To find capital, Living Large brands work every angle
There’s a phrase, “money talks,” but when it comes to financing a young franchise system, talking to those who have the money can prove equally beneficial. While people often think of the link between franchisor and franchisee when discussing relationships in this industry, having a relationship with those on the financing end of the equation—bankers, lenders, investors—pays off down the road.
Making those connections is a focus for one of this year’s Living Large brands, and doing so before, not when, the funding is needed is just as important. Setting up that initial relationship helps capital sources not only better understand the franchise concept but also feel invested in the people and, particularly for small-business banks, want to help them be successful. Like their franchisor, franchisees should also find bankers they feel comfortable with, and even tap them for business advice.
Lack of capital is a major reason for stalled growth, which can in turn force brands into a cycle of signing franchise agreements—sometimes with less-than-ideal candidates—to fund development efforts. Those deals affect the success of the system long term, as ultimately questionable signings can later bring problems with franchisee performance and, in some cases, prompt transfers or unit closures.
The three brands we’re following this year aim to stay away from the aforementioned situation. Here’s how:
“We stay in touch with our financing sources on our strategic initiatives.” — Dan Tarantin, Delta Disaster Services
Funding help from PE firm
It’s simply smart business to educate your financing source on the specifics of the concept, says Delta Disaster Services CEO Dan Tarantin, who notes not only does it make for a healthier relationship, but also deepens the level of understanding of why capital is needed.
“We stay in touch with our financing sources on our strategic initiatives, keep them updated on new services so they see how we’re putting that money to work,” says Tarantin. “Never underestimate the value of educating your investors or lenders.”
For Delta Disaster Services, there are two layers of ownership and investors since Harris Research Inc. acquired the Denver-based cleanup and restoration brand in March 2018, adding it to a portfolio that includes Chem-Dry Carpet and Upholstery Cleaning and N-Hance Wood Refinishing. Private equity firm Baird Capital, meanwhile, has been the majority owner of HRI since 2011 when it acquired the franchisor from Home Depot.
Tarantin, also HRI’s president and CEO, led the effort to identify and purchase Delta and notes Baird partners have seats on the HRI board and are involved in setting high-level strategy versus being hands-on with operations.
“Private equity firms that are most effective let the management team run the day-to-day,” says Tarantin, “and that’s what Baird does.”
That backing is also allowing HRI to make investments in Delta, which has already gone from eight open franchises to 24 since the acquisition.
“The investment is not just the purchase price,” says Tarantin. “We’re planning for multiple years afterward.”
In addition to a new flood house and training center that will open this year in Denver, technical expertise is another investment area, along with hiring an operations director who also serves as a business coach for franchisees. Deploying capital to open more company-owned operations (there’s just one in Denver) isn’t in the cards, notes Tarantin.
“It’s difficult to run a brand that’s both franchised and company-owned and grow both,” he says. Franchisees “want to see you make investments in them, versus the franchisor.”
HRI offers franchisees in-house financing assistance for initial license fees, a capability Delta didn’t previously have and one Tarantin says “the biggest chunk of franchisees we bring on” are putting to use. The company also has equipment providers who can help franchisees finance those purchases.
“We actually try to drive it so there’s not a lot of profit at the end of the year because we’re reinvesting it in the company.” — Rob Flanagan, Wag N’ Wash
Put profits back in
“You hit a certain point, 10, 20 units, it doesn’t matter, where the things you need to do to support your growth, you don’t have the money to do.”
Rob Flanagan lays out a scenario he says is all too common in franchising and one Wag N’ Wash is determined to avoid as it looks to cross the 20-unit mark this year. A 100 percent founder-owned franchise, the pet store brand focused solely on cats and dogs has two decades in operation under its belt and is on solid footing financially thanks to an ownership philosophy of reinvestment.
“There’s no huge salaries at the top end,” says Flanagan, who joined Wag N’ Wash as president in 2017. “We actually try to drive it so there’s not a lot of profit at the end of the year because we’re reinvesting it in the company.”
