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Which Money Source is Best for Your Franchise System?
December 2007
Franchising World By Don Marks
Formulate a Specific Plan
Consider These Questions
Don Marks is CEO of Pop-A-Lock companies. He can be reached at donmarks@systemsforward.com.
The right amount, for the right reasons, at the right time, from the right source can cause significant, positive change in a franchise system and ownership. Each of these factors requires a detailed analysis and plan.
What is the right source of money?
First, decide how much money is needed for ownership liquidation desires or system growth. Be careful to only take as much money as is actually needed to have a substantial positive impact on the organization or supply the minimal owner liquidation desired. More money can be available at a later time and a higher evaluation for the equity sold, once one has implemented the programs funded by the investment. Specifically, what is the money going to be used for?
A specific plan and budget should detail the cost savings or revenue and profit growth derived from actions, programs, purchases, new employees or other matters that result from specific expenditures of the invested capital.
What are the implementation strategies? What sustainable, strategic, competitive advantages will result from said use of funds for the ownership or franchise system’s needs? What is the franchise system going to do that other current, or new, competitors can not or will not do? Will the invested monies fund explosive geographic imprint growth? Will the invested monies allow a restructuring of the relationships of system members? Will the invested monies allow new revenue, or customer programs? Can a national account program be commenced or expanded using the funds provided by an investor? How long will it take for the impact of newly-funded programs or opportunities to have a positive impact on the trailing earnings, interest, depreciation, taxes and amortization or “EBIDTA” of the franchisor?
The investor may set key management compensation, subsequent investor funds for the owners, or franchise system, or other company control matters to yearly EBIDTA, or other performance standards. The investor, and possibly the owners, will need an exit or return of investment strategy and timetable. There may be several planned “pay day” opportunities to owners or management from additional private equity or public entities. The investor, the owners, and franchisor management must all agree on and work toward these events.
If a strategic, implementable plan and detailed answers to these questions cannot be provided, the organization is not ready for more money. Additionally, without these answers it will be very difficult to know the right amount of money to obtain, or if it is the right time to liquidate ownership or fund new opportunities. It is also critical to have knowledge of the current, near-term, and long-term industry, market and competitive factors and conditions that could affect plans to use the money, and could affect the costs and availability of money.
The reaction and actions of other system members, suppliers, customers and most importantly, franchisees, must be an integral part of any financing decision. What is the benefit to the system, and especially the franchisees of the financing event?
How will competitors and the media react to the financing event? What is the communications plan and how can the company involve all system members, positively, in the financing event.
Consider all the money sources from individual, groups, or organizations of “angel” investors, bank or mezzanine financial institutions, private equity, other related businesses or entities, current or new strategic customers, suppliers or public market money. A supplier could provide significant cost reductions, and new customer opportunities, and thus be the catalyst for significant growth of a franchise organization. Likewise, a large customer could provide significant new business opportunities. Make sure all the costs, both financial and usage of management, other corporate, and system resources that will be required to get the money are completely known and understood.
Who will provide these resources? When will they be needed? When and how will they be paid for? What financial reports, audited numbers, business plan, market analysis, and competitive analysis, does the money source require? The distraction and resource drain of a funding process could have a serious negative impact on an organization if proper planning is not completed, or if sufficient resources are not available. Additionally, any debt or obligations due to the funding event could have an impact on the performance of the franchise system. The agreed-upon distributions to owners and management, resultant from a funding event, could also have an impact on the success of ongoing operations. What is the money source’s motivation to provide money? Is the investor a short-term, near-term or long-term investor? Is the investor’s time plan the same as the owners and franchise system? Does the investor understand and believe in the strategic vision of the company?
Is an institutional investor or a premier financial institution needed?
Should the money source be one of the significant, strategic, global Far East, Mid East, or European private and public money sources that are interested in investing in U.S. franchise companies and franchisees? Initial public offerings and public companies overseas may have some substantial advantages for owners or franchising entities.
Find individuals or companies that have successfully completed a financing event. Ask them to explain the results, both short-term, and long-term, of the investment. Find the public record, or ask some potential investors, for examples of the documentation associated with an investment similar to what the franchise company is contemplating. A detailed evaluation of key documents will demonstrate the parameters, requirements, protections and expectations of investments similar to the investment sought by your franchise entity. If internal resources are insufficient in knowledge, ability or time available, seek outside financial, business or investment expertise with experience in financing opportunities similar to that sought by the franchise entity. One should also ask the International Franchise Association for recommendations on financing sources through its Supplier Forum members.
Is equity for money matched to the owner’s and franchise company’s needs, and the investor’s needs? How are the investors repaid? How are owner distributions going to be handled? What safeguards are in place to ensure needed capitalization, control debt ratios, and ensure other corporate, and system financial safeguards? The financing entity should be experienced in funding a significant number of funding events, in the industry of interest, and in franchising. How long has the financing entity been an organized, funding source? It should understand and specialize in the franchise company’s market cap to determine whether it is a small, middle, or a large-cap company. The funding source may need to have experience in many global markets, and should be of sufficient size or have committed networks and contacts to bring serious resources to the owners and the franchisor. Money is often not enough. What resources come with the money?
Make sure the financing source understands and is committed completely to confidentiality throughout the investment process. The investment entity needs to have an efficient business model, that is scaleable, and provides as much value as possible through flexible investment strategies. The investment entity also needs to be accessible, responsive and understand and agree to appropriate deadlines. Of course, it is necessary to ensure that the money source’s interests are aligned with management’s and owner’s interests, with appropriate control and risks to the party with the most knowledge and ability to handle same.
What controls and protections ensure the franchise system and the owners, can maintain control, if desired, of the day-to-day operation of the business?
First, answer all the questions, then make detailed strategic and implementation plans. Then decide the right amount of money needed for the right reasons, at the right time, from the right source.
