Our Living Large franchisors talk money
When Carmelo Marsala first came up with the idea for Spray-Net, an exterior painting franchise based in Canada, the only assets he had on hand were bucketloads of passion and $20,000 in savings cobbled together from miscellaneous jobs as a teenager.
The founder and president of Spray-Net first bought a truck and a trailer and some equipment with the money. He didn’t have any capital left over for marketing or even flyers so he knocked on people’s doors asking if they would be interested in the painting service.
From that bootstrap operation, Spray-Net has grown largely on the back of reinvestment in operations. He made $127,000 in revenue in 2010, the first year of business, and $750,000 in year two. Within four years, the company had $3 million in sales.
Marsala established corporate territories first before franchising and even today the money from corporate is diverted to fuel franchise growth. This situation might continue for at least another year when systemwide sales are expected to hit $25 million.
Spray-Net invests heavily in software development and borrowed from the Canadian Imperial Bank of Commerce to get to the next level. Bank loans have been used for equipment and other tangibles, not operating cash flow.
Marsala is hopeful the scalable business model he has set up will mean he’ll be completely debt-free soon. “The beauty of being a franchisor is that most of your costs are initial and once you’ve covered those, the business should generate enough revenue to be able to fund itself,” he says, adding that Spray-Net has not explored other avenues of funding.
Blink Fitness, a low-price fitness model that was birthed from the luxury brand Equinox, has also not looked to go the initial public offering route or work to get bank loans. Funding comes from sources within the Equinox family, says Todd Magazine, president, adding that Equinox treats Blink pretty much “like an investor would treat a company they were investing in.”
Milestones had to be met every step of the way to meet financial criteria. What kinds of criteria were these? “Initially it was unit economics and demonstrating the power at the unit level,” Magazine says. “Once we had some consistency, then it was about how we expand on that. Criteria have been related to return on capital and contribution, traditional investment criteria that any investor would look at in their models.”
It might be tempting to think of Equinox as a benevolent overlord; indeed, Magazine says Equinox was “pulling for us, they obviously wanted us to succeed” and Blink did receive “a lot of the advantages of being part of a company that had tremendous experience in the fitness space.”
But Blink still had to prove itself financially. Blink remains an affiliate as a sister company in the family of fitness brands that includes Equinox and SoulCycle. Each arm has its own profit and loss statements.
Consistent with its measured growth, Watermill Express, a drive-up drinking water and ice franchise based in Brighton, Colorado, has used bank loans only when needed. Seeking private equity or other kinds of investment has not been considered.
Neither Watermill nor Spray-Net shared the amounts of their loans. “Our growth has always reflected somewhat in our funding abilities,” says Lani Dolifka, president and CEO. “However, our management style is more conservative so we like to make sure we have plenty of cushion with our finances.”
“The common theme throughout our company’s history is that we have always used bank debt as the primary vehicle for growth and that has forced us to very careful and conservative in how we spent our money because we have obligations to the bank,” Dolifka says, adding the bank has ensured that Watermill has financial safeguards in place, such as not being leveraged too much. She declined to name her banker.
Watermill has spent money judiciously however, investing in research and development during the Great Recession, a time when most other companies were cutting back. “As business owners you have to be bold to do the things that most people won’t be courageous enough to do,” Dolifka says, of the decision.
The lending institutions they have worked with have truly been partners, Dolifka says, and she frequently communicates with them, keeping the officials abreast of what’s happening. Dolifka points out it’s important for franchisors to educate their business partners and that includes the banks they work with.
“They need to understand exactly what your business does and who your customers are and what drives your sales and expenses. It gives them awareness so if you ever need changes to that particular lending relationship, they understand why you’re coming to them for something a little different.”