I am blogging a series of posts on the Secret Sauce of Franchise Investing based upon an excellent article I read some time ago on what private equity likes to see before investing in a franchise. In this post I am highlighting the sixth ingredient which is good unit economics.

What are good unit economics? One franchise investor I know keeps it really simple. He tells me he always is trying to have each franchise location average net income of at least $100,000. That’s it. To him, that is good unit economics. So if you have 10 locations that net $100,000 on average, you now have $1 million in net income and then so on. But consistency is a key. Many franchisors may have a few high performing locations but have lots of dogs scattered throughout the concept. You need to research carefully whether franchisees are consistently successful on average.

In my experience, achieving that $100,000 net income threshold is challenging for lots of franchises including sandwich shops, ice cream / dessert franchises or perhaps even certain gym opportunities. You really need to choose wisely as Indiana Jones did when searching for the Holy Grail. A great place to look for new franchises that have good unit economics is a web site called Franchise Chatter. Franchise Chatter has a great section on “Franchise Earnings” together with a list of Top Franchises with sales of at least $1 million and another list of franchises with average sales-to-investment of ratio of at least 2:1. These are the metrics used by Franchise Chatter to determine good unit economics. It is interesting to see the successful franchises under these metrics. The Franchise Chatter Top Franchises list often differs from other franchise lists you might see.

Surprisingly, one place I do not rely on much for researching good unit economics is the Franchise 500 published each year by Entrepreneur Magazine.  The list tends to cover the “fastest growing” franchises but in my experience the information presented does not cover the type of unit economics necessary to make a good investment decision. And also based upon my experience, making the Franchise 500 list doesn’t mean all the franchisees in a given concept are successful. In fact, many of those franchises listed in any given year do not have good unit economics for franchisees.

So ultimately, whether you are looking to start a successful franchise, or invest in one as a franchisee, I highly recommend concentrating on good unit economics when examining the franchise opportunity. Don’t just look for the fastest growing concepts.

 

Back in January of this year, I started a series of blog posts regarding the Secret Sauce of Franchising Investing. I wrote the detailed posts on my first four “ingredients” and then Covid hit. I turned my attention to writing on issues impacting Iowa business relating to the government shut down, relief funding and other issues occurring due to the virus.. Then, I hunkered down helping clients through this terrible time period. As a result, I took my longest break from the blog since I started in 2006. But, I am back, and ready to get blogging on issues once again.

I wanted to touch on the “fifth ingredient” of the Secret Sauce for franchise investing which is whether the franchise has reached a critical mass of units. I know a lot of people want to find that new and fresh franchise. Who doesn’t want to get in on the ground floor of McDonald’s or Subway, right? While there can be a great deal of excitement with a new offering, professional investors are usually most comfortable investing in a franchise that has reached a critical mass of units. What is a critical mass of units? I think that number may vary depending upon the offering, but the example in the original private equity article mentioned 50 units as a good barometer for a critical mass.

Why is it important to have a critical mass of units? First it tells investors the franchise has had some reasonable success in attracting franchisees to pay fees and incur the risk of starting a new location. Second, if the locations have been open for some time, it demonstrates a longer-term viability of the concept. Third, the larger the system, the more resources the franchise will have to develop areas for further growth and marketing. And finally, it means the franchise has survived those initial growing pains that all new franchisors are sure to experience.

You may want to ask yourself, why be the guinea pig when you can let someone else take that risk?!

 

 

On Friday, March 27, the President signed into law the Coronavirus Aid, Relief and Economic Security (CARES) Act. The components of the Act that help businesses are a part of a multi-faceted stimulus bill to assist businesses and individuals with the economic challenged caused by the Coronavirus. An excellent overview of the Act has been prepared by the Cline Williams law firm of Omaha, NE. So I would like to express my appreciation for their legal alert I received with the overview.

Some highlights of the CARES Act:

Small Business Assistance

  • SBA Loans obtained under the Act may be used for payroll—including paid sick, medical, or family leave, continuation of health care benefits, interest payments on mortgage obligations, rent, utilities, interest on pre-existing debt obligations and certain other expenses and obligations for the remainder of 2020.
  •  Loans under the Act must be made on or before June 30, 2020.
  • There will be no prepayment penalty on payments made before year end.
  • Loan administrators are to collect little or no fees.
  • Payments owed under loans may be deferred in almost all circumstances for up to 1 year.
  • Loans administered under the Act may qualify for partial or full forgiveness.
  • Maximum loan amount is the lesser of (1) $10 million or (2) 2.5 times the average monthly payroll cost during the year prior to the loan.
  • Generally, qualifying employers must have 500 or less employees and cannot have already received assistance under section 7(b)(2) of the Small Business Act for payroll expenses related to COVID-19; the Act specifically includes self-employed, sole proprietors, and independent contractors
  • Includes Emergency Economic Injury Disaster Loan (“EDIL”) grants up to $10,000 for payroll, sick leave, and other expenses and obligations. For businesses who receive an Emergency EIDL grant and later receive a Section 7(a) loan, the amount of loan forgiveness is reduced by the amount of the Emergency EIDL grant.

