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-All right, Thrivers. We have a treat today. We have a gentleman by the name of Mr. Augustine who's here. He is the Thriver of the Month and he has a boatload, a mountain, of questions for us.
And this one is a great, it's about capital. And you wrote here, how does my desire to expand my operations through franchising impact how I should raise capital upfront? Can you walk me through what you mean by that?
-Yeah. My the big idea is opening up a series brewery coffee houses.
-Think the best of craft beer meets the best of coffee.
-And I want to take this idea and I want to blow it up into a franchise. And so we don't have store one open but I want to think with the end in mind upfront so that I don't wind up having to do a bunch of corrections later on.
And so I'm not sure what that means in terms of any changes, in terms of approaching investors and things like that.
-Well, just so that I and the Thrivers can, kind of, get where you're coming from here, how big of a store is this going to be in your mind, in your vision?
AUGUSTINE: Take your average size, say, Starbucks, expand it about 10%, maybe 15% tops, in terms of size. Some locations may have a brew house in-house. Others may not and may just bring product in.
-And what's the proposed name of this place?
AUGUSTINE: It's going to be Augustino's Brewing.
CLAY: OK. So I'm just to put a little A logo on the front here. You know, let's just pretend this is your store right here. And so this would have the brewery. You're going to serve beer and coffee?
AUGUSTINE: That's correct.
-OK. And do you any idea right now-- and again, we're working through all these issues, so if you don't, it's fine-- but do you have any idea-- we'll put a little sidewalk up here-- how much is this going to cost to open up one in your mind?
AUGUSTINE: Open up one is going to be, low end, about 250K, high end, about 600K, In terms of getting it rolling.
CLAY: Well, if you want to franchise, there is a document that we're going to go ahead and attach here called The Road to Franchising. And I want you to write that down, OK? The road to Franchising.
It's a document I'm going to share with you, it's very specific. I've worked with a lot of companies, advised companies that are very successful franchises. Worked with people who've wanted to franchise, help people grow their companies.
I'm going to get this to you, very specific document.
-But, in order to franchise, you have to create this thing called the FDD, Franchise Disclosure Document. And this document is something the Federal Government regulates. So it's not something where I can just-- you can't just, sort of, hack your way through it. There's a certain, very specific, linear process you have to go through to do that.
And you also, in order to sell a franchise at the end of the day-- So let's say you have this great franchise. So this is your franchise and it is great. It is producing bags of money, therefore, it is a great business. OK? This is your franchise, we're very happy. It's making some money for you.
Well, the issue is now you want to sell it to other people. Well, where do most people hear about franchises? How do most people find franchises?
-My guesses would be either going to that location and saying, hey, this is great, I'd loved to have a location of it. Or going to outlets where it just lists all sorts of different franchises, and different industries, and that sort of thing. I know you've got magazines, you got websites in terms of that.
Well, here are your two things. One is third party sites. And the second is brokers. Now some people call these brokers coaches, but the point is these are guys who actually are going to--
So let's say, I'm looking to buy a franchise. So I go online and I search, I type in franchises for sale. And I might find a website-- one of them is called FranchiseGator.com. I might find a different site-- and then you put in your information. And then, next thing you know, all these franchises that meet the parameters you're look into to stick within will start calling you.
Or you reach out to a broker, and you say to the broker, hey, broker. I'm looking to buy a franchise and I'm looking to spend somewhere between $250,000 and $600,000. That's my budget. And I'm looking to have a business that meets this criteria and that criteria. And these brokers then will recommend franchises to you.
-This is kind of where they both come to, OK? Now brokers are not going to recommend your business. I don't know if they're going to go on the record as saying this, but as a general rule, brokers are not going to recommend your franchise unless they can make a decent commission on it.
-So you have to take the cost of the franchise, OK? So you have to take the cost of the franchise that you design. So let's say that you say, the franchise fee to buy my franchise is going to be $50,000. You have to add on a broker fee. You have to have enough of-- you have to build it into the actual system so that you can offer a generous broker fee so the brokers want to recommend you.
