← The Brian Beers Show
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Owning franchises could change your life. I've scaled my business to over 30 locations that do north of 45 million a year in revenue. And the good news is that you only need one to get started. The bad news is they are not cheap. But today I'm going to show you proven strategies to raise money. First we're to determine how much money you actually need, which may be less than what you think. Then we'll get into debt versus equity. Finally we'll look at what type of investors are looking to receive. Plus I've created a very unique strategy to that combines protection of debt with the upside of equity. You're going to want to stick around for that. So let's go Part 1 How Much Money do you actually need? All franchises are expensive, right? Well, it depends on your definition of expensive. You don't need millions of dollars. 50% of franchises cost less than $350,000 per location. And many great service based options come around 100 to 200,000 for a single unit. You can find the estimated initial investment of a franchise in item 7 of Franchise Disclosure document or FDD for short. This total investment includes a number of things. The franchise fee, the grand opening, marketing your equipment, your down payment of vehicles, the first few months of rent, any leasehold, improvements to a building and other startup expenses. Plus working capital which is cash in the bank on your account. One day one there's always a range from a low to high based on a lot of different factors. And as you go through the discovery process with the franchisor, the you'll develop a more accurate budget. You're going to talk to existing franchisees to get their take on the startup cost versus the expectation and that helps you develop a more accurate idea. And as you go through the discovery process with a franchisor, you're going to develop a more accurate budget. You're going to speak to existing franchisees, you're going to have your own spreadsheet and decisions you're going to make based on how you plan to finance and pay for things. I want to tell you something here that you probably don't want to hear, but it's the truth. I'm all about setting massive goals, but this doesn't apply when you're buying your first franchise. I see some people wanting to raise tons of money to buy huge development deals and they've never even run a business before. It's better to start small, be conservative and then 10x your actions. Whatever working capital budget you have, double it. Take your estimated year one sales Cut in half. It's much better to set an expectation that starting the business will be a grind versus thinking that it's all going to be sunshine and rainbows. And then you get knocked on your ass when it gets hard. Taking on other people's money, whether it's a bank, friends, families, investors, whoever it is, puts a lot more responsibility on your shoulders. I recommend to raise the minimum amount that you need to get started, prove that you can execute, and then grow from there. This is exactly what one of my very successful clients did earlier this year. I helped him find an emerging retail franchise. His first location was up and profitable by the second or third month. To him, this was enough of a proof of concept. He leveraged his existing network, his early results, his experience in another business, and he raised over $1 million to lock down development rights for 30 more locations. By the way, if you're new here, my name is Brian Beards. I've been in Franchising for 15 years and built a portfolio of franchises across multiple industries that do north of 45 million in revenue. I help people find, operate and scale profitable franchises. And new videos are released every week here on YouTube, so make sure you subscribe if you want to learn more. Now. Having cash to fund the franchise isn't the only requirement. Most franchisors want franchisees to meet certain net worth and liquidity levels after they make the investment. The net worth requirement goes up with the investment ranges. A lower cost franchise mainly have a net worth requirement of 50 to $100,000. Right now. Mobile concepts that cost around $200,000 require a net worth of around 250 to $300,000. High cost retail concepts, salon suites, trampoline parks that might have a per unit of investment of a million dollars or more or are going to require a net worth of one and a half to two million dollars. If you don't meet these net worth requirements on your own, you're probably going to have to bring in a partner to qualify. And before you bring a partner in, you need to understand the difference between raising debt and equity. So let's get into part two, debt versus equity. You can raise either one to fund the franchise. First, let's go over debt ranked from easiest to two. Hardest to get. Number one is the franchisor. Some franchisors were internally finance the franchise fee or equipment. This usually only happens when the franchisor is backed by private equity and it won't cover your entire budget, but it could help make a dent. Number two is a heloc you can use equity in a personal home or investment property that you own. These generally have lower interest rates. They're