Small businesses who wish to apply for these loans can start here or I encourage you to reach out to your existing banker. Eligible entities are those with less than 500 employees, including the following: small businesses, 501(c)(3) nonprofit organizations, veterans organizations, certain tribal business concerns, eligible self-employed individuals, independent contractors, sole proprietorships and businesses in the accommodation and food services industry that have less than 500 employees per physical location.

For the purposes of determining the 500 employee threshold, applicants should include full time, part-time and other basis employees. General SBA affiliations apply except such rules are waived with respect to businesses in the accommodation and food services industry, franchises assigned a franchise identifier code and businesses licensed under Section 301 of the Small Business Investment Act.

Business Tax Assistance

  • Delay of estimated tax payments for corporations to October 15, 2020.
  • Delay all or a portion of payroll taxes until December 31, 2021 or 2022 depending on the circumstances.

Items for Employers

  • The Act amends the Families First Coronavirus Response Act (“FFCRA”) to: (a) expand eligibility for paid leave for certain rehired employees and (b) aid private employers in meeting their paid leave requirements under the FFCRA by providing advances of FFCRA payroll credits. Further instructions and forms are expected from the Department of Labor on the credits.
  • The Act creates a new “employee retention tax credit,” under which eligible employers may receive a refundable payroll tax credit for certain wages paid by employers during the COVID-19 crisis (subject to caps per employee and time restraints). See Section 2301. The tax credit is limited to those employers (a) whose operations were fully or partially suspended because of a governmental order “limiting commerce, travel, or group meetings” due to COVID-19; or (b) whose quarterly gross receipts have declined by more than 50% when compared to the same quarter in the previous year. Employers who receive loans under the Paycheck Protection Program (Section 1102) are not eligible for this credit.
  • The Act creates the Pandemic Unemployment Assistance program, which runs through December 31, 2020 and substantially expands available unemployment benefits for employees who have been laid off or furloughed.

Please also see assistance available through the State of Iowa in my prior posts on this blog.

For assistance I recommend you reach out to your existing banker, tax / accounting adviser or your business attorney.

 

 

The State of Iowa has now created a fund to help Targeted Small Businesses with no employees that have been impacted by the Covid-19 pandemic. The program offers eligible small businesses grants ranging from $5,000-$10,000 to businesses that are single owners with no employees that are also TSB certified, or have an application submitted to the Iowa Economic Development Authority (IEDA) by April 10, 2020 to become TSB certified.

The Iowa Center for Economic Success will review grant applications for eligibility and determine the grant amount by the level of impact including loss in sales revenue and employees.

The following documents are required for upload in the online application:

  • 3-month income statement
  • Revenues – March 2019
  • Revenues – March 2020 to date
  • Balance Sheet (as of application date)
  • Completed Business W-9 Form

Additionally, you must provide:

  • Date of business establishment
  • Description of Economic Impact Loss (loss of sales or revenue)
  • Estimated loss of revenues March 15, 2020 – April 15, 2020
  • Description of how funds will be utilized to maintain operations or reopen after the disaster

How is eligibility determined:

  • Must be experiencing disruption due to the COVID-19 pandemic; and
  • Be a Targeted Small Business or have an application in process by April 10, 2020 to become certified as a Targeted Small business in accordance with Chapter 52 of Iowa Code.; and
  • Be a single owner business with no employees, or a corporation with only one owner and no employees; and
  • Verify that Targeted Small Business income is the primary source of income for the business owner

To be eligible for TSB Certification, businesses must be:

  • Located in the state of Iowa; and
  • Operating for a profit; and
  • Make less than $4 million in gross income, computed as an average of the preceding three fiscal years; and
  • Majority owned (51% or more), operated and managed by a female, individual with minority status, service disabled veteran or individual with a disability

The funds may not be used to pay debts incurred prior to March 17, 2020.

Link for the full press release.

 

Small businesses in Iowa can apply for grants up to $25,000 to assist during the coronavirus pandemic. The money comes from approximately $4 million in disaster money before the legislature postponed its session earlier this month and monies already available through the Iowa Department of Economic Development.

Eligible businesses include those with between 2 and 25 employees prior to March 17, 2020. Those businesses who receive the grant will automatically be granted a sales and withholding tax extension; businesses that don’t receive the grant can also apply for that. Businesses with 50 or fewer employees can also ask for a delay in their unemployment tax payment until July 31.

“This money is simply a stopgap,” Iowa Economic Development Authority Director Debi Durham said. “It is a stopgap basically to keep the doors open because the first thing we’re dealing with is keeping as many people employed as possible.”

Businesses can apply for the grant or tax assistance starting Tuesday morning at iowabusinessrecovery.com. For the grants, businesses must be seeing pandemic-related disruption, and the amount dispersed will depend on factors including loss of sales and employees, according to the governor’s office. The deadline to apply for assistance is noon on March 31, 2020.

