Finance

Often when I speak at franchise shows and conventions a tenant will ask me, "What is the best lease length?" The term, or length, of your commercial lease is an important part of your franchise business plan and ensuing lease negotiations. However, most franchise tenants do not take enough time to consider that one day they will eventually want to sell the franchise. Alternatively, they may want to expand/downsize, relocate, or close and so do not give the term of the lease the attention and consideration it truly deserves.

The industry standard lease term for a franchise tenant can be five, seven, or 10 years (but not shorter). For many of the more expensive franchise systems a 10-year amortization period is normally required on the initial term to justify that initial capital investment cost...

Greg Hamer, Sr., worked in the oilfield service industry for two decades before dipping his toe into franchising. He knows about hard work and about managing assets. Today, he is the largest Taco Bell franchisee in the state of Louisiana. Hamer has operated B&G Food Enterprises out of Morgan City, La., since opening that first Taco Bell unit in 1982. In the 1990's, the company added KFC and Pizza Hut units to the portfolio and most recently, Teriyaki Experience.

After nearly three decades in franchising, Hamer oversees an empire of 55 units stretching from Mississippi through Louisiana and into Texas. It's a large operation that generates $64 million annually and keeps a payroll of more than 1,400 employees.
Hamer, who serves as chief executive officer, says that prudent financial management and unit economics oversight plays a pivotal role in how he manages the operation...

As noted in the last issue, investing is not for the faint of heart. It takes time and an ability to integrate an expansive range of information--as well as a steady head and a strong stomach. This combination often means that seeking outside help makes the most sense. But how do you go about finding an investment manager that's the right "fit" for you?
Before interviewing your first prospective manager, make a list of questions that are important to your specific situation. You will quickly discover that you can listen to a multitude of well-honed and entirely different pitches--each of which sounds plausible. However, the long-run success of your financial relationship will be how perceptive your manager is at determining what inspires, scares, and motivates you...

For many businesses, growth often means a physical expansion of an existing store or the opening of additional stores. Is it worth the cost? There are two parts to the answer: finance and marketing. The financial analysis answers the question, "What do we need?" The marketing analysis answers the question, "What will we get?" To get our arms around the analysis requires an extension of my "break-even" discussion in the previous issue.

Let's look at how the big guys do it. Suppose a large quick-serve franchise is looking at a new location. By knowing accurately their fixed and variable costs, they can calculate a break-even sales volume level. With thousands of existing outlets to use as models, they know their costs to the penny, exactly what they need to invest, and their target return on investment...

In the previous issue, I outlined a seven-step process guaranteed to improve performance. We call this process Profit Mastery. My goal going forward is to give you more detail on each of the steps, a specific action plan for how to apply each to your own business, and how to incorporate the results into your strategic thinking.

Everyone knows their costs, right? This is a concept as old as Methuselah. Well, do you know yours? And do you know how those costs behave in your business? And can you answer the question: Why would anyone in their right mind care?

I firmly maintain that this information ought to be "walkin' around in your head" knowledge. Not only does the behavior of these costs have a significant impact on your profitability, it also impacts your marketing strategy...

The way to a man's heart may be through his stomach, but the way to a banker's heart is through strong unit economics.

Entering 2010, the stars are in alignment for strong multi-unit operators seeking expansion opportunities, specifically:

The most fundamental business strategy calls for black numbers on the bottom line. In simplest terms, it's proof the business is generating more cash than it is spending.

All too often, though, entrepreneurs get involved in businesses without employing a proper system to help them keep a watchful eye on what they're earning and what they're spending. Managing day-to-day operations can be so time-consuming that it leaves little room for financial analysis. Or perhaps key individuals lack a basic understanding of how to read and interpret financial statements. Combine these factors with the down economy, and you'll likely wind up with a troubled business.

Today, more and more multi-unit franchisees are realizing the importance of keeping their eyes focused firmly on the bottom line, and they are putting in the time to understand and continually analyze their financial statements...