interest only payments for a period of time. And you can pay down principle with cash flow as the business grows. Then you can do private debt to raise money from friends, family, private investors. There are very few rules rules as long as it's a pure commercial room, like the money is going to your LLC or S Corp and not to you as an individual. Which means like you can have a ton of flexibility in how you structure private debt. You can literally set any terms that you and the lender can agree on. Interest rates, the debt coverage payments, interest only periods, amortization, balloon payments, freema penalties, guaranteed interest amounts, personal guarantee collateral. Having access to your financials, we could get very complicated very quickly. So I recommend you keep your terms simple, but just know that you're not bound by the requirements of traditional lenders. When you go private. You should expect us to pay a higher interest rate in private debt versus the sba. But the speed, the ease of doing business, the flexibility may make it worth it. Next we have the sba. This is a government agency that guarantees a portion of the loan to the lender. Now the SBA is very friendly to funding franchises. They will lend 70 to 80% of that total startup cost. So let's set you set a budget of $500,000 which includes working capital, franchisee grand open marketing equipment, down payments, like all that stuff that we talked about earlier. $500,000. The SBA could lend up to 80%. So 400,000 of that 500,000 they may be willing to lend, which means you only need $100,000 to get started, which may be less than what you think. A lot of people don't know this. There are a lot of rules around SBA loans. So here are a couple of the high level ones. We could do a whole other deep dive on SBA as it can get pretty compl. Number one, that the SBA will require collateral, at minimum the business collateral. They also will try to get your personal assets as well as collateral. Number two is you can get a second loan to help fund that down payment, but it has to be approved by the SBA and that all debt must be subordinate to the SBA. So you get a second loan from friends and family for that $100,000. It is going to be second in the debt stack or whatever. The SBA always gets first and then your second lien holders, they also going to want to see a strong debt coverage ratio. Which basically is your cash flow over your debt payments. Like once you get this thing going. And if you work with my team, we'll connect you with SBA loan brokers who do a lot of this stuff and they can help you find the best lender based on the scenario that you have. Let's get into raising equity. Now equity means someone is an owner of the business. At minimum, an equity holder will earn a percentage of the business profit and at maximum they have voting rights on important operational decisions. Raising equity for a franchise is more complicated than an independent because of the franchisor is has to be part of it. Because most franchisors require all equity holders to sign the franchise agreement, which includes a non compete, they can't participate or invest in a competing business during the ownership or for a few years after. And many times each equity holder has to personally guarantee all obligations of the franchise agreement to the franchisor. This makes sense when there are like two or three partners who are actively involved in the business. But what if it's a passive investor who has no involvement in the day to day? For savvy investor, the risk and downside of fully guaranteeing your franchise agreement are not worth the potential return. You're going to want to check item 15 of the FDD where it lays this out. Some franchisors have provisions for minority equity holders, like here's example where at minimum 67% of the ownership must sign the franchise agreement. Which means that you could raise 33% of the franchise from passive investors who don't have to sign it. Now it says that they still must sign the confidentiality and the non compete. But that's not as big of a deal as signing personally guaranteeing the franchise agreement and all the obligations under it. If not, if the franchisor does not have this, you could try to negotiate them to carve out a similar exemption for your passive investors. Now let's say you figure out this investor issue with the franchisor and you want to fund the remaining balance through the SBA. Now the SBA requires all individuals who owned 20% or more to personally guarantee the loan. So if you planned on raising let's say 30% for investors to avoid signing the agreement, you're going to need 10% to a 15% someone at 19% and 11% or any other combination that doesn't give anyone more than 20% because they would then have to personal guarantee your entire loan. And they're probably not going to do that. Now let's get into unique structure that combines both debt and equity. I created this unique structure that could be your answer to funding the franchise. For investors. It provides the downside, protection and the simplicity of debt with the upside of equity. It acts similar to like phantom equity. And here's how it work with a $500,000 budget. For example, as a franchisee, let's say you want to raise 450,000 from private investors and you're going to put up $50,000. You structure the $450,000 as a loan or with the following repayment terms. 