Franchisees and candidates alike take notice of this strategy, he points out, and are encouraged by the long-term outlook. Conversely, “If they see ownership taking lots and lots of cash out, it can be a concern,” he says.
Some of that reinvestment has been directed toward human resources and areas of the business where franchisees said they wanted more support.
“For most emerging brands, their capital allocation is going to labor and making those key hires,” says Flanagan, and that’s exactly the approach he’s taken since coming aboard Wag N’ Wash. Last year the brand hired VPs of finance and operations, along with a marketing manager and content coordinator. It also launched its first-ever customer loyalty program, which is aimed at increasing customer frequency.
As a “higher investment” franchise—initial costs range between $510,910 and $843,410—Flanagan says Wag N’ Wash draws more sophisticated and well-capitalized candidates from the outset. The franchisor directs franchisees to U.S. Small Business Administration lenders it works closely with but doesn’t directly get involved in financing.
“What I would tell any franchisee is cash is still relatively cheap,” says Flanagan. “Interest rates are going up, but it’s still a relatively strong way to fund the investment.”
“When we look at how we deploy capital, we want to be very conscientious.” — Dan Henry, Tough Mudder Bootcamp
Outside capital for human capital
Though the deal wasn’t finalized as of this print deadline, Tough Mudder Inc. is in the process of securing a capital investment that will include spinning off its upstart fitness business, Tough Mudder Bootcamp, into a separate enterprise from live endurance events it holds around the world.
“This is absolutely the right strategic move for both businesses,” founder and CEO Will Dean told Franchise Times in advance of the public announcement in November. While the spin-off includes bringing in an outside capital investment, Dean stressed that separating diverse sides of the company would be a better fit for the management team, rather than for raising capital for the Bootcamp business.
While not able to share the specifics surrounding the capital infusion just yet, Dan Henry, director of franchise sales, says in 2019 the brand is “expecting to make quite the injection” of funding toward human capital.
“We really want to make sure we give a significant amount of support to our franchisees,” he says. “Operations, the creative team and our franchise sales and development team” have all been identified as areas for investment. “When we look at how we deploy capital, we want to be very conscientious,” he adds.
Tough Mudder Inc. provided all of the original capital for the Bootcamp franchise and Henry notes it’s a big financial plus to be aligned with an established parent company. Along with adding credibility to the concept, that association has allowed the brand to focus its attention on bringing qualified franchisees on board, versus needing to sell agreements to fund growth. Franchisees must have a net worth of at least $400,000, and though it doesn’t directly provide financing, Tough Mudder Bootcamp has “outside partners that we connect them with,” says Henry.
Benetrends Financial is one such partner, specializing in franchisee financing such as 401(k) rollovers, multi-unit funding and SBA loans.
“We’ve worked closely with them since our formation,” continues Henry. “And we’re always looking at ways of getting franchisees capital.”
What the experts say
Unit-level economics win. When it’s time for an emerging franchisor to secure private equity partners or other investors, they must first have strong unit-level economics “with a good understanding and track record on how to support and track franchisee profitability,” says Brian Schnell, chairman of the franchise practice at law firm Faegre Baker Daniels.
And, he continues, it’s important to have “strong franchisee validation that franchisees believe their franchisor will do what it takes to grow, evolve and protect the brand.”
Find key stakeholders. Early on in a franchise’s expansion life, it’s important to focus on finding the right franchisees who will be key stakeholders in the brand’s development and expansion, says Schnell. “Make sure they are all in, have reasonable expectations and are trending toward profitability. There is no substitute.”
Budget for success. “It’s not just about what’s coming in, but what did you budget,” says Renee Israel, who founded and later sold gourmet popcorn franchise Doc Popcorn.
Emerging brands, especially, need to be purposeful about tracking spending and must “be accountable for the initiatives” planned and how capital is allocated. Her best advice:
“You can say yes” to new projects, “but if you say that to something not in the plan, be ready to say no to something else so you can stay on budget. Don’t get distracted.”
Join the conversation in the Franchise Times Insights group on LinkedIn. Upcoming topics include: attracting capital and accelerating franchise sales.