In the few minutes it takes you to read this article, 40 businesses across the nation will fail--and that statistic was before the economic downturn of the last 24 months. Tragic? Yes. Remarkable? Not at all. The road to business success is littered with the skeletons of companies whose owners--mostly brilliant and skilled individuals--failed to "take care of business" in the financial management of their enterprise.

Just a minute--am I saying that good ideas, technical skills, product knowledge, and sales ability don't guarantee success? You bet I am. Anyone in a position to provide capital will tell you: the ability to develop and control an organization financially is absolutely vital.

Consistent with the hundreds business classifications in the U...

There's a year-end ritual I've always hated. No, it's not those standard resolutions to eat better, exercise more, and clean the piles off my desk. Worse. It's being asked to forecast where "X" will be in a year, "X" being the level of the Dow, the price of gold, the yield on short-term Treasuries, etc.

I've never understood the fascination with trying to predict exactly where something was going to be at "3:01 p.m. CST 365 days hence." Nor have I seen the relevance. Markets aren't predictable. Never have been and never will be.

As we've seen, particularly in recent years, a lot can happen in 12 months. If you had suggested in January 2009 that none of the major investment banks would survive independently, that the Dow would fall 23 percent in a single week, or that oil prices would go to $150 and then plunge more than 50 percent, you might have been escorted to a restrained ward far away from the public eye...

Gaining access to and securing capital is more important for franchisees today than ever. Every week we talk with multi-unit franchisees about how they are growing and the kind of financing it takes for them to achieve their goals and objectives. It's an important topic and sometimes we get some very candid responses.

Jeff Reetz got his first taste of franchising working in the corporate office for Pizza Hut back in the late '90s. But he saw the appeal of being a franchisee and couldn't resist the pull. Today, the 56-year-old is owner of 2JR Enterprises LLC, which operates 32 Pizza Huts and 12 co-branded WingStreets in Louisville, Kentucky, and southern Indiana. The company does about $32 million in revenue annually and Reetz shows no signs of slowing down...

Buying assets out of bankruptcy court is time-consuming but usually easy. But if your target is a franchisee and you get choosy - meaning, for example, that you want to buy only 10 outlets in a bankrupt 20-outlet franchise restaurant chain - things get dicey. Why? Because it's hard to determine a fair value for such assets, and if you fail to do so, you could find yourself back in court fighting angry creditors who think you've cheated them.

That can turn any effort to pluck diamonds out of bankruptcy court into a disaster, and the threat leads many would-be bargain hunters to look elsewhere for their gems. But it needn't do so, because there's a solution to the problem - a thorough-going legal due diligence campaign coupled with an appraisal designed specifically for bankruptcy court that factors out the earnings drag of unprofitable outlets in a franchised chain, not to mention the drag created by, say, a big recession...

Six ways we sabotage our investment success
Did you do your homework? In my last article, I discussed taking a broader look at the concept of "performance measurement."

Rather than allowing a simple percentage change (or even a percentage change relative to a broader index) drive how satisfied you feel with your portfolio's performance, I suggested thinking longer and harder about defining success on your own terms. After all, what good is a "good" performance number if it doesn't leave you with a portfolio that can help you achieve your goals?

I also asked you to pull together some thoughts regarding what you need your assets to do for you ("must haves")--and then spend some time thinking about what you'd like them to do ("nice to haves")...

Gaining access to and securing capital is more important for franchisees today than ever. Every week we talk with multi-unit franchisees about how they are growing and the kind of financing it takes for them to achieve their goals and objectives. It's an important topic and sometimes we get some very candid responses.

Jason Shifflett, 32, owns Shifflett Companies in Olive Branch, Miss. The company operates 30 Domino's Pizza stores and Shifflett hopes to add more soon. He sheds light on his management philosophy, "We want the best manager in every store," and believes in measuring growth by "Order count growth, sales growth, profit growth, and people growth." Shifflett plans to top 100 stores within the next 10 years.


How is this economic cycle affecting you, your employees, your customers? As costs go up, it becomes very challenging to maintain margins...

Gaining access to and securing capital is more important for franchisees today than ever. Every week we talk with multi-unit franchisees about how they are growing and the kind of financing it takes for them to achieve their goals and objectives. It's an important topic and sometimes we get some very candid responses.

