Franchise Financing Options (featuring Steve Stovall of BeneTrends)
Amanda: Good morning, afternoon, whatever time of day it is you’re listening. We have a special series of “Franchising with Purpose” coming up this month in June. I’m actually joined by Steve Stovall, the Vice President of Business Development at Benetrends for over 10 years. He is a Philly native, so we’re glad to have him on the phone, and Temple alum. Go, Temple. Right, Steve? How are you? Can you hear me okay?
Steve: I’m doing fine, Amanda. Thank you for having me today. And I have to tell you, I’m very excited. I’m a little nervous, but I’m very excited to just answer some general questions that people always seem to have about business financing. And I’m really looking forward to your questions.
Amanda: Awesome, Steve. Well, thanks for being here. We are also super excited to dive into kind of the more financial side of things. So, just some background for you, we’ve kind of been going through this journey of educating, me primarily actually, and kind of sitting in the seat of our listeners and folks who are potentially interested in looking into franchising and business ownership on all the different things to consider. And, you know, we’ve talked to some existing franchisees about their journey and what was important to them, and talked a lot about kind of the introspection. You know, what does it take to really look in the mirror and say, “I wanna work for myself and business ownership is really the route that I wanna go?” But I’m excited to talk to you today about the financial options that are available because business ownership may be right for you, and you may be really excited to look into franchising, in particular, just again, with the support that’s provided in a franchise business model. But the cash flow is not always what, you know, we would like it to be or that nest egg that we’re sitting on. While it may be one option for some people, isn’t always an option for everybody. So, just kind of wanna talk through, and we’ll kick it off with kind of a general overview of the different options of, you know, cash flow and financing and things that are available to somebody who is interested in looking to purchase a business.
Steve: Sure. And I [inaudible 00:02:44] think that everybody’s probably most common with, and that’s just simple cash. A lot of people find themselves with an overabundance of cash in the bank or in some sort of fund, that they have easy access to, and literally, they have to cash to pay for everything. I would say that, unlike that person, I would probably have to get a small business loan or dip into my 401k or IRA, that’s without tax or penalty. And we have a special program for that. The IRS calls it the ROBS program. We call it the Rainmaker. Some people like to borrow money from their portfolio of non-retirement investments, get a margin loan or something like that. And there are also equipment leases. And there’s even unsecured lines of credit that people have access to if their personal credit is very high. However, I tend not to recommend the unsecured lines of credit, because literally, you’re getting $100,000 and $150,000, across 10 or 15 literal credit cards. And that can be a pretty impressive juggling act if things start to get tight. So, that’s something we…
Amanda: Yeah. I was gonna say, “That sounds tricky, to say the least.”
Steve: Exactly. Exactly. What I try to do is, when a client comes to us, I try to talk with them about what we do. I try to get a verbal idea of what the client’s working with, whether they are very accepting of debt or rather reticent to create that for themselves, and things of that nature. Then I’ll describe the products that we have. Then, I will get a financial assessment from them that lifts all of their liquid assets. And then, I will get a credit report, if possible, as well. The reason I get the credit report is, obviously, so we are able to recommend a small business loan and all other types of financing, and then the financial assessment, so I can look at specific numbers. And like I said, if someone comes to me with a million dollars, I would be remiss if I didn’t tell them that they could use their cash in order to do a project. However, what I really try to do, and at the end of transitions, rather a theme, but I really try to take a little bit from each asset, so that I can put together enough money for the financial injection for a small business loan, perhaps some position in [inaudible 00:06:02] the reasons.
The first reason is, I don’t want to negatively impact anyone’s financials more than I have to. So, I like to leave them with more than enough money for themselves, personally. I also like to leave more than enough money for the business, if it runs into trouble. And obviously, I want them to have enough money to get the equity injection and have some operating capital. But, you know, at the end of the day, I’ve got to deal with these people, and I’ve got to be at peace with myself. So, I really look for as many ways as possible to help someone finance their business. And it gets to a point of, you know, you may know someone has home equity or something like that, and that is a recommendation if they have enough home equity. So, I always promise to leave no stone unturned in order to help someone fund their business.
