FBR Issue 3 - 2020

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<strong>FBR</strong> SPECIAL REPORT Funding Your Franchise: You Have Options Jeremy Ames, President & Co-Founder of Guidant Financial There are a few significant differences in financing a multi-unit franchise versus a single unit, though many of the same financing solutions will work for both. Aside from the usual cash, credit cards or even asking for financial support from family and friends, the most common methods used to finance multi-unit franchise purchases include loans from the Small Business Administration, 401(k) business financing, unsecured loans and portfolio loans. Here’s what you need to know about each: SBA Business Loans Loans from the Small Business Administration (SBA) are one of the most popular financing methods for business owners of all kinds, from startups to franchises. SBA business loans are not directly from the SBA. Rather, the SBA encourages banks to lend to small business owners with preferable terms and low interest rates. In return, the SBA covers 75 to 85 percent of the loan for the bank if the loan defaults. This creates a win-win situation for both the lender and borrower. When it comes to multi-unit franchises, SBA lenders usually look at each individual unit and also at the collective performance of all the units. Most lenders want to see at least two years of profitable tax returns with the initial business prior to applying for funding for another location. The sooner the business becomes profitable and the stronger a borrower is, the more flexible lenders are. For example, if the borrower shows a strong credit score, has prior business experience in the industry and is able to put down a significant down payment (more than 20 to 30 percent), the bank may be willing to approve funding for more than one location simultaneously. SBA Loan Eligibility Requirements • 20 percent down payment for an existing business purchase or 30 percent for a start-up • 640+ credit score • Personal collateral required • Industry experience preferred • Secondary income preferred 401(k) Business Financing With 401(k) business financing (formally known as Rollovers for Business Start-Ups or ROBS), you can use up to 100 percent of funds from an existing retirement account to buy or start a small business or franchise without taking a taxable distribution or getting a loan. Funding through ROBS has been an option since the Employee Retirement Income Security Act passed in 1974, and it’s growing in popularity. Since ROBS doesn’t involve taking a loan, there are no monthly payments or interest rates, and there are no collateral or minimum credit score requirements. ROBS can also be used in combination with an SBA loan, allowing business owners to use retirement funds as the down payment for the loan. The process for funding a single-unit franchise versus multiple units is the same with 401(k) business financing. You can either roll 100 percent of your retirement funds during the initial transaction to use for one or multiple units, or choose to use a lesser amount initially to open the first location, then complete another rollover when you’re closer to opening your second location. However, there are timing considerations to take into account, especially if you plan to open multiple units within the first two years. In this case, you may choose to open your first location using an SBA loan, then use ROBS as the down payment for a second loan so you can show lenders strong liquidity. ROBS Eligibility Requirements • At least $50,000 in a rollable retirement account • No minimum credit score requirements • No down payment needed Unsecured Loans If you don’t want to jeopardize personal property in order to obtain financing, unsecured loans provide up to $150,000 without any collateral. Unsecured loans work like small business credit cards, consisting of multiple lines of revolving credit that can be used and paid back as needed. But instead of relying on collateral, lenders look at your creditworthiness to secure the loan. As such, a high credit score and solid borrowing history is necessary. Unsecured loans have no use-of-proceeds requirements, so the funds can be used for your first franchise location or subsequent units. It’s important to note that this type of loan shows up as revolving credit on one’s credit report and can have a meaningful impact on a credit score, especially if payments are not made on time. For that reason, we recommend using unsecured loans as a last resort and only as a short-term financing solution. Unsecured Loan Eligibility Requirements • 690+ credit score • Credit utilization rate below 50 percent • Minimal recent credit inquiries • No recent derogatory comments on your credit report Portfolio Loans If you own stocks, bonds, mutual funds or other eligible securities, you can borrow up to 80 percent against the value of your portfolio without having to liquidate your holdings. Portfolio loans, also referred to as stock loans or securities-based lending, work like a revolving line of credit—allowing you to finance a business or franchise by borrowing (and repaying) at will. Because of this, they’re ideal for financing multiunit franchises as you can use as much as you need, pay it back, and then borrow again when you’re ready to move forward with additional locations—all without getting a new loan. For a detailed walkthrough on funding your franchise, visit www.FranchiseBusinessReview.com/financing 14 | For more information on the companies in this report, visit www.FranchiseBusinessReview.com
