For those interested in investing in a franchise, now is a great time. There is no greater proof than the recent volatility in the stock market. Many portfolios are way down and it will take some time to recover. Investing in a business provides more stability and often a higher and more consistent return with less capital.
It's time to learn about new ways of investing and all of your franchise funding options.
Nat and Pete go over all the forms of funding, including franchise loans, they typically see and how they are leveraged. This content of this episode is just as pertinent now as ever!
Pete: So Nat, welcome back to our next podcast. What a crazy week with the stock market. A roller coaster, so I try not to look at to the my portfolio. Although I've got a pretty balanced mix, but it's been a crazy ride watching the news and all that kind of stuff. So today, I think we should talk a little bit about how we fund franchise businesses, right?
And from standpoint of the stock market, I get people that tell me this week, hey Pete; I lost a lot of money in stock market; I don't know if I can invest in a franchise. And I say listen, maybe we should look at diversifying your assets and put some money in a franchise, so you're not taking that roller coaster. Are you kind of seeing that same thing?
Nat: Yes. And I feel like a lot of the underlying psychology for the guys that are kind of having the courage to move forward right now is that they want to do something that they feel that they have more control over. And so I think when you own your own business, you always are going to have more control than kind of having index funds or things like that.
Pete: And when you have your own business, you're working with your money every day. And the other piece of it is that if you're in the stock market, some person in New York is managing and watching. And so I do like this idea of diversifying. And I'm getting more people to say, hey Pete; I want to create career and income security and leverage my dollars in a way in which I can take control of it.
So with all this craziness, right? We saw the fed dropped the rate to 0.25. So we know that there's money out there. So let's talk about if somebody wants to take advantage of this opportunity, because as you pointed out when we look to invest in a franchise. We're not investing it through today's lens of what's happening, we're all sitting in our basements or in our houses.
We're looking at something that's going to be down the line six, nine, twelve months from the standpoint. So let's talk a little bit about if you were going to take the chance of investing in a franchise, how do you capitalize it? What do you want to talk about? What category first? You want to talk about traditional?
Nat: I think a lot of guys and a lot of lendersare going to kind of want to know what your liquid capital is. So I think you're always going to be thinking about or taking an inventory of like your liquid capital or what your savings looks like.
And so I think whether that's, I typically like to be a little bit conservative with that, and try to tell guys 25, 30 percent you probably need to think about from your personal assets or liquid capital.
Pete: No, I was going to say liquid capital is loosely defined, right? It could be cash; it could be stocks, it could be bonds, it could be equity in your home you tap, it could be retirement dollars. But you can't borrow 100%, right? You have to bring something to the table.
Nat: Right.
Pete: Let's talk a little bit about the ways in which you can get liquid capital, right? So you can sell your stocks, you sell your bonds, that kind of stuff. What we're seeing a lot of people do is leveraging home equity, right? To bring that capital in.
Nat: Yes, I think that that's a no-brainer. Access the easier money first, right? So the home equity, I see a lot of people doing that, and then they're kind of doing a combination of things.
A lot of times, I'm sure you're the same where I personally a lot of times will refer people I'm working with to some financing or funding experts to kind of walk through what their options are. So I know that there are also a lot of retirement funds, retirement opportunities to use some of your funds, and all that. What else are you seeing out there?
Pete: No. So I think home equity, right? When I say it's cheap money, I think the rates are anywhere from like three to call it 5.5, especially with the rate cuts we've just recently had. So it's a nice way to do it. The other big one I see people use is the retirement dollars; the robs program.
And to your point, there are companies that help you do the robs program. And so we know what robs is; somebody asked me the other day it's rollover business startups. And it's a way in which in a tax compliant way, you could take your retirement dollars instead of investing in stocks and bonds, you're investing in your own business, which seems very attractive at this given point.
And there are, as you pointed out, companies that help you take your retirement dollars and do it in a compliant way, so you're not paying tax penalties and stuff like that. And for these companies to help you take advantage or leverage your retirement dollars, I think it's like a fee of like five thousand dollars to set it up.
And basically, it's totally turnkey. They set up the corporation, that is going to be the entity that buys your franchise business, to managing all the paperwork, it's pretty cool.
Nat: Yes. I like the idea of, it's kind of like this opportunity to supercharge your retirement too. Because your retirement account essentially owns the business, and then when you decide to sell, the proceeds will remain in your retirement account.
Meanwhile, if you own your business for ten years, you're taking a nice income from the business every year. So it's kind of a win-win situation.
Pete: Yes. You're actually an employee of your retirement account.
Nat: Exactly.
Pete: In a given scenario. And you pay a maintenance fee; they keep you compliant, which is really important. And I always tell people, you and I refer them to good companies that they specialize in that, and you always want to use when you're doing the robs program, you want to use a company that specializes in that particular program at some point.