10% interest, 12 months of interest only payments. Then it's amortized over 10 years with a monthly payment of around 5,950, with a balloon payment at year five of $280,000. This is very similar to what the SBA is going to look like right now. In addition to the interest, you offer investors a share of the profits. This makes it more exciting than just a 10% return. You offer them 30% of the profits over $10,000 per month. So for example, let's say you had a monthly profit of $15,000. The first $10,000 is yours, leaving 5000 eligible for profit sharing. 5000 times 30% is 1500 dollars goes to your investors, leaving the additional 3500 to you. Now, once you grow the monthly profit to $20,000 a month, the first 10,000 is yours, leaving 10,000 eligible, 3,000 to the investors, 7,000 to you, and so on. Now you can play with these numbers. The interest rate, the amortization period, the profit sharing percentage, that monthly hurdle, and adjust it based on what makes sense to you as a business owner and to what your investors are willing to take. Now, the nice part of the structure is that franchisors are not involved. They don't have a say in anything related to debt funding. They only have a say in equity partners. So this allows you to give the upside to the investors and get around the franchise agreement, the non compete, the personal guarantee, operating agreements, K1s and all the other equity complications. There are a few factors to consider here. What happens when you sell? If it's designed like phantom equity, your investors should get a percentage of the net proceeds or not up to you. What happens when that debt to the investor is fully repaid? The investors could receive that profit sharing payments in perpetuity, or the deal could be over. Can you buy out the profit sharing component like you could define a formula to buy out the profit sharing, I'd recommend a multiple of like at least 3 to 5 of the annual Profit amount once it hits a certain threshold. So for example, you could say I can buy out your profit sharing agreement at four times your annual amount once all the debt has been repaid and once you've earned a certain amount. Totally up to you, right? What happens when you want to expand? Do the investors get a percentage of all of your company profits or just the units and territories that they directly funded? So you've got a lot of flexibility to the structure the deal. So it's a win win. Now I highly recommend using a business attorney who's experience in fundraising and creating these types of documents. I'm not a lawyer. None of this is legal advice. This is just my experience in being part of these deals. Part 4 what type of returns do investors need? Put yourself in an investor's shoes when you're looking to raise money. Here are four factors that they are probably going to consider because I consider these when I'm an investor. Number one is risk. What if nothing goes to plan? What if the shit hits the fan? What if this thing is sold for scraps? Could I lose all my money? Is my downside only a certain percentage? How good? You're giving me a personal guarantee. But like do you have assets from other places that could pay me if this thing totally goes wrong? I look at the reward, right? What's the upside? How much money can I make? Is this like really exciting or is it meh. Look at liquidity. Like how easily can I turn this investment into cash? What does that payback period look like? Is there a market for this thing to be sold? And then time, how much time and mental energy will this investment steal or have the potential to steal? Like how much am I going to get pulled into this? Every investment needs to battle against all the alternatives. And the stronger alternative is going to win 9 out of 10 times. So like right now you can get a 5% return basically risk free in a money market account that's backed by U.S. government bonds. It's 100% liquid. There's zero time or effort required. You can get 8 to 10% investing in an S&P 500. Over the long run, just set it and forget it and it happens. You can get 10% return in a hard money lending fund that has over $1 billion under management that you can get your money back within 90 days. Request. I'm invested into a coffee business that should return 11 times my money over four to five years if hopefully when it has an IPO. I'm a partner in a few franchise businesses with this exact structure and I expect to receive like a 30 to 40% return on my money each year. I've done private lending deals with a first position liens against hard real estate at a 12% return. I've invested in other real estations that have a 15 to 20% return. The potential rewards of investing in a private illiquid business like yours must far outweigh the risk. So good luck on raising capital and remember this advice. Start small. Be conservative. Get the reps in, Learn the business. It's much easier to raise money from a position of strength than it is for weakness. If you have any questions, drop them in the comments below. I'll be here to answer them and I'll see you in the next video. Cheers.