Amanda: Great information. Let’s talk a little bit about kind of that initial conversation, right? So it sounds like it’s really important to identify a lender or a partner in this process that, Steve, sounds very much along the same lines that they have your best interest at heart, right? You wanna be able to sleep at night knowing that you made the best recommendation for that person as possible. But what questions can we expect to get in that verbal conversation, just kind of figuring out what might be the best option? Is there anything that somebody should bring to that conversation or be prepared to answer that you find most commonly people maybe aren’t prepared for or… Talk to us a little bit through kind of that conversation in determining what the best option might be.
Steve: I will honestly say that the first conversation is really about alleviating the fears that the potential client might have, and also bolstering their confidence that they can actually do what they wanna do. If someone’s coming to me and they wanna buy a Griswold Home Care, I want to talk about how home care is one of the biggest business opportunities in the world, you know, for the past 10 years or so. And I want to tell them that I don’t know of any companies that aren’t very cash flow positive. And I wanna talk about, you know, the number of people that are turning 65 every day, and things like that, and have a very supportive conversation with them. And then, I’ll start talking about what their expectation is for funding the project. And then, I will say, “How did you plan to put that money there?” And some people have already thought about it, and they’ll say, “Oh, I look to get a loan. I wanna use cash. I wanna use my 401k.” And that makes the conversation a little bit easier because they already have an idea of what can be done. For the folks that say, “Well, but that’s why I’m calling you,” well, that’s good too, because I’m probably gonna tell them some things that they didn’t know that they could do. Of course, they know they can use their cash.
Of course, they know they could get a small business loan if their credit’s okay, and they have collateral and everything. But, you know, not everybody, even to this day, not everybody is aware that if you have a 401k from a previous employer, or an IRA, or a pension, or a 403b, or some other qualified retirement plan, that up to 100% of the dollars in that retirement plan to be rolled over without tax or penalty and use to pay the franchise fee, or use to be the equity injection for that loan, or use to be a salary for you as you get a small business loan, or just as additional operating capital or something like that. So, in the basic, I guess, 60-minute conversation, I lay out all of the opportunities that we have. And then I want the client to really engage me and start asking me questions. And one of the first things that I tell them is, “There is nothing that’s out of bounds in this conversation. So, please, ask the silliest, craziest question you can, because the only bad question is the one that you don’t ask.” And you know, I may start them off by asking about what color socks they’re wearing today or something, just to get the conversation going, but to really try to connect with my clients because they really have to trust me, and it’s really about building trust. And that’s another reason that I look exhaustively into financials, so I can find the least expensive way, the least invasive way for them to fund their business or franchise.
Amanda: Absolutely. You know, in previous episodes, we’ve talked about kind of that inner circle and how, you know, the bank or whoever is part of that financing opportunity kind of becomes part of it. So it is important to find somebody who’s supportive of, not just you and business ownership, but the industry who, you know, has an idea of what’s going on and can give you, you know, really good, solid advice, but looks into all those kind of nooks and crannies. And I love what you said about the only silly question is the one that you don’t ask, great, especially when it comes to money and to finances, and the big investment that it is to own a business, right? I don’t wanna sugarcoat things. But ask the questions. We talk a lot about asking your potential franchisor or your brokers or all those people, all the tough questions, and making sure that this really is the right decision for you and the right company and the right industry. But you wanna ask those tough questions of anybody who’s involved on the finance side as well, for sure. So, Steve, you talked a lot about the different options and things to consider, but wanted to get your take on how the type of business or franchise factors into the decision to, you know, go cash versus 401k, or retirement rollovers, and all those kinds of things…not rollovers, but… Because I know, there are some franchises out there that do require you to be part of the business right out of the gate, right? So, it would require leaving whatever full-time job that you’re currently working in, and there are others that don’t require that, so you could continue to earn a paycheck and earn your, you know, income that you’re currently earning while you build your business or your franchise. So, is that something that you talk with folks about or how much does that kind of factor into the decision of where to kind of pull that money altogether from?
Steve: And that’s a great question. And in general, I’ll just say, that when people are buying franchises, you know, you can’t have too much money when you’re buying a franchise, just because you’re doing something new and you really don’t know what’s going to come up. But if you’re buying a new franchise and it’s an active opportunity, meaning, you need to leave your old employer, then that means that, not only do you need money for the business, but you really need money set aside to maintain that lifestyle. And you probably need enough money to maintain it for six months to a year, depending on the franchise that you’re buying. You know, I’ll just backtrack, and say that a lot of research goes into buying a franchise. You’ve got to vet the franchisor. And by vetting them, certainly, you look at the franchisor and you look at the Franchise Disclosure Document, but you have to talk to the franchisees and get as much information out of them as well, and try to understand what kind of cash flow you can expect or [inaudible 00:15:13]. And then start planning accordingly. So, if you are buying an active business, and you set aside your money for your salary and money for the business, and you have some count off that you don’t plan to touch, then that’s one way to buy a business.