So we've got home equity, we can leverage our retirement dollars. Some people are using their, up until maybe this last week, their stock portfolios. You can do a line against your stock portfolio at your brokerage.
Nat: Yes, totally. One thing before I forget is a lot of the franchise companies are on the SBA registry, which is kind of nice too. Because it makes a little bit easier to get funding when you say, hey, I'm going to open up Supercuts as an example.
They can look it up on the registry and see that okay; this is a five-star franchise or what have you. So that's one way that franchising makes it a little bit easier for you to get funding too.
Pete: Well, let's talk a little bit about borrowed money, right? Going out and getting some capital. So we can do an SBA loan. And we're not experts, or I'm not an expert in SBA.
Nat: I'm not either.
Pete: But here's the breakdown, right? So I did this on my webinar the other day. So you can, with an SBA loan, borrow anywhere from 50,000 up to $5 million. It's going to take, require about 20 to 30% down. So that liquid capital we just talked about. You're going to pay an origination fee of call it 2500 bucks to 5,000 to get it set up.
You're going to pay a closing fee, and that is usually three percent of the loan amount. You have a guarantee fee, which you pay about three percent of 75 percent of the loan. It's kind of like the insurance that's protecting the financial institution. You're paying for that insurance. And the rates with an SBA loan, it's a variable rate, it's prime plus 2.75 generally speaking.
And it takes anywhere from 35 to 45 days, and there's key things you have to do to be able to apply for an SBA loan. So you have to basically have a signed franchise agreement, you have to create a business plan, or we'll call it a pro forma. And you can pay companies to help you do that, or you can do it on your own.
And certainly, you have to be able to basically work with the franchiser because they're going to kind of help you through the process of getting all that done. And the companies that help you with the SBA financing, the companies that we work with a lot of times, have a higher success rate because they understand the franchise systems.
Nat: Right. Yes, kind of going back to that what I was saying about the franchises being on the registries and all that. Pete, I'm curious. When do you like recommend, or what do you think is the right timing for somebody to kind of start? Say they're kind of working with you, you start with three franchises, maybe they narrow it down to two. Like when do you like to see your guys ideally start talking to some of these lenders?
Pete: Early in the process. So generally, what I do is the other day, I presented a couple of companies that gave them the idea of what the franchise concepts were, introduced through those franchise companies.
And then my first coaching call, I'll actually connect them to the funding companies. Because as they're starting to formulate their thoughts of what franchise they like, I also want to start thinking about okay, if I was going to invest in this franchise, how do I best leverage my capital?
Nat: Yes. I think it's good for people to get that education because whether they're opening up like a molly maid service type business, which is a little bit lower investment.
And you can start it sooner or open up like an orange theory, which is a bigger investment; it might take nine to twelve months to get it open. I think it helps to get all that information about funding early rather than later.
Pete: We're seeing a big trend. I am with service-based franchise concepts; people like them, they're lower investment. Obviously, they can get open faster, you're not looking for real estate.
But the cool thing about a lot of the service-based businesses is you can do the SBA express loan. And SBA express loan there's just less paperwork, and now you can only do a max of 150,000. And the cool thing about SBA express loan is that if the loan is under $120,000, you don't have to do a personal guarantee, which is very cool.
Nat: Not bad. I think my wife would like that.
Pete: Yes, all of our wives like that. Or husbands, right? Doesn't make any difference. But I think the idea is there's many different mechanisms. One of the other ways in which you can finance a business is some franchisors do in-house funding or financing.
Nat: Yes. I've seen that occasionally, which is kind of nice. Obviously, it's a win-win situation for both sides because that's going to be a fast track to getting the locations open.
Pete: Well, they have a little bit more skin; the franchisor has a little bit more skin in the game since they're providing the financing. I've seen less of it now; it was when the capital markets were tight in 2009-2010 that was a little bit more prevalent than it is today. But with the SBA and all this other stuff.
Now you can go out there and also do traditional loans, right? A traditional loan, although you don't see that as much with people starting up a franchise, because you have to have experience, generally speaking.
Usually takes a little bit more down, and so it's a harder loan to get until you've established yourself in the industry and with that specific business. But that's another mechanism.
Nat: I always kind of grimace a little bit when somebody I'm working with like, oh yes, I'm going to go down to my neighborhood banker and talk to him about getting this loan to open up a business. I always try to be encouraging to some extent because I understand so much of life is relationships.
But it seems like definitely the harder path a lot of times versus some of these companies that specialize in franchise funding compared to trying to get your neighborhood banker up to speed on what exactly you're trying to do.
Pete: And I think that's why some of these funding companies that focus just on franchising have a much higher success rate of getting SBA loans approved, is they understand that.
