🍟 11/7/2022 – Lessons From a 9 Unit Halal Guys Owner
Funding A Franchise Portfolio With Paul Tran
Paul is a 9 unit Halal Guys owner who also worked in franchise development.
He raised money from investors to fund his first few stores, and has opened up others since that used profits from existing stores, and debt financing for others.
Below, Paul shares what he’s personally learned as a multi-unit owner, as well as the things he’s seen consulting for other restaurant owners.
I have a client who runs a successful chain of restaurants here in SoCal.
Sorry to get all Voldemort on you, but I can’t speak the brand’s name because they wanted to remain anonymous.
Even though his stores are thriving, and he will continue to build more…the way he designed his fundraising at the beginning has put him in a very disadvantageous position.
In a nutshell – he gave his investors an indefinite ROFR for majority equity.
ROFR stands for Right of First Refusal, for anyone who doesn’t know.
And the “forever” part means that, if he ever wants to open more stores, he always has to ask the original investors if they want to invest first before anyone else, and it’ll always be at the same terms as the original.
If they decide they want to fund it, they get to fund it. Even he can’t put up his own money as a first resort.
If they decide NOT to, then he can fund it; but the ROFR resets again for the next store.
And the next store after that. And so on.
The investors are happy and making passive income – so no wonder they keep exercising the ROFR.
But that’s also the ugly part. My client got the short end of the stick, and doesn’t make much money for all the risks and hard work he put in.
He can’t complain too much – most restaurants don’t make it this far, let alone, multiply; but this is a reminder to all startup founders (and aspiring ones) to design their deals with the long-term in mind.
And be aware that their excitement, short-term thinking, and FOMO can cloud their judgment.
Debt is expensive in the beginning, but cheap later on if you do well.Equity is cheap in the beginning, but expensive later on if you do well.
Most founders don’t want the burden of getting into debt and having to service it. Which is understandable.
But as you grow and have predictable profitability, it’ll make better sense to consider debt financing.
Not only is getting into debt a nasty stigma (one that needs more context, because good debt can change your life), most banks won’t finance new startups – especially restaurants.
So, if you HAVE TO fundraise, limit far-future-reaching terms like unlimited ROFRs or equity if you can.
And be confident in your company, so that you don’t set yourself up to be taken advantage of.
Just like being alone is 10,000 times better than being in a toxic relationship; the same rule applies to courting investors.
Be okay with not taking the deal, and patiently figure out a better way.
Getting funding is a short-term problem. Getting investors is a long-term solution. Act accordingly.
If you’re curious to know how I did it for my stores (I own 9 restaurants for The Halal Guys franchise here in Southern California, and we do about $15 million a year), here it is in a simplified nutshell.
✔️ For the first four stores, we raised $500K each.
✔️ We retained 60% equity, and gave investors 40%.
✔️ We sweetened the deal by giving them a preferred “accelerated payback”.
An “accelerated payback” means that the ROI to the investors would be artificially higher until they made their money back.
In our case, we gave them 80% of the profits – distributed quarterly, when possible – until they recouped 100% of their money.
In retrospect, we could’ve given 70%, so that we had more cash flow and a cushion (there were moments in our business where it was too close for comfort); but all good. It worked out.
After that, the profits would be split, according to our equity – 60% us, 40% them, forever.
✔️ Just like property management companies charge real estate investors to actively manage their properties…we charged the investors a management fee for actively running their stores.
It was at least 5%, and could scale up to 8% if inflation, emergencies, and increased costs required it.
In exchange, they wouldn’t have to worry about day-to-day operations i.e. hiring/firing, marketing, accounting, etc.
✔️ NO ROFRs.
This was a good deal for all, because we:
✔️ Couldn’t get debt financing early on;
✔️ Wanted to alleviate and reward the risk our initial investors took;
✔️ Had incentive to return investor funds ASAP, so that we can get our 60% equity and profits; and
✔️ Hoped that after a few stores were opened – with track record – we’d get better terms (which we did – including the ability to self-fund).
Eventually, we were able to fund one of our own stores – so had no debt whatsoever, and pure profitability; and we were able to get debt financing for another store – so it worked out, perfectly.
Of course, this was a circumstance unique to us, and it wasn’t the most ideal situation (it was for us, at the time), and this is no legal nor financial advice.
But something to think about.
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