Tweet

Benefits of Owning Equity in a Franchisor Company

Guest post by: Ken Hollowell

Article Overview: Many private investors are discovering the tremendous benefits of investing in a franchisor company.

Benefits of Owning Equity in a Franchisor Company

If you're not familiar with Profran Consultants, Inc., the firm develops selected businesses into franchisor companies. Ken Hollowell, founder and CEO/President is considered one of the leading franchise consultants in the world. Mr. Hollowell has consulted with thousands of business owners spanning nearly 35 years and developed over 800 different franchise businesses. Some of his clients have included Merry Maids, Dick Clark's American Band Stand Grill, Lizio's Spaghetti Vendors, Bill Johnson's Big Apple Restaurants, No Appointment Family Haircutters, Classy Closets, Acute Pain Clinic, Ringtail Technologies, Giga Backup Solutions and many more. No doubt you already know that franchising is the most successful method of business expansion in these modern times. Over 6,000 businesses in the United States have chosen franchising as their preferred method of development. Franchising has grown as an industry to over $2 trillion which contributes 48% to the gross retail national product. Even in these depressing economic conditions, franchising has experienced an increase of 22% over the past couple of years.

Profran Consultants prepares about one hundred Reg D private placement offerings annually. The majority of the offerings are for no more than $1 million with twenty percent to the investors. Many of these clients are new franchisor companies preparing to launch a franchise systems either regionally or nationally and require the capitalization to market their franchise opportunities. Usually a franchisor company has committed from $150,000 to $250,000 in the development of the franchise system as they prepare to launch but lack the necessary funds to both promote their opportunity and support the network being created. It is not uncommon for a franchisor to have a marketing budget in excess of $50,000 per month to aggressively promote their franchises. Even though each franchisor charges a lump sum initial franchisee fee, the majority of that fee is consumed in marketing and training costs. The growth of the company comes from the royalties and before the royalties can flow, each franchise operation must be opened. It may take 6 to 9 months for the average franchise to open its doors for operations once the franchise agreement is signed.

All clients are consulted in the areas of exit strategies or future expansion with the possibilities of an IPO. When Mr. Hollowell worked with Merry Maids, they concluded they would exit their company with a buy-out. After they had achieved over 300 franchisees in their network, a publicly traded company acquired them for $50 million.

The value of the franchisor company will depend on the recognition of their brand and the number of franchisees in the network that the franchisor is receiving monthly royalty payments from. Each franchise agreement signed is a receivable on paper that could be worth millions of dollars during the term of said agreement to the franchisor. So if a franchisor is receiving 10% royalties from a franchisee on $1 million gross revenues, that amounts to $100,000 annually. All franchise agreements are considered a receivable. With 50 franchisees in the network with the term of the agreement being 20 years, the paper value of the franchisor company could be in excess of $100 million dollars. The selling price would actually be around $40 million. Investors would benefit with an 8 time ROI with 20% equity.

Related Articles
  FRANCHISING PERSPECTIVE
  Qualities to Look for in a Franchisor
  The Ten Golden Rules
  Franchisee checklist - assessing the franchisor
  10 Tips for Selecting the Best Franchise
  What is Brand Equity?
  Which Industries hold most promise in 2009
  WHAT YOU NEED TO KNOW ABOUT BUYING A FRANCHISE
  Buy a Franchise or Get a Job?
  Before you Buy: How to Interview Franchisees to Get the Real Scoop
  What is a Franchise?
  Franchising Is a Better Path to Success than Opening a StandAlone Business
  Evaluating the franchisor
  Make the most of your franchisor's marketing plan
  Franchising your business
  10 Tips for selecting the Best Franchise
  Buying Into a New Franchise System
  Evaluate Complaints Against Franchisors Before Signing The Agreement
  Maintain a good working relationship with your franchisor
  Many Franchisors Prefer Multi-Site Operators These Days

Article Tags: funding your company, ppm, private placement offering, sing capital



