Finance

A financial legacy can provide an incomparable "leg up" to offspring--if they are adequately prepared. However, inelegant handling of the training stage can create generations of enmity, or breed unmotivated individuals with an entitlement attitude. A family business (especially if some offspring participate in day-to-day operations while others do not) presents even more complexity, particularly in the area of "fairness." Following are a few things to think about as you grapple with starting the preparation process.

Unveil your own financial management beliefs--the sooner the better. In the frenzied intersection of building a business and raising a family, it can be overwhelming to take time out to discuss the emotionally laden subject of "money" with your heirs...

You might not know it from reading the news, but there's a lot of money out there looking for a good home, and high-performing multi-unit franchise companies have become targets for private equity investors. Estimates of available private equity peg the pent-up funds at about $500 billion, more than enough pie for most multi-unit franchisees to get a slice--if they have what it take to appeal to investors.

Developments in the mergers and acquisition universe, along with the growth in large multi-unit organizations and a stabilizing economy in 2011, have combined to produce what experts predict will be a favorable environment for franchise sellers with the right stuff: a strong national brand; a positive cash flow for the trailing 12 months; an infrastructure able to leverage the investment; and an organization large enough to make the deal worthwhile in terms of the costs and time involved for both buyers and sellers during the due diligence/courtship process, which can take six months to a year or more...

Back in 1981, with the prime borrowing rate at an all-time high of 21 percent, most bank customers felt that those cameras they have in banks to photograph robbers should, in all fairness, be pointed at the "real" crooks: the lending officers. At such rates most companies found it difficult (if not impossible) to borrow money. Actually, it wasn't so hard to borrow money--it's just that no one could repay it.

Those days of exorbitant interest rates are gone now, at least for the time being. In fact, interest rates are at all-time lows. However, the problems of finding capital and repaying loans remain, and many business owners have feelings of animosity and bitterness toward banks and bankers as a result of their bad experiences...

Our next financial concept? OPM (other people's money).

As a former commercial banker, I've had the opportunity to see both sides of the "debt/leverage" issue. When you go to a bank for a business loan, your banker (whether they tell you or not) will quickly compute your debt-to-equity ratio. As bankers, we viewed debt as an equivalent of risk: the higher your ratio, the more debt you have in proportion to equity. Therefore, the higher your financial risk. Let me explain why this is so. It all goes back to the financial basics: Assets = Liabilities + Net Worth.

An asset is something you own, and you own assets to generate sales. But to own an asset, you must buy it, and someone must provide the money. Money is provided either by creditors or owners...

On many occasions during the past year, I've seen and heard the past 10 years dubbed as "The Lost Decade." From a stock market perspective--with prices essentially flat between 2000 and 2010--it's not hard to understand why. Upon writing this article, the annualized return on the S&P 500 over the past 10 years was -0.68 percent, versus the average return of 6.28 percent since 1929 (according to FactSet Data Systems). Interestingly, over a similar time frame, aggregate corporate profits have doubled while total household net worth is about 50 percent higher.

While the stock market seems to say we've made no progress, economic statistics indicate otherwise. So why the disparity? For a better understanding, enter our lessons learned from the past decade...

Using retirement plans to fund growth

Refugees from corporate America seeking capital to open a franchise business are tapping into their retirement plans to fund their fledgling businesses. So are multi-unit franchisees seeking to expand.

Take Patricia Preztunik, a multi-unit franchisee in Northern New Jersey who signed on with BrightStar Healthcare in May 2009. With four territories today, she purchased two up front, then two more, one at a time.

Preztunik says she spent six to eight months doing research before starting her own business. "I'd been looking at doing something for a few years. I had friends who had, but I had not taken the plunge," she says.

She rolled over funds from her corporate 401(k) after speaking with a business attorney, who informed her of the possibility of using it as start-up capital to fund her new business...

Treat the causes, not the symptoms

Seat-of-the-pants management styles may be fine themes for business magazine articles and their Hollywood adaptations, but responding to the symptoms of problems instead of preventing problems in the first place is like taking aspirin to cure pneumonia.

In the financial world, we often see symptoms such as low cash, low net profits, or both. But those symptoms are caused by something--and that's where the "Road Map" (see diagram) becomes useful. It represents the financial skeleton of your business.

As you can see, it's a self-contained system, but, as with any system, it requires maintenance to function properly. It presents a "big picture" overview, and it also leads us through a process of analysis designed to pinpoint potential problem areas...

Entrepreneurial spirit will drive a slow recovery

Long ago, when I was a newly minted junior analyst at a local investment firm, a grizzled veteran noted that it was pointless to be in the investment business if you weren't a long-term optimist. To me, that time-worn piece of advice continues to ring true. Operating from this mantra, I've spent my entire career believing that whatever short-term morass the economy or the market found itself in could be fixed (eventually) by the drive and ingenuity of the American entrepreneurial spirit. I'm hopeful that this time will be no different--although I admittedly find my optimism being severely tested. In nearly 30 years in the business, I've never witnessed such a complex array of issues at play...

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...