If you’re buying a business where you can maintain your given job, that’s a great opportunity for you, especially if you have the personality that you can stand being passively associated with a business. But some businesses are really managed…you manage the manager, and if you get a good manager, then you’re able to operate that business. And while the business may take X amount of dollars, you have cash flow coming in, so you’re able to maintain yourself and you’re able to get a small business loan or something like that, to keep the business going. However, there’s also the instance where people are buying resale or existing operating businesses, and now, we have to take a look at the cash flow of that business, see what kind of debt service can be sustained by the type of business and the cash flow that it has. And after the cash flow as the debt is paid, is there enough money for the incoming buyer to make a living with that business or would they need to move over more money from their 401k or some other source? So, I would say that there are three examples. And each one would have its own special set of circumstances.
But it’s really hard to generalize because when you are building a financing model for someone, believe it or not, this is almost like you are building a child for them or something because they want everything to be just right. And then when you get to the bank, and you go to closing, and you remember that there’s one document that didn’t get done, and you’ve got to rush that through or there’s something with a rollover, and the state’s taking 8 days instead of 5, to incorporate, or you’re doing a margin loan and the stock market goes down, you know, 10,000 points the day before, there’s always something that will keep you on your toes, and you have to be responsive and reactive, and anticipatory, and almost clairvoyant in some situations. So, I would love to say that there are, you know, specific things beyond just the gathering of information that I can do or that people can do. But I will just say, in general, to ensure that you ask every question, that you prepare for just about every situation and you have a backup plan, will help you get a new business, that is an active business where you have to leave your job, a passive business where you’re going to remain employed, or you’re buying a resale that is a business that’s already [inaudible 00:19:12]. Being prepared for situations and having a backup plan is always the best way.
Amanda: Isn’t that always the best way, just life advice, in general, right, to have a backup plan, be prepared for things, especially when talking about business ownership?
Steve: Well, I never said that… Right. I think that it’s absolutely good advice. It’s just good advice. Having a backup plan has really saved me and saved some deals more often than not.
Amanda: So, you mentioned… I kind of wanna go back and revisit the fact that, you know, there’s always something, as much as you… I shouldn’t say always. But as much as you wanna get your ducks in a row, you know, you go to closing, you think it’s a done deal, and then something happens. What’s advice that you would give to somebody in that situation, right? You know, having a backup plan is super important, working with somebody that you trust and that’s gonna help you work through those things. But are there any other things that you would… Any other pieces of advice or wisdom that you would pass along to somebody, should they find themself in that situation?
Steve: Well, I think you hit the nail on the head. Finding a company that has values that are like yours, and there’s just a lot of similarities between an individual and the finance company, the franchise company that they work with, just makes things go so much easier. And anytime that you can get a list of what needs to happen in order for a deal to get done, whether it’s a new franchise, small business loans, an existing franchise, a rollover, a portfolio loan, whatever it might be, if you get a list of everything that needs to happen, and you are independently able to check off, write down the list everything that needs to happen, and it doesn’t happen, two things that you can do is, you can go to the list and say, “Well, that was already done.” And if you’ve maintained a copy of whatever that is that was not done, then you can go to your computer, and send a copy of that file. So make lists and keep copies of everything until the deal is closed. And I think that the lender, the 401k provider, the franchisor, the business that you’re buying, whatever the case may be, I think that, first, people will laud your professionalism and your preparedness, and I think, again, we go back to sleeping well at night. I think that the client will sleep a lot better. So, make sure that you get a list of what’s supposed to happen and keep copies of everything that you send in.
Amanda: That’s great advice. So, to sum it up, you know, in that process, being organized, to be prepared, and work with somebody that you trust. And then, just great life advice, in general, right?
Steve: I couldn’t say it any better myself.
Amanda: Who knew a financing episode would be such a great life advice? All right. So, let’s dive in…
Steve: And I don’t charge any extra for it.