Raising Money With A One Unit Concept

“Can I raise money when I have only one location?” “Can I start franchising with one location?” These are questions our firm is regularly asked. In the past, our answer to both questions has always been “no”, but we are not as convinced today, especially as to the first question. This article will address these two questions.

Question #1 – Can I raise money when I have only one location?

Assuming the operator and/or owner has exhausted all personal resources and is maxed out on debt, raising money with one location is dependent on three things. (All of these things go into building a story to attract investors.)

Operator track record. The best track record is an owner/operator (i.e., concept owner) who has successfully grown a business before and is succeeding with this new concept. The problematic concept owner is the one who is new at operations but has developed what amounts to a viable concept. The experienced operator has a distinct lead and can gain great traction; while the first time operator has a tough time.

First unit success. The success of the unit should be measured in terms of at least two years. This means that the unit economics must have a positive cash flow that shows a reasonable unit operating profit to sales in the neighborhood of 15% to 20%. Additionally, the sales trends should be positive and there is a growing demand for the concept in different locations. A successful first unit can be an intoxicating incentive for investors who are looking for a homerun and want to get in the game in the early stages of concept. (We saw this scenario years ago with the sale of Del Frisco.)

Who you know. “Who you know” is probably as important as who you are. If you have investor friends, family and key contacts who believe in you (even if you have not done it before) and are willing to sponsor you, this can be your key to success. Very few investors, unless it is your mother, will forego looking at the first two tenets (strong management and unit economics), but investor contacts go a long way. We have seen several cases where a person acquired the development rights for franchise concepts and with little or no track record or stores open, and was able to raise significant funds because of contacts.

As a side note, it seems to be a little easier to raise money in the initial stages if the targeted company is a franchisee unit with development rights for a well-known national concept. It is much more problematic to raise money for a new concept (whether it is franchised or not).

In summary, the key to raising money with only operating one unit is putting together a story that addresses the three items above.

Question #2 – Can I start franchising with one location?

Let’s change approaches and examine whether or not you can franchise with one unit. We would strongly recommend against it. The risks are too great. It is very difficult to convince a rational potential franchisee that you have a viable business and a credible concept worthy of licensing with one unit. With only one unit, the franchisor normally cannot develop the training procedures and duplicate its system. The realistic approach is to have a number of viable sites open in diverse demographic areas.

There is no magic number of units that have to be open to franchise, but the key elements are:

Concept. The concept has to be proved out. The units need to, by and large, be consistently profitable. You must have a clear understanding of what is necessary to make a unit successful.

Testing. Franchising is the best way to leverage a concept, but it is only effective if the concept is mature, has a proven track record and the kinks are worked out. Viability also needs to be tested through different economic times and market conditions.

Replication. Replication is key, all centered around a clear understanding of where and how a franchisee will be successful. The question that must be answered is, “Are the concept and the individual units capable of being “cookie-cuttered?” One unit simply does not provide the critical information to evaluate whether the concept has replication potential.

If you have just one unit, do not franchise. Instead, beg, borrow and be creative to get the second unit open; and hopefully those two units will generate enough cash flow to open a third. After the opening of a fourth, fifth or tenth unit, the business may be ready to attract money and start franchising. Be realistic. One great unit may attract friendly investors, but it will not attract good franchisees. Correlating “one great unit” to a “club,” remember what Groucho Marx said, “Any club that would have me as a member is not a club I want to be a member of.”

Next month – our annual tax planning column (using Uncle Sam for money).

From April 2006 Franchise Times

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Dennis Monroe

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