before it spoils, and cooks can prepare in the morning for both truck and restaurant. This will vastly decrease your operating costs for the truck and might increase its profitability by 25 to 50 percent. The restaurant on its own should be a profitable venture because of the positive brand association with the truck and your built-in following.

Finally, when you have a restaurant, rainy days are nonissues. You don’t have to take the truck out when the weather’s bad and customers don’t want to stand in line on the street, so days that would have created a loss for you in the past are no longer a problem. With two sources of income, you only have to take out the truck when the demand exists. When it doesn’t, you can ride out the storm in the comfort of your very own restaurant.

Tip

If you do expand into a bricks-and-mortar restaurant, make sure you open in a high-traffic location. If you’ve learned anything from food trucks, it’s that location is one of the most important aspects of a successful hospitality business.

Identifying the Benefits of Expansion

Expanding your food truck business has the potential of bringing you increased sales for higher profits and further expansion. A successful expansion plan combined with high consumer demand will most definitely add profit to your bottom line. Those profits, combined with additional exposure, will help further establish your brand in the marketplace, which will assist in extending the life of your business. The additional profits and branding will also make your business more attractive for a potential sale.

Beep! Beep!

Avoid the ego trap. Expand because you think it’s the best thing for the health of your business, not because you want to have the biggest truck fleet on the road. Many of the most successful businesspeople I know made the most money when their companies were small and regret expanding. They ended up with more revenues, less profits, and a bunch of headaches.

Watching for the Pitfalls of Expansion

If it were easy to build an empire, our society wouldn’t spend so much time celebrating those who succeeded. Your expansion will come with increased expenses, stress, and a more complicated organizational structure, which means you’ll need more capital and better management. Proper capitalization and the hiring and training of new staff will be critical. After that, you’ll need to worry about maintaining the quality of your food and service. But the biggest concern is the exposure you’re creating by leveraging your current business. Your expansion is putting additional stress on the original operation, and if it isn’t successful it will threaten the health of the entire enterprise.

Before you choose to expand, examine every part of your organization, determine what point of the truck’s lifecycle you’re in, gauge consumer demand, and put together a clear plan. Once you’ve prepared the plan, sit with it for at least a month. Speak to your staff, trusted advisers, other operators, and take some time to think. If expansion still feels like a good idea after that, go for it!

Selling Your Business

Whether your truck is a great success or runs into difficulties, the most viable exit strategy is to sell your business. If your truck has been a success, you can sell it for the value of the business plus the value of the truck. If the business hasn’t been profitable, you’ll only be able to sell it for the value of the truck.

My rule of thumb for determining the value of a food truck business is 40 percent of annual revenues: that’s what your brand, website, trademarks, concept, customer lists, databases, and anything else related to the business other than the truck itself is worth. If your truck is making $500,000 in revenue, the value of the business side of things is $200,000. If your truck is worth another $50,000, you should price the entire operation, including equipment, at $250,000.

To determine the worth of the truck itself, reference the Kelly Blue Book, Edmunds, or another guide to valuing automobiles. These guides price used automobiles by their make, model, year, and mileage/condition. Once you’ve done your homework, it’s time to visit some truck dealers. Get a proposed valuation from at least three. They’ll let you know whether they’re interested in brokering a sale or purchasing your truck. Dealers may know people looking for trucks and will put the two of you together for a percentage. There’s no standard for that, but the fee shouldn’t exceed 10 percent.

Try online bulletin boards like ROADSTOVES.com, auction sites like eBay.com, and classified sites like craigslist.com to sell your business and truck. Putting them up on these sites will help you test the market. You can gauge interest at different price points and get a good feel for the questions potential buyers will ask.

Beep! Beep!

Don’t put the name of your food truck on websites if you’re still running your business. Word travels fast, and your business could be negatively affected if people know you want to sell. Keep all your strategic alternatives open by revealing only the necessary information.

The guidelines I’ve provided for the valuation of your business and truck are only that—guidelines. Also take into account the unique attributes of your particular truck and the motivations of potential buyers. There are things that can drive up the value. For example, if you have a pending contract to serve as the exclusive vendor for a local stadium or arena, your business could be worth more to buyers, and selling for 40 percent of annual revenues might be too low. Some buyers want to purchase a food business to fulfill a life-long dream, and that could mean they’d be willing to pay a higher price because the intrinsic value is more than the market value.

Here’s a brief list of the steps you’ll need to take if you’re considering selling your food truck business:

The Least You Need to Know