-The second is you have to make sure-- OK, so this is idea one. You have to have the franchise fee, OK? This is the franchise fee. You have to add enough of a margin in there to add a broker fee.
-And the second is, you have to operate your business at approximately a 30% profit. And it has to be turnkey.
[WHOOSH AND MAGIC WAND SOUND]
CLAY CLARK: So when you're building this business, if it's a system where-- if it's a company where it requires the owner to personally work in the shop, or if it requires the owner to personally do a lot--
--of hands-on marketing and it's not turnkey, you'll have a hard time selling franchises. And if you're not operating at a 30% profit margin, you're going to have a hard time selling franchises. And if you don't have enough money factored in for a broker fee, you'll have a hard time.
-Oh, and there's one more. There's one more, OK? You have to be SBA approved. Now the SBA is the Small Business Administration. They're the ones who approve the vast majority of small business loans. So you're going to have to be SBA approved if you want to be able to get people-- the average buyer is going to go get an SBA loan. So if I want to buy a franchise, I'm going to go to my bank and try to get an SBA loan. So if I go to my bank and I say, hey, I'd like to buy one of your franchises, and I don't-- and they say, well, I'm sorry, we can't approve the loan. It's not SBA compliant. That's not good.
-If I reach out to a broker and they don't recommend you, that's not good. If we go through and you don't have enough of a profit margin in here, that's not good. So these are your three things.
-So going back to your question, how does that affect the funding?
-Well, when you're funding your business, you're going to have to make sure that, however you fund it, you're going to have to get a 30% profit out of that thing. So if you got funding from me and I say, hey, I want 10% of your gross sales to work with-- to fund it, then you might not have enough profit left to be able to do that.
STUDENT: Yeah. Now is that 30% to the franchisee, or is that 30-- or is that 30% that I show personally in terms of my operations?
CLAY CLARK: Well, let's say that this business, you built it for $250,000. And this year it produces income, gross-- we'll say this is gross income, gross revenue. This is not profit, OK? But it produces $1 million of gross revenue. It needs to be able to kick out a profit--
[WHOOSH AND MAGIC WAND SOUND]
--of $300,000 to you as the franchisee.
STUDENT: Yeah. So the franchisee needs to be able to go at the end of the day and make $300,000.
CLAY CLARK: Ish, roughly. Now the franchisor, you have to take, of that gross revenue, you have to take usually 6% to 8% and pay that back to the franchisor.
CLAY CLARK: And that's how you make your money. But what I'm saying is that if you were to go out there today-- let's say you partnered with a guy and let's say I'm the guy, and I say, yeah, I'll partner with you. If you need $250,000, sure, I'll go ahead and do it.
-But I want 20% of the profit for doing so. You might put yourself in a bad spot.
-So if I were you, I would try to, if I can kind of go through your funding strategies. I'd recommend is one, I would look at a 401k rollover. I would look at that, where you can take some of your savings and roll it over into the funding of your business.
-That's not something you want to do without the help of a tax planner or a financial consultant that can help you. I would look at that. The second is, I would look at getting an SBA loan.
- --you know, a Small Business Administration loan. The third is, I might look at a home equity loan, also known as a HELOC. I'd look at that.
Fourth is, I would look for a partner, so somebody who puts in money with you, your partners. Fifth, now that we're kind of getting into that outside zone. That's where I would for like VC funding, or some other-- I really would try to stick with conventional financing as much as possible.
Because you need to be able to show that you're operating at a 30% percent profit. You need to be able to make sure you're getting SBA approved. You need to make sure that you can put in a margin big enough where you can offer a good broker commission for people that bring you deals.
-Now what is a good broker commission, generally speaking?
-Well OK, I can speak to, one of my friends owns a franchise where he has a little over 100 stores. Another friend of mine has one where he has about 20.
-And than another friend of mine has one where he has over 500. The one that has over 500, he kind of goes, oh, I wish I would have had broker fees factored in. So typically, if a broker goes out there and, let's say, he sells a Subway sandwich shop or he sells a business-- or maybe a McDonald's. He might be able to generate broker fees that are north of $10,000. He might be able to make a commission of more than $10,000 for bringing that deal.
