Bringing home the bacon, from many sources
Private equity is one source of funding franchisors can access once they reach a decent size, but the companies we’re following all year in Living Large advise caution to find the right fit.
The rapper Notorious B.I.G. had a simple equation for looking at capital: mo’ money, mo’ problems. But new franchisors may find themselves with the opposite scenario. Without sufficient funding, it’s hard to build a system good enough to attract star franchisees. And without star franchisees, it becomes harder to secure capital.
From Small Business Administration-backed loans to private equity, there are several routes to the goal. All of our Living Large franchisors are beyond the “asking your dad for a loan” stage, but none is large enough for an IPO. Here’s how capital looks for the emerging franchisor.
“We self-funded with myself and the initial founding owners. Then we ran into an issue, not because of the funding but because of the SBA.”
Running with the big dogs
When it comes to financing, it pays to be adaptable. That’s a lesson New Orleans-based My Salon Suites continues to learn. CEO and President Ken McAllister has been through several stages of funding and each one brings its own challenges.
“We self-funded with myself and the initial founding owners,” McAllister says. “That worked well for the first two years. Then we ran into an issue, not because of the funding but because of the SBA.”
In 2009 and 2010, competitors of My Salon Suites were approved for loans by the SBA. When McAllister started franchising in 2012, part of his plan was that franchisees could get this type of funding. But in 2014, the SBA classified the entire industry as a rental/developer model, which meant future ‘zees would not qualify for loans.
“People not completely funded got caught up in it,” McAllister says. “The good news is we only had a couple that got caught up in it.”
McAllister now steers franchisees toward private equity. On the franchisor side, he chose a different route. Ratner Companies, an enormous cosmetology company, bought in as an equity partner. They brought a budget salon rental concept ideal for lower-income markets and a great deal of industry experience to the table. Meanwhile, McAllister attracted them with an intriguing concept and a good system for building stores.
“We were very fortunate by being introduced to the Ratner Companies,” McAllister says. “They could have easily come in and bought me. They were looking at ‘hey, what can you do to help us.’”
The entire negotiation process took about six months. McAllister says the Ratner Companies weren’t his only option, but it soon became clear they were the best one. His main concern was that the companies fit well together from an operation and philosophical standpoint.
“We went down that road with a couple of others,” McAllister says. “Anything you do, you have to have two willing companies that can agree in principle that the directions of the companies are similar.”
“We were able to get capital; we always had a strong business model. It goes back to franchising experience, not just putting the money up.”
Finding partners at Young Chefs
“There are equity firms hanging around literally fishing for good franchise investment opportunities,” Waco, Texas-based Young Chefs Academy co-owner Roger Schmidt says. “The problem is you’re bringing in a partner that may not have the same goals and desires as you do.”
But CEO and founder Julie Burleson knew she was in the industry for the long haul, not hoping to pump up a valuation and get out in three to five years as many equity firms do. She wasn’t looking for money as much as she was looking for insight.
“We were able to get capital; we always had a strong business model,” Burleson says. “It goes back to franchising experience, not just putting the money up.”
Burleson says a few years ago, her company was growing too fast and taking on unqualified franchisees. She began looking for partners she could work with and stumbled upon Schmidt, a franchise lawyer who had left Curves and was looking for a new opportunity.
“At the time she came out of the blue, myself and other friends of mine were looking at five franchise concepts to invest a good deal of money in,” Schmidt says. “I kind of broke off from them and said, ‘I want to do this instead.’”
Schmidt says he was attracted to a few things about YCA. It had a very sound base of franchisees and a good concept. Furthermore, it was a young enough company that he felt he could really make a difference.
Burleson considered a few other investors, but wanted someone hands on rather than a passive investor and wanted someone with franchising experience. She says Schmidt (and fellow equity partner Kevin Ayers) fit the bill. Companies do need to be ready for partners, and Burleson says she had a proven business model, a strong trademark, and scalable support systems in place. But at the end it usually comes down to personal fit.
“You can have someone with a million dollars and they simply may not be the right candidate because they don’t fit,” Schmidt says.
“We don’t have any loans, any debt or any investors. That’s how we live our personal life as well. If we can’t afford it, we don’t buy it.”
Bootstraps all the way
“We don’t have any loans, any debt or any investors,” San Ramon, California-based Vitality Bowls founder Tara Gilad says. “That’s how we live our personal life as well. If we can’t afford it, we don’t buy it.”
Vitality Bowls is not Gilad’s first company. She and her husband used earnings from previous businesses to stay afloat and were able to keep the first store running through a combination of credit cards, frugal living and working for free. Revenue from the first store paid for the second store, which helped fund the third store. There was enough money from the three stores to get the franchise off the ground.
“A lot of franchisors, when they first start, think ‘we need a half a million dollars in the bank to get started.’” Gilad says. “We are the marketing department. We are the department that does everything. It is myself, my husband and my brother. We don’t have to hire these big salaries.”
After over a year, the franchise side is just beginning to make money. Most gets reinvested right back into the business. “We’re just at the point where we’re just starting to take a little,” Gilad says. “We’ve left that money there and used it to grow the company.”
Living frugally means much of the work is all hands on deck. Gilad and her husband are extremely active managing their managers and visit stores often. But the cash stockpile is beginning to pay off. Recently Vitality Bowls hired out a web development project, and as the company continues to grow Gilad plans for it to become a source of personal income as well.
Gilad recognizes bootstrapping is not for everyone; 90 percent of franchisees are financed. Many roll over a 401(k) to get started or take advantage of SBA financing. But her debt-free approach has built Vitality Bowls into an asset strong enough that others are taking notice. Instead of Gilad seeking a loan, the lenders are seeking her out.
“We’ve been approached by many investors wanting to purchase a percentage of our company,” Gilad says. “We’re not looking to get out any time soon.”