Tales from a successful Franchise - part 1?

I wasn't feeling so successful last week. Scrambling to cover payroll. Yeah, payroll comes every week (ours is north of $40k/wk., but that's for 4 stores, QSR) and after 15 years we oughta know how to handle it. But there were a few other cashflow factors.

It was also the day for our electronic payment to our primary food distributor. Hey, that happens every week too. And it's in the same $ ballpark as the payroll. But the tipping factor was that, dammit, our monthly bank loans also happened to fall due on the same day.

The debt service comes to around $18k per month, and now we have something to chat about. Our first unit was a distressed existing unit, bought for a low price 15 years ago. I suppose some would call it churning, but really, even in a "top tier" system, there are indeed some units that don't do well (it's the unit), and some Zees who don't do well (it's the Zee), and some ya can't figure out who was who. The difference is that the Zor will become involved and make sure the unit gets sold to another Zee, or takes over itself. The public NEVER sees a For Sale sign, nor a dark unit with our brand on the sign.

So we get our first store paid off, but then open a new unit as our 2nd store. And right after that, bought two more existing stores, which were Zor owned. Back then our debt service was around $20k/mon.

Now here's an interesting point: NONE of our loans are, or were ever, SBA. We have never applied for an SBA loan. Our deals are through major national lenders who have franchise financing departments. IMHO a lot of stuff that gets done with SBA shouldn't get done in the first place, but that's my opinion. No loan "brokers" or placement consultants were used either. (Folks, DON'T automatically assume you HAVE TO go SBA; maybe you end up needing to, but BE CAREFUL if you have to. Because I think a LOT more SBA loans fail than do the kind of conventional loans we have.)

And here's another point: People who buy top tier franchises don't necessarily have huge money, they have huge loans. Because the top tier "concepts" are considered to be a pretty secure bet, the ffective cap rates are low. Or to put it another way, people are willing to pay a BIG multiple of cash flow to buy them. Perversely, this even things out and makes them in effect as risky as a lot of other small business. Since the business has to carry such high debt, it can't afford for anything to go wrong. The slightest operational slipup and there goes not only the profit but maybe even the debt service.

Critical in our brand is to run your own pro forma P&Ls when contemplating buying a unit. Everybody runs their own numbers. That's where the negotiation takes place, on the numbers. There is actually a sort of standard, corporate (Zor) method of valuation, using a 20 year DCF. An inflationary growth is built in, and then a discount rate applied. But of course the appropriate growth as well as the appropriate cap rate can be matters of differing opinion.

Some Zees will therefore use shortcut methods such as a multiple of cashflow. But then of course you still need to determine, or project, cashflow. And in practice, let's face it, nobody's projections ever turn out to be accurate in all respects. But you have to start somewhere. Or at least, we think so.

So anyway. We get the 2nd store paid off, debt service drops to $10k. But then we borrow over a half million more for reinvestment. And dang that debt service is back up to $18k. I'll be glad when, in a few months, the 3rd & 4th stores will be paid off too, taking $10k/mo. off our bill. For us right now, it's all about the debt.