IncQuery: Paths to Glory
What it takes to go national, to get a read on your company's market value, and to find key executives.
How do you build a nationwide organization when you don't have enough capital to finance the expansion on your own? This month we hear about the challenges of launching a franchise operation, the first steps you can take to determine what your business is worth, and the process for finding senior executives.
What About Franchising?
My partners and I have done extensive research and developed a comprehensive business plan for a new type of superstore. There are businesses that do what we have in mind, but they're all local. None of them has a national or even a regional presence.
Our goal is to have one of these stores in every state within the next 10 years. Unfortunately, our capital is limited, and the lenders we've approached don't believe our goal is realistic. Franchising might be a good alternative, but we don't know enough about it. Can you give us an idea of the pros and cons? As a franchisor, what are the first steps you should take to get people interested in investing? --George
You'll get a range of opinions on franchising, depending on whom you talk to. "I would advise you to look at franchising only as a last resort," says Gordon Roddick, cofounder and former cochairman of the Body Shop International chain of health and beauty shops, which has both franchised and company-owned stores in the United States and many other countries. "Franchising is difficult in the USA, for a variety of reasons. First, there are the disclosure requirements. You have to reveal almost as much information in the Uniform Franchise Offering Circular as you would have to disclose if you were going public, and the circular has to be updated regularly. So your competitors have free, unrestricted access to very sensitive information that they can use against you.
"In addition, franchising makes it far more difficult to sell a company. And if your franchisees start acting unreasonably, you'll quickly discover that there are many regulations protecting them and relatively few protecting you.
"I would think about joint-venturing instead, which would give you a piece of the action in any new store without the headaches of franchising. You could negotiate a percentage based on the model and then perhaps allow the operators to earn additional equity based on the performance of the store."
Dan Bishop, founder and CEO of the Maids International, has no such reservations about franchising. "I haven't found the rules to be burdensome at all," says Bishop, who owns two nonfranchise companies in addition to the Maids, which is mostly a franchise operation. "Still, if your concept is good, there's nothing better than owning all the stores yourself. I've also seen people do well with partnerships and joint ventures.
"But before you decide how to handle the expansion, you need to get a few of these stores up and running. Anybody is going to ask, 'How do you know your idea works?' People will want to see something that's successful. You have to be able to show them at least one operating unit, and probably more than one.
"And there are some questions you really need to address. You say, for example, your goal is to have one store in every state in 10 years. Have you done the demographic studies to support that plan? Does it really make sense to have the same number in Wyoming as in California? I've seen many franchisors get into trouble by selling the wrong territories in the early stages because they need to raise money.
"You also have distribution to think about. How are you going to supply stores all over the country? That's a crucial issue. If I'm going to be one of 10 franchisees, I want to know in advance that you can manage multiple locations, which means, at the very least, keeping us all supplied.
"The point is that whether you franchise or take some other route, you have business and moral obligations to the people you bring in. You're going to tell them your system is great and they can do well with it. You can't expect them to accept that on faith. You have to back it up with an operating history."
What's It Worth?
After 15 years my husband and I are thinking about selling our company, but we're finding the process very confusing. We've been told that we could get more money if we agreed to stay on, but both of us would like to work less. In addition, there seems to be little agreement on how to value a company. Ours grows about 12% a year. Our customer-retention rate is 90%. We have no debt and good cash flow -- our customers pay us when we make a sale. How can we determine the business's value? --Sarah
You're not alone, Sarah. A lot of people are thinking about selling their businesses -- and feeling a little overwhelmed by the process. (See this month's Street Smarts, as well as Jill Andresky Fraser's "Business for Sale Roundup.") But valuation is not as complicated or as mysterious as some people make it seem.
"Basically, it's all about cash," says Sam Kaplan, president of Central Chase Associates, in New York City, who has bought and sold dozens of companies, both on his own and with partners. "You need to sit down and figure out as accurately as you can the net cash flow from the business during the next 10 years, and you should take it year by year. In other words, you should estimate the amount of cash you'll have left over each year after paying all of your expenses, excluding your salaries and any dividends you take out.
"Then you should go to an accounting firm and have someone there run the numbers through what's known as a present-value software program. One popular program is called TValue, but there are others. The program will tell you how much the cash generated in each of the next 10 years is worth today.
"You can then look at your options. If you sell the business today, you should be able to get a price somewhere in the vicinity of the present value of the cumulative net cash flows for the next 10 years. Then again, you could decide to keep working for, say, 3 years and build up the profits. If you're successful, you could probably get a higher price at that point, based on the cumulative net cash flows for the 10 years after that.
"As for sticking around after you've sold the company, that's a different issue. Some buyers will insist on it, while others may prefer that you leave. It all depends on the circumstances. But I'd start by looking at the future cash flows, which will give you some idea of what the business is worth."
Where Do I Find Top Talent?
I was interested to read your story about " The Downsizer's Dilemma" (IncQuery, December 2001), but I have a question. Where can we find all of the good talent that's being laid off or that's looking for other opportunities as companies tighten up their spending? Our three-year-old company is growing rapidly, and we have been trying, desperately at times, to find people at the level of chief operating officer and chief financial officer. Where are they? --Brian
"You're talking about very expensive talent," says Martin Babinec, founder and CEO of TriNet Inc., a five-time Inc 500 company, who has worked with hundreds of emerging growth companies by providing online and in-person human-resource services. "COOs and CFOs are professionals who help drive the strategy of a company. Yes, there are more of them available now than, say, two years ago, but if they have the right credentials, they're in great demand regardless of the state of the economy.
"As for finding them, your best bet is to work through your existing network. If you have financial backers, talk to them. Venture capitalists and other funding sources typically play a big role in recruiting C-level people for emerging growth companies. In addition, you should be speaking with your professional-service providers, like your attorney, your auditor, and so on.
"First, however, you need to know what kind of person you're looking for, and you have to be able to articulate why someone on that level would want to work for your company. A good executive recruiter can help you sort through those issues and line up your expectations with those of the executives you want to hire."
HAVING TROUBLE SLEEPING LATELY?
Could you use some advice from an experienced entrepreneur who's been where you are and figured out what works and what doesn't? Send your questions to IncQuery@inc.com. Editor at large Bo Burlingham, aided and abetted by Street Smarts columnist Norm Brodsky, will find the best people around to answer them. And if you don't like their answers -- well, you can tell us that, too.
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