| “In The Spotlight: Financing Tools From Those Who Have Done It” |
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by Dennis L. Monroe |
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from Franchise Times, May 2003 Issue |
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This month's column is the next in our Spotlight series. The purpose of this series is to showcase the different techniques and approaches to business and finance used by successful franchisors and multi-unit operators providing an understanding of what does and does not work.
Steve Overholser, the CFO of Great Clips, is featured this month. In a recent discussion, Steve provided insight into how a franchisor can move ahead with its franchisee finance programs.
The first Great Clips salon opened in 1982 in Minneapolis, Minnesota and offered high quality cuts and perms at reasonable prices. In addition, the customer did not need an appointment. The success of the first salon led to the establishment of other locations, and Great Clips began franchising salons in 1983. The business has seen dramatic growth over the past 20 years. Today Great Clips has over 700 franchisees operating more than 1,800 salons in 90 markets nationwide. In 2002, a new franchisee was approved every 2.1 days, a new salon opened every 1.6 days, and a franchise agreement for a future salon was executed every 2 days. Great Clips' goal is to have over 3,000 salons across North America in the next five years.
Obviously, Great Clips has found an incredible niche. Even with a strong concept, we know fixtures, equipment and working capital required for a hair salon are not easy to finance. The Great Clips franchise finance program began with the original franchisees who were family and neighbors (and their bankers and insurance agents). The initial money used to open the franchisee salons was based on personal net worth with investors using techniques like second home mortgages.
As Great Clips moved into the 1990's with 200 stores, they decided development should be in areas that management knew and had contacts: Minneapolis/St. Paul (which is still a major store location); Des Moines and the vacation spots of Minneapolis/St. Paul residents. This geographic concentration helped Great Clips continue franchising through strong branding and people with significant net worth.
Great Clips did not seek outside capital until two of the founding partners left the company in 1997. At that time, Great Clips put together a consortium of four small business investment companies (SBICs) and raised $15.5 million using preferred stock and subordinate debt with attached warrants. These funds served as the basis for buying out several of the existing shareholders.
Backing up a bit, in 1992, Great Clips tried to do something unique - they put together a master franchise arrangement with an investment group that was given development rights in various states. This master franchisee put together several private placements to raise money for development of 200 stores. In 1999, Great Clips decided to repurchase these assets (franchise agreements and training centers) and cancel the development rights. A second master franchisee still exists with 53 stores on the east coast.
One of the continuing themes for Great Clips is the primary use of individual franchises. On a limited basis, Great Clips provides a franchise that grants the rights to three units, or in smaller markets that have 15 potential unit or less, a market development agreement.
When Steve joined the company in 1995, it was clear Great Clips needed to contact financing sources for the franchise community. While Great Clips had done a great job of getting to 600 units by 1995, they still had not looked beyond the basic individual franchisee net worth approach. Steve and his staff set up a financing arrangement with Textron Financial Corporation for loans between $60,000 and $100,000 per unit. These loans were paid off over a five-year period. The unique factor in this approach with Textron is that there were no credit enhancements or guarantied remarketing agreements from the franchisor. In fact, the remarketing agreement with Textron was nothing more than a "best efforts" approach for a period of 90 days. Great Clips showed Textron that because of the way they clustered franchisee development, there was enough competition in a particular market so other franchisees were willing to take the sites that may be in default with Textron. This arrangement worked well.
Steve then proceeded to contact lenders he thought would be interested in direct loans to franchisees. Some of these lenders were IRH Capital, GE Capital, NCB Capital and CIT Small Business. These lenders have formed the backbone of the Great Clips franchise financing program. Again, Great Clips is not offering enhancements; it is strictly an informal best efforts approach when trying to remarket any units. Great Clips does a wonderful job providing detailed financial data to the lenders showing the backup for their UFOC earnings claims. Great Clips also provides to the lenders direct data from 690 of their 1,880 stores. This data creates a sample for lenders to see how the units are performing.
Great Clips is currently moving ahead with 12% growth each year. About two-thirds of that growth comes from existing franchisees and one-third from new franchisees. Great Clips has utilized the SBA; at present about 200 of the units have been financed through the SBA.
Great Clips has taken a fairly moderate approach to the net worth and liquidity requirements of new franchisees. In 1995, $100,000 net worth and $50,000 in liquidity were required. Today $250,000 net worth and $150,000 in liquidity are required. This is not a stringent standard and thus opens the franchise system up to many potential franchisees.
In addition to sourcing lenders for the franchisees, the franchisor put together a business plan and proforma framework for the franchisee to use when meeting with a lender. (The package is in a standard format used by most lenders.)
What can we learn from Steve Overholser and Great Clips?
1. Create a system that works based on a desirable franchisee profile.
2. Cluster development so other franchisees are willing to take troubled sites.
3. Provide a franchise finance program with key lenders keeping your exposure to a minimum by showing the performance of the stores and a minimal number of store closures.
4. Keep your lenders fully informed. 5. Provide the franchisees with a template and business plan for obtaining financing.
6. Always look for new potential lenders for your franchise community.
Next month's column will summarize new ideas discussed at the Franchise Finance and Development Conference held in Las Vegas in March.
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