<strong>FBR</strong> SPECIAL REPORT Continued from page 13. swimming pool services such as installation and repairs, and outdoor services such as powerwashing. Pinch A Penny stores also offer backyard products, such as outdoor furniture, spas, and grills. Built on a reputation of providing superior customer service and expertise, the brand has been included in many top industry rankings, including Franchise Business Review’s Top Franchises for Women, Top Franchises for Veterans, and the Top 200 Best Franchises. Taking a family approach to business, Pinch A Penny provides its customers, franchisees, and employees with all the necessary resources to carry on its tradition of quality, reliability and expertise in a fun, family-oriented atmosphere. “The most important thing for us is: Do you have an attitude of service? Are you a giving person? Are you trying to help people? Our business is built on trust, said Michael Arrowsmith, CEO of Pinch A Penny. “When a franchisee comes into our system, we take care of them the way that we want them to take care of the customer. While our franchisees have to do their part in building their business, we offer the structure, expertise, and tools to help them from the beginning.” Pinch A Penny offers a month-long training that allows franchisees to receive a couple of national certifications, as well as a diploma from the Pinch A Penny ‘Pool School of Graduates. Through that process, franchisees start learning about the pool business and get to know other Pinch A Penny owners. The corporate office not only encourages prospective franchisees to talk with other franchisees—it requires them to do so before they can be approved as a new owner. From the beginning, Pinch A Penny has established a process of new and existing franchisees networking and interacting with one another, Arrowsmith said. In a nutshell, the foundation of the company is rooted in transparency and treating all involved like family. “Pinch A Penny is a family-owned business, our franchisees run their own family businesses, and our customers are families,” he said. INVEST IN OUTREACH The Learning Experience is a childcare center franchise that serves children in preschool through kindergarten in more than 275 locations throughout the country and internationally. Just as it serves families at its centers, the corporate office treats franchise owners as family—underscoring its brand position—Happy Happens Here! Brad Wahl, SVP of the Florida-based brand, said The Learning Experience culture is driven by its brand mission: to have a positive impact in the lives of children, their families, and in the communities they serve. “Our business is dependent on a total commitment to this mission and our culture. It’s even more critical during this time because the health and safety of our little ones is of paramount importance,” Wahl said. “The ability of our entire brand family to recognize this and commit to this direction has been our focus throughout the pandemic. It comes down to communication, communication, communication.” The Learning Experience invested in new digital training and communications platforms at the corporate level to enhance communication with franchisees. To ensure consistency, the corporate office delivers simple messages frequently through multiple channels to ensure effective reach. And communications are not one way—franchisees are encouraged to voice their feedback, too. It is several brand committees of influence, including its curriculum committee, brand awareness fund committee, and diversity and inclusion committee, that drive corporate decision making. “When we see opportunities to improve the system, we include the entire Learning Experience community in that process,” Wahl said. “It helps drive our innovative mindset with the goal of positively impacting our entire community.” CULTURE FIRST Many franchise organizations “talk the talk” when it comes to culture, but it is clear that they don’t all “walk the walk.” A strong culture doesn’t just happen within a company—it has to be designed, built, and constantly maintained. The top franchise companies that have the honor of be named to our first-annual Culture100 list are clearly among the best of the best franchises in the business. We invite you to learn more about what makes them unique, and explore business ownership opportunities in your local market. Daniel Anisz Window Genie of Naples, FL Franchise owner since 2018 FEATURED Franchisee Why did you invest in this franchise? Throughout the whole process, I have found Window Genie to be very transparent. I like having several things ready to go starting a business, so that you don’t have to reinvent the wheel. With Window Genie, you can follow proven steps and start bringing in money right away. The support from the corporate office and other franchisees is invaluable. Background prior to becoming a franchisee? I worked at the corporate office of a franchise prior to buying my Window Genie business. This helped me understand the value of following a process and getting help from others. It helped me avoid mistakes that others have made in the past. What do you like most? I like having the freedom to make my own decisions and run the business I see fit—that’s probably my favorite part. I also like having the ability to make my own schedule and be in charge of my day-to-day routine. How did you fund your franchise? I funded my business through a Small Business Administration (SBA) loan. Any advice for prospective franchisees? Know that it is hard work, but it can be very rewarding. Building a business takes grit and determination. Following a proven system works. Don’t buy into a franchise and try to reinvent the wheel. What else would you like to share? I moved my family from Toronto to Naples for this business. Failure is not an option for me. This is the hardest things I have ever done, but I am also very happy that I did it! For more information on Window Genie opportunities, call (800) 700-0022 or visit windowgeniefranchise.com. For more information on the companies in this report, visit www.FranchiseBusinessReview.com | 15
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