April 2015 Living Large: Three CEOs Work Every Angle to Find Capital for their Systems
‘Show me the money’ is that famous line from Cuba Gooding Jr. in the movies. It could also be the mantra for the three CEOs we’re following all year. Here are their approaches to ensure the till never runs dry.
“It’s the big golden egg,” Nancy Bigley says with a laugh, getting ready to discuss this month’s Living Large topic: Attracting capital to your franchise system, and helping your franchisees do the same.
“I’ve grown up with, you pay your credit cards at the end of the month. You don’t live beyond your means. I took that approach with our business, too.”
— Nancy Bigley, Bottle & Bottega
She and her business partner opened the first Bottle & Bottega studio four years ago, using their own savings and no outside money. After one year in operation, Bigley was able to get a line of credit from her banker, which she recently expanded to $50,000—but she hasn’t had to use it yet, and she would like to keep it that way, as a cushion for the unexpected.
“Like the bill I got yesterday from my software development team that was twice what I expected,” she says. “I was like, how did that happen?”
They then opened a second corporate studio, and have been using cash flow from the company to fund the franchising effort, begun in 2012. In January they added one unit to get to 17, a growth rate Bigley finds comfortable.
“We’re still very boot-strappy in how we operate, just in being uber conservative. I’m super conservative with my debt and savings. I’ve grown up with, you pay your credit cards at the end of the month. You don’t live beyond your means,” she says. “I took that approach with our business, too.” She also believes in developing a close relationship with a banker, and she counsels her franchisees to do the same. She banks with Chase, which has a branch down the road from headquarters in Chicago.
“Get your banker to know you, before you need them. I make it a point to go in there every other month,” to update her banker on progress. “I tell him what’s going on with our business.”
“I just like them as people,” she says about how she chose. “They’re there for a long time, they’re friendly, they want to work with our business.” Franchisees, too, should find bankers they feel comfortable with, and tap them for business advice.
“You set up that initial relationship, and make sure they know who you are. Not just, I need money. Particularly if they’re a small-business bank, they’re really pulling for you,” she says.
The cost to open a Bottle & Bottega studio is about $125,000, on the low end for a franchise. Many of her franchisees use their 401(k) or other retirement savings for financing, and go through Guidant Financial and FranFund, two vendors with which Bigley has a relationship, to do so.
Another source of funds is the brand’s national builder, Northboro Builders, which Bigley signed last year to do build-outs for franchisees across the country. Northboro just added a finance arm, backed by a private equity group, which can provide funding for well-qualified franchisees.
She knows her brand could go faster with outside money or a riskier approach, but she’s satisfied with the pace. “It’s also about the fun, about enjoying it, and it’s not just about the numbers.”
Boiling down to ‘who’
“A savvy investor will research who owns the company historically and currently, and they’ll also research who’s involved. That’s a really big key—it comes down to the ‘who,’”
— Tom Lewison, Wild Wing Cafe
At 37 restaurants today, up by one since the beginning of this year, Wild Wing Café is established more firmly than our other two Living Large franchises.
The brand has private equity backing to show for it. Axum Capital Partners bought Wild Wing from its founders in 2012, and cycled through one CEO before parting ways and then hiring Tom Lewison last year.
Before accepting their offer, Lewison looked very closely at who the investors are, a practice he recommends whether examining a source of funds or bringing on a new franchise partner—or evaluating your franchisor as a prospective franchisee.
“This private equity group and the principals involved have a very strong balance of skill sets they bring to the table, including access to capital. They’re very good at working with banks and getting the cash you need,” he says. Wild Wing Café is refinancing its senior debt right now, and gaining growth capital in the process. They’ll end up with three different lines of credit available for growth or acquisition.
He emphasizes budget discipline is still mandatory, regardless of your backing. The short-lived CEO “made some very bold decisions regarding how much money to spend on the front end to support growth, overestimated, and was not successful in the growth part of it,” he says.
Lewison believes access to capital starts with franchisee selection. “Are they qualified financially, so if they have a rainy day they have staying power? If they’re qualified financially, it’s easier for them to have access to capital,” he says.
Lewison is pursuing a couple of tactics that aren’t usually available to smaller brands, but his connections from other pursuits are opening the avenues. He has signed contracts with REITs, or real estate investment trusts, that agree to work with franchisee-owned as well as corporate-owned stores. He’s working on similar relationships with build-to-suit developers.
No matter who’s searching for capital or why they’re pursuing it, Lewison advises always focusing on the person. “A savvy investor will research who owns the company historically and currently, and they’ll also research who’s involved. That’s a really big key—it comes down to the ‘who,’” he says.
No thanks to bank loans
“Even though the franchise concept is very romantic, if you will, it does take a lot of work, a lot of effort, a lot of money. That’s a reality.”
— Lenny Verkhoglaz, Executive Care
Since 2004, Lenny Verkhoglaz and his business partners—his wife and her brother—built up Executive Care from zero to $8 million in revenue by 2014. “That’s a nice number,” he says, and what’s remarkable is they didn’t use any outside capital to get there.
“I could have” taken bank loans as his company’s financial track record became established, “but I’m not American born. I came from Ukraine in 1978, when I was still a child. We were just taught to work hard, rely on yourself more than anyone else,” he says.
When they decided to franchise, in 2013, they used the same financial discipline to forecast the amount of money it would take to get to break-even, and they used cash flow from their original company to fund the franchising effort.
“I have an MBA in finance, and I have an IT background, plus working in management level positions throughout my career,” Verkhoglaz says. “It taught me discipline, projections, planning—always looking ahead of the curve.”
By talking with franchise attorneys and other experts, he planned for a $500,000 investment until the franchising company got to break-even, and figured that would take up to five years. “We’re not at the break-even point yet. We estimate we’ll need another 10 to 15 open units,” generating royalty income, to get there. “I’m proud to say we’re a very well capitalized company,” he says.
Not all young franchisors can say the same—in fact, stories are legion about start-up franchises with nothing in the bank. “I hear some people put a lot of their operations on personal credit cards. That is a recipe for suicide,” Verkhoglaz says.
An Executive Care franchise costs roughly $100,000, including the $35,000 franchise fee, and about half of that is for working capital. Executive Care is listed on the U.S. Small Business Administration’s registry as an approved franchise, which costs a couple thousand dollars in fees each year and involves, initially, scrutiny of the franchise’s finances before listing. That registration provides a faster track for franchisees seeking loans.
He’s looking forward to 2016, when he predicts the franchise operation will break even, and no longer need subsidizing by the home health company. He advises others thinking about franchising to make sure they can sustain all the years it takes to feed the beast.