Tomato Cafe owner Deborah Gagnon is growing her company’s roots by setting up a licensing agreement with an Arizona partnernship
Deborah Gagnon has heard it all.
Gagnon, president of Albuquerque-based Tomato Cafe Inc., an upscale gourmet Italian food bar with one location in the Northeast Heights, has received at least 20 phone calls over the past decade from people wanting to duplicate her concept elsewhere through licensing arrangements.
The licensing concept has always intrigued Gagnon, 43, an athletically-built firecracker who helped grow her small business into one of the city’s most popular independent restaurants since opening in 1993.
“The restaurant business will eat you up and spit you out,” she says, acknowledging the industry’s notoriously long hours and constant competition from national chains. “You just don’t want to grow old in it.”
Having a source of residual income through a licensing agreement — which would put extra money in Gagnon’s pocket without having to invest much of her own — had seemed the way to go in recent years, if the right opportunity came along.
But that never happened. Either potential buyers would know how to operate a restaurant, but didn’t have the financial backing, or were plenty rich but had no business savvy. Few, if any, could provide the whole package.
“I never got that combination,” she says.
Last year, however, things changed. In April, Kathy and Steve Dodd, a 30-something couple from Lake Havasu, Ariz., who had roots in Albuquerque, asked Gagnon about launching a Tomato Cafe in their area. Steve had prior experience with Frito Lay and in grocery store management, and both had been running a successful Keva Juice franchise.
“I felt, finally, this may be the couple to make it happen,” Gagnon recalls.
In January, after eight long months of negotiations, Gagnon signed with the Dodds her first licensing agreement. The pair intend to open the first out-of-state Tomato Cafe next spring in Lake Havasu, a popular tourist destination.
As part of the deal, the Dodds must pay Gagnon an undisclosed down payment, then a percentage of their monthly gross sales. In return, they can use the Tomato Cafe name (which Gagnon had trademarked several years ago), her product list, restaurant and advertising designs, and recipes. Essentially, “they get all my secrets,” she says.
Gagnon, meanwhile, will provide advice and guidance, and will lend the assistance of one of her managers, who will help the Dodds during their first few weeks of business. The couple will also spend two weeks training at Tomato Cafe’s Wyoming NE location before opening.
Gagnon, who declined to release annual revenues, says she’s encouraged by the partnership, and may look for similar deals elsewhere, including the Hawaiian island of Kauai, where she owns an investment property.
The idea of having a back-up business plan is just a smart thing to do in the Duke City’s dining market, she says, which has become crowded in recent years.
“It’s a very tough business,” she says. “The writing on the wall in Albuquerque is that only the best, well-run independent restaurants will survive.
“If they run it well,” she says of the Dodds, “it’s another source of income for me.”
Licensing agreements sound like a no-lose deal: Find an interested buyer with capital, have a lawyer draw up a contract, and bam — you’ve got an additional revenue stream.
But not every business is suitable to be licensed, and not every business owner is a good candidate for that kind of arrangement, says Allegra Hanson, an Albuquerque business attorney who has handled these kinds of deals.
In a nutshell, licensing agreements grant someone the right to use an existing business’s name and concept. “You’re buying somebody’s expertise so you don’t have to recreate the wheel. You can hit the ground running,” she says.
For the owner, “it’s a way to cash out without selling your business,” Hanson says. “I think that’s appealing to a lot of people.”
Unlike franchise arrangements, which require practically exact duplications of the original concept, licensing agreements are usually far less limiting. The seller can determine how closely, or not, the buyer must mimic the original business, rules which could include everything from menu items to food suppliers to decor. “It can be as restrictive or non-restrictive as you want,” Hanson says.
Still, both buyer and seller have to be financially and philosophically ready to make such a commitment.
For sellers, the business “has to be one that will generate money and be a concept that has the ability to transfer across geographic markets,” she says. Someone who makes Indian fry bread in New Mexico, for example, probably won’t have much luck licensing their business in, say, New York.
Also, “you really have to have a track record,” Hanson says. “You have to have three to five years of experience to really have something of value.”
Beyond that, a seller needs to know his or her time will be stretched in the early months as the licensee gets up and running — hours that can multiply if the buyer needs a lot of extra help. “If you have to spend 20 hours a week holding this person’s hand, that’s a trade-off,” says Hanson.
Additionally, if the licensed business isn’t run well, the buyer’s good name is on the line as much as the seller’s. In that case, “you’re wasting a lot of time and you’re damaging your reputation,” she says.
The buyer, meanwhile, has to realize he or she will have limited control about how to run the licensed business. The buyer also has to be comfortable giving up a percentage of monthly or quarterly gross sales, which Hanson says usually run between 3 and 8 percent, plus be willing and able to come up with a down payment.
In the case of Tomato Cafe, which has turned a profit every year, Gagnon had a list of requirements for the Dodds but still left some decisions, like hours of operation, where and how to advertise, and the ability to come up with a few additional recipes, up to them.
The things that must stay the same as the original business, however, include menu prices, the original recipes, logo, the restaurant’s advertising catch-phrase (“All you can eat gourmet Italian food bar”), signage, vendors, the “food bar” concept, employees’ job descriptions, equipment and restaurant size.
A growing business
Massachusetts native Gagnon and her now ex-husband, restaurateur Don R. Watroba, came up with the Italian food bar concept in the early 1990s after Watroba’s four New England dinner houses closed due to a collapsing economy. While his restaurants were profitable, his bank went under, forcing the Federal Deposit Insurance Corporation (FDIC) to call in Watroba’s four bank notes overnight. A Chapter 11 filing soon followed.
After moving to Santa Fe for a change of pace in 1992, the couple decided to take another stab at the restaurant industry, but this time, they approached it differently.
“Because of what we went through, whether the economy was good or bad, [we wanted people to be able to] afford to go out,” Gagnon says. “He learned his lesson — we wanted a recession-proof concept.”
In July 1993, they opened Mama Lena’s Italian Kitchen, a nod to a former neighbor, at 1930 Juan Tabo NE. It had such an enormous following that the next year the pair opened a second location at Wyoming and Academy NE, and changed both restaurants’ names to Tomato Cafe, a moniker they trademarked.
The restaurants are a serve-yourself, buffet concept featuring homemade soups, six pizzas, three pastas, six sauces, plus meatballs, ravioli, and vegetables. Beer and wine are also available. The all-you-can-eat lunch is $6.99, and the dinner buffet is $8.99 — both only a dollar over what Tomato Cafe first charged in 1993.
In 1997, Gagnon, by then amicably divorced, bought out Watroba’s shares and became president of Tomato Cafe Inc. Although the restaurants never lost money, sales at the Juan Tabo location slowly declined over the following years, probably because of a shift in neighborhood demographics, Gagnon says.
In May 2003, she decided to close the Juan Tabo restaurant.
Now Gagnon, who won the 2002 New Mexico Restaurant Association’s Restaurateur of the Year award, has her sights set on possibly expanding on the West side, and finding additional licensing agreements elsewhere.
And this fall, the company is also going to promote another service: on-site catering for private and business functions.
“We never really pursued it,” she says. “Now that we’re down to one store, I want to increase catering, buy a van, and advertise it.” Sounds like another idea just waiting to take root.