Tony Lutfi is the chief operating officer - and franchisee, he says - for MarLu Investment Group, which operates 46 Church's Chickens, 2 Little Caesars, 3 Arby's, and 1 Burger King. The restaurants are spread across several western states, including Nevada, Arizona, and Texas. The company does about $40 million in revenue each year and Lufti says they have goals to reach 100 units over the next 5 years.

MUFR: How is this economic cycle affecting you, your employees, your customers?
Lufti: For us, the economy has been tough more psychologically than it is in dollars...

It seems there really is a silver lining in every cloud. And the recent economic downturn has deposited a little of that silver at the feet of some multi-unit franchisees who can tolerate risk and don't mind a little "remodeling" work.

Today, opportunities abound to buy distressed franchise units from other troubled or bankrupt franchisees--often for pennies on the dollar. If they have the stomach, these "rescuers" can snatch up these units, turn them around, and watch the dollars flow in.

It's a strategy that contains risks, for sure, but done right can offer serious rewards. Multi-unit franchisees like John Metz, David Ostrowe, Don Rottinghaus, and Lyndon Johnson all know firsthand the ins and outs of taking over distressed properties--and they're not always successful...

I know few people who had money-making investments in 2008. On the flip side, I know many whose portfolios technically beat their respective benchmarks.

In a rising market (like that experienced in 1999), beating the benchmark would have been considered a badge of honor--providing ample bragging rights on the golf course and around the dinner table. However, having relatively "less loss" in a down market isn't exactly considered a wonderful experience for most of today's investors.

Why doesn't it feel so wonderful? The answer lies in the prevailing view of what constitutes performance success. While losing 5, 10, or even 25 percent when the market was down 39 percent could be viewed as strong relative performance, the absolute losses--as we've all learned--cause overriding pain...

Business owners often get trapped because they don't heed the messages their business sends and they don't pay attention to basic principles. The following checklist represents a clear set of danger signals - situations and issues - that have a clear and negative effect on cash flow.Take a few minutes under the harsh, cold light of reality to ask yourself how many of the following danger signals exist in your business and then evaluate carefully their implications:

Gaining access to and securing capital is more important for franchisees today than ever. Every week we talk with multi-unit franchisees about how they are growing and the kind of financing it takes for them to achieve their goals. It's an important topic and sometimes we get some very candid responses.

We recently spoke with Chris Haque who is president and CEO of Haque Holdings in Seattle, Wash. He operates Denny's, Church's Chicken, Baja Fresh, Tortilla Flats, and Bennigan's Bar & Grill. Haque's company does more than $20 million in revenue annually.

MUFR: How is this economic cycle affecting you, your employees, your customers?
Haque: Obviously, the economy is affecting us in sales, especially in southern California...

At some level, there's a growing realization that the current economic "decline" is not just a speed bump. The assumption that a return to the "status quo" is sure to come--that it's merely a matter of time--also appears to be quickly fading. The emerging conclusion: Things typically don't come this unhinged only to revert to what existed before.

While exceptionally unsettling, it's important to remember that U.S. economic history is littered with instances of major structural shifts that have been caused or accompanied by significant advances in technology, as well as changes in financial and social systems. (Take a look at John Steele Gordon's Empire of Wealth for numerous examples.) New industries emerge while others die. Bubbles are created as investors rush to profit from new technologies or trends...

"Can I afford to hire (or keep) that new manager - or salesperson?"
"What do I need to do in sales to cover their full cost?"
What do these questions have in common? Each relates to how changes in costs, volume, and pricing affect your bottom line. By the end of this article, we'll have given you a single analysis model to help you answer these questions more accurately than ever before.

And, we'll also dispel one of the biggest "cost" myths around - at least regarding employee costs. It goes like this: "for every dollar you pay me in wages, it only takes one dollar of sales to cover." Baloney. I can immediately think of at least two major contradictions: 1) there are some direct (or variable) costs that have to come out first, and 2) there are a whole raft of "other" costs that attach to that one dollar of salary - FICA, FUPA, FEEPA...