How