So basically, he as the broker, markets himself on the internet. And people up here, we'll call them seekers, a seeker is looking to buy a franchise. So he Google's restaurant, beer franchise, coffee franchise. And then he reaches out to this third party site.
The broker then says, hey, I have a perfect franchise for you based on that criteria. I would recommend Augustine's. And they go, oh really, why? He says, well it's great because it's SBA approved. You can get a small business administration loan. It operates at a 30% profits. It's turnkey, and--
And then they go, and what? Oh, never mind, but then he knows that he can make more than $10,000 for referring him.
-So that's how you want to do that. Does that make sense?
-Yeah-- so, at least on current terms, here today, 2015, about 10 grand, is that a good cushion?
-That's a minimum.
-OK, that minimum, and then--
-Here's what you'll do. This is homework for you, OK. This is an action item. I would recommend that you would go online and put on your seeker hat. So this is your homework. I want you to, one, pretend that you are a seeker, OK.
So step one, you're going to seek a franchise. I want you to pretend like you're trying to buy one. OK? Two, I want you to go through a broker.
-When I say a broker, I mean like three brokers.
-OK-- step three, I want you to go through a third-party site, where you go up there and you put your information in. And you know why you want to do that?
-Why is that?
-Because you're going to learn-- you going to be able to ask the broker, hey, how much of a commission to you make on this? And sometimes they're required to tell you. Sometimes they don't. Sometimes they do.
You're going to learn about which franchises they're trying to pitch you. You're going to ask them, well how come you recommend this one? You're going to find out why they recommend certain franchises. Then you can go to their competition and look at their sites, and you can look at their FDDs. They are required by law to send you an FDD.
You have to have the Franchise Disclosure Document in your possession for a minimum of a few weeks before you're even allowed to buy a franchise. That's a federal law. You can't just go out there and talk to a broker and then buy a franchise five days later. They have to send you the FDD.
You need to do that. When you read those FDDs, this is the final step, OK. This is the final step here for you. Read the FDDs. And I have read some FDDs, my friend. Let me tell you something. Reading an FDD is a lot like taking a staple gun and surgically sort of attaching your tongue to a table. It's a little bit rough, but at the end of the day, you're going to learn a lot that way, OK. So I would recommend you do that. Does that make sense? That's kind of a [INAUDIBLE] up here for you.
-So in terms of obtaining an FDD for a franchise, is there anything that needs to be done on that. I've seen some of the episodes. Is it just a matter of, can I sign some document--
-To make an FTD?
-Well no, no, to receive one from a company--
-I mean-- just say, send me the FDD.
-Well if you're saying to this, you're saying, hey, I'm looking to buy a franchise-- looking into buying a franchise. And I'd like to go ahead and look at buying a such and such. I need to see that FDD so I can look at it. They're going to send it to you.
-Sometimes a charge you 60 bucks. Sometimes they charge you 30 bucks. Sometimes they say, hey, let me just send it to you. But, I'm telling you, you need to do this.
-Because once you've gone through the process, you're going to go, bam, I get it now. Now here's the worst thing you could do, as it relates to funding. This is my final thought here for you. Don't go out there and get funding from an outside partner who wants a big percentage of your gross revenue, or who's really dictating the financing terms. Then you put yourself in a bad spot.
-Because the cost to make an FDD, and the cost to franchise, and all those different costs, I can kind of coach you through it in these subsequent episodes. But we want to keep those costs really low. We're going to barter, we're going to trade out, we going to do whatever we can do to keep our costs low. But you don't want to put yourself in a weird spot.
So if you can, when it relates to funding, really stick with the 401k rollover, the SBA loan, the equity, maybe a traditional business partner. VC funding and all that outside funding, mezzanine funding, that's a kind of a last-- that's the worst case scenario.
-Awesome-- did I answer your questions?
-Yeah, yeah-- that got me--
-Good deal-- all right, my friend, well hopefully that helps.
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