Nat: Yes. And also there's also that concept of compressing time too. Because if you find, identify a franchise you want to do, and you if it takes you 30 days to get your money, and then you can get your door open, that's a lot different than if it takes three months.
I actually saw one guy, he was buying a pretty substantial resale, and he just was set on using his local lender, and it took him almost 12 months to get through that process. There's different options; I always like to try to make it a little faster, even if I have to spend a little more money.
Pete: Yes, absolutely. Compression time is important. One of the other ways you can fund a business is friends of family, right? And there's pros and cons to it, but you can; I've seen parents fund businesses.
I've seen people that they'll go get somebody that's kind of almost a silent investor in their capital, kind of providing capital for the business. Do you see that much?
Nat: I see or hear people talking about that a lot of times early on. I wouldn't say I've seen it successfully come to happen essentially, right? I do think like if you have your wealthy father-in-law that's going to invest. I think it's important to get him involved in the process and on calls with the franchisor.
So you have buy-in on the concept. I love the idea of crowdfunding or sourcing and all that; it just a lot of times, it will again it'll kind of slow down the process. So if you're chomping at the bit, you want to get your business open sooner rather than later, every additional partner that you're going to have is, it's probably going to slow it down fair amount, and they're going to want to have a saying.
If they're writing a big check, they're definitely going to want to, you're going to want to have a say in what's going on here.
Pete: Yes. If they're a good investor, right? So you mentioned a little bit, right? I talked about kind of borrowing money from family or friends and stuff like that, but you mentioned partnerships, right? So that's another way you can fund it, right? If you don't have enough capital, get a partner. But there's pros and cons to having a business partner, isn't there?
Nat: Yes, it's kind of like having a spouse. You're going to be talking to each other a lot and hanging out a lot, so you better make sure you like them quite a bit.
Pete: Yes. I was working with a guy the other day, and he was a partner, there was three partners, and he goes I don't know if I vetted my partner so well. He goes I find myself that I'm doing all the work, and they're getting all the economic gain.
And so he goes, I think I need to get out of this partnership, and I thought yes, you probably. You need to get out of this partnership.
Nat: Sometimes, a hundred percent of a little bit smaller business is better than 50% or 33% of a bigger business.
Pete: Yes. So the good thing is in today's world is we have this roller coaster with the stock market, and we're going to have that, right? If it goes up, it's going to go down. People forget that we had such a wonderful run of 11 years or so. But I think the idea is that if you've got some capital, some liquid capital, there is capital out there today that you can leverage to fund a business.
And there, as we've talked about before, so many different franchise opportunities, and so many different ways to fund it, that you got to take advantage of these. And maybe diversify so that you don't go through that roller coaster of the stock market and be in control of your money.
Nat: Yes, I totally agree with that. It's definitely empowering to feel like you have some options, right? I think options are always empowering.
Pete: Yes. And I was talking to somebody the other day, and he goes Pete, I'm in current transition, I'm living off of my 401k. And I said, well, if you're living off your 401k, why don't you take the time that you're currently looking for jobs.
Why don't you take the time to build a business? So if you're going to be living off that anyway, you might as well be building something so that you're not in this situation again living off of your savings.
Nat: Right. Well, the other thing I think people forget. Like starting a business is hard work, but if you invest three, five years into it. I think, like from my experience with actually my own companies, you're able to develop a nice business, put a nice leadership team in place. And ideally, you could have that business all through until you're in your 80s. It's not like you have to sell it when you're 65.
So what I guess what I'm trying to say is invest the three to five years, build a strong business, and then maybe you're able to kind of drop back and work less. And I don't know whether that's 20 hours a week or five hours a week or whatever. But I think in my old age, that would be kind of sustainable. I think I told you that story of that molly made owner that was on the podcast not too long ago.
And this guy, he's had his molly made for 20 plus years. He's an older gentlemen, in his 70s at this point. He likes going out, and kind of they've got like 15 molly made cars. He likes to kind of keep up on the maintenance, go the office every day, have something to do.
I just think that that's such a beautiful example of guy that poured his lifeblood into the business early on, and now it's kind of like it's on a little bit on maintenance mode. And it gives him purpose and meaning in life.
Pete: Yes, absolutely. I always say set up your retirement right, do something you enjoy, and have a little bit of income. And so I think that's the beauty of franchises, you can do that, you can build and grow it. And I think you always famously say, hey, listen, if you have a job, you're just renting your income.
Nat: Exactly. I like to own my income. When you think about like how much money you'd have to have invested to pull out five or ten thousand dollars in income like that makes a business look even that much more attractive because you can. In my case with my senior care, when I bought that, fifty thousand for the franchise fee, maybe another hundred thousand in working capital.
Grow a million-dollar business that's tossed down a good amount of money. I would have had to have; I don't even know. It would have been millions and millions in order to generate that kind of income off the principal.
Pete: Yes, absolutely.