Related Forum Posts
Re: Trying to buy own building - For that matter, what is best? Owning your own building, or renting office space?
How to valuate a business - Hi Garth - here is how we did it at Northern Crown Capital when I was helping them raise venture capital for Toronto-based entrepreneurs. Assume the start date is 2003 so 2008 projections are 5 years out: How Northern Crown Capital Valuates a Business 2008 Financial Projections Earnings Before Tax $5,865,000 Tax Rate 42% Taxes $2,463,300 Net Earnings $3,401,700 Amount Seeking to Raise Today $3,500,000 Discounted Value of Future Opportunity, 5 Years Out 2008 P/E Ratio 15 Value of Company in 2008 $51,025,500 Discount Rate Applied 30% Year 2008 $51,025,500 Year 2007 $35,717,850 Year 2006 $25,002,495 Year 2005 $17,501,747 Year 2004 $12,251,223 Value of Company at Investment in 2003 $12,251,223 Less: Investment Amount $3,500,000 Present Value $8,751,223 Discount for Risk & Private Company 40% Less: Discount for Risk & Private Company $3,500,489 Private Company Value $5,250,734 Present Value (What the Owner Keeps) $5,250,734 60.00% Financing (What the Investor Gets) $3,500,000 40.00% Total $8,750,734 100.00% I hope this helps!
Lisa Shepherd Story - Great story! I love the Earn - Learn - Equity - it's very relavent for new entrepreneurs.
Re: Franchise Surveys - Good topic, thanks Agree with John [quote="JohnHenning"]Another good tool to researching a franchise is to speak with their existing franchisees. However, part of banding to to have confidence in your franchise brand so I suggest you may not get the answers you are really looking for. Further to this is reading the documents is one aspect as the Rosy pitch is offered by the Franchisor Let me share a recent pro-bono clients experience where reading and talking led to an underlying problem, a lack of business sense and preparation. A wealthy Singaporean Lady whose family members just wanted jobs, good or bad so their views to her were also slanted in their favor. Unless it is a household name, you prepare and understand the concepts, agreement and operations of the franchise. You are taking on too much risk. Locally, let get a couple of numbers. Best Western Hotel, an international brand sells for RM400,000 (plus $135,000) and they must approve the location to protect their brand. She was about to take care of her family members (for how long was the unknown) and put out RM600,00 ($200,000) to buy a new franchise of 4 restaurants (2 located in Malls and 2 in lessor locations, 2 big and 2 small) Now as a former Real Estate Broker in another life, I rank restaurant location right up there with buying properties. An to shorten this, some highlights Highlights Franchisor was selling his personal band name and reputation, not the Real value of the Restaurant brand Selling 4 locations help diversify the risk with the better ones feeding the less successful locations, real return on investment much lower, perhaps 50% of estimated returns Had client do their own demographics for the proposed locations, sit, watch, and count the crowd, test the food, where the masses were going to eat, etc Franchisee had to pick the menu for each location and of course buy the food at no loss to the Franchisor, so 4 locations, 4 menus, 4 different risks and and result NO SALE
Home Equity to Finance your business - Jen, do you have Home Equity you can leverage? Maybe a relative or close family member can do it for you in return for an interest "balloon payment" at the end of 5 years (the rate would be above what they would get if they invested it in a GIC).


Share this article with your friends. Fund someone's dream.

Leave a comment below or share on the left and you'll help support entrepreneurs in Africa through our partnership with Kiva. Over $50,000 raised and counting - Please keep sharing! Learn more.

Newsletter

Get advice & tips from famous business
owners, new articles by entrepreneur
experts, my latest website updates, &
special sneak peaks at what's to come!

Name:
Email:

Popular Articles

Leader's Success Secret: Celebration

Promoting your company and self with verve

What To Do With a Troublemaker?

Suggestions

Email us your ideas on how to make our
website more valuable! Thank you Sharon
from Toronto Salsa Lessons / Classes for
your suggestions to make the newsletter
look like the website and profile younger
entrepreneurs like Jennifer Lopez.