Iowa Governor Reynolds announced that first quarter unemployment tax payments that are due April 30th  will be delayed till the end of the 2nd quarter, July 31, 2020.  Eligible employers include those employers with 50 or fewer employees. Eligible employers also must be in good standing with no delinquencies in quarterly payments.

To qualify for the extension, the employer must be current on all quarterly tax payments before the 1st quarter of 2020 regardless of whether or not they are seeking an extension of tax payment. All employers must file Quarterly Employers Contribution and Payroll Report electronically by 4:30 on April 24th to avoid late report filing penalty.

Payments for Q1 would be due when Q2 payments are due, July 31, 2020. No interest or penalties will accrue for delayed payments for the eligible group.  The extension of payment deadline without interest is not a holiday or forgiveness and the taxes will be due July 31, 2020. Employers still need to file their quarterly reports, which contain employee wage data necessary to compute benefit eligibility and amounts to be paid.

For an employer who elects to take advantage of the extension, please contact our Unemployment Insurance Tax division at either 1-888-848-7442 or by sending an email to Q1tax@iwd.iowa.gov.   If an employer would like to request additional time to pay the tax, please contact the Unemployment Insurance Tax Division. IWD recommends sending an email versus a phone call as there is a high call volume during this time that may lead to extended wait times.  Employers must notify IWD of intent to delay payment by Friday, April 24th at 4:30 pm.

Link for the full press release.

Governor Reynolds announced on Saturday, March 21st that the U.S. Small Business Administration (SBA) has issued a disaster declaration for the state of Iowa as of January 31, 2020 and continuing. The declaration allows pandemic-impacted small businesses to apply for low-interest support loans. The declaration comes after Iowa Governor Kim Reynolds submitted a federal funding request via the SBA’s Economic Injury Disaster Loan program.

Link for the full press release concerning the disaster loan declaration.

I saw an excellent article from Eric Engelmann on whether you should accept the disaster loans. Some of the considerations he mentioned include:

  • There could be better options coming such as federal legislation.
  • Collateral and personal guarantees are serious issues.
  • Debt might not be the right answer.
  • The SBA money might take too long to clear.
  • Are there other faster options available? Family, friends, home equity?
  • Banks may not be your friend.

Also, in listening to the Governor’s press conference this weekend she indicated that she will be announcing soon whether companies accepting the disaster loan will still be eligible for federal loans once they become available. She did not immediately know the answer to that question. That is something you will want to know before accepting such a loan.

The Brick Gentry Law Firm is here for you during these challenging times. We have temporarily moved to a virtual, technology-driven, remote work day for many of our attorneys and employees. Working with our IT team we have assured the security of our network and information exchange. We have also asked everyone to temporarily stop in-person office meetings.  While our work routine may have changed, we want to assure you that we are here to assist you and to guide you through all of your legal needs. Our priority of providing timely and professional legal services will not be affected.

Link to our full Brick Gentry P.C. statement regarding Covid-19.

 

Iowa Governor Kim Reynolds has issued a State of Public Health Disaster Emergency. Lots of people have inquired whether the Governor has the power to close certain businesses and other events. This announcement does a good job of outlining the various code sections under which the Governor is supporting her decisions. Some of the highlights:

Pursuant to Iowa Code § 135.144 (3), and in conjunction with the Iowa Department of Public Health, unless otherwise modified by subsequent proclamation or order of the Iowa Department of Public Health, I hereby order that effective Noon today, March 17, 2020, and continuing until 11:59 p.m. on March 31, 2020:

A.   Restaurants and Bars: All Restaurants and Bars are hereby closed to the general public except that to the extent permitted by applicable law, and in accordance with any recommendations of the Iowa Department of Public Health, food and beverages may be sold if such food or beverages are promptly taken from the premises, such as on a carry-out or drive-through basis, or if the food or beverage is delivered to customers off the premises.

B. Fitness Center: All fitness centers, health clubs, health spas, gyms, aquatic centers are hereby closed.

C.   Theaters: All theaters or other performance venues at which live performances or or motion pictures are shown are hereby closed.

D.   Casinos and Gaming Facilities: All casinos and other facilities conducting pari-mutuel wagering or gaming operations are hereby closed.

E. Mass Gathering: Social, community, spiritual, religious, recreational, leisure, and sporting gatherings and events of more than 10 people are hereby prohibited at all locations and venues, including but not limited to parades, festivals, conventions, and fundraisers. Planned large gatherings and events must be canceled or postponed until after termination of this disaster.

F. Senior Citizen Centers and Adult Daycare Facilities:  All facilities that conduct adult day services or other senior citizen centers are hereby closed.

Link to the full statement by Governor Reynolds regarding the State of Public Health Disaster Emergency.

The Iowa Secretary of State sent out a Tweet on March 18, 2020 concerning filings and the closing of its office lobby until March 27, 2020. Fastrack filing procedures are still in process so corporate filings may still be conducted. As I have indicated, I have access to Fastrack filing access so I am able to complete filings as needed.

Link for the full statement from the Iowa Secretary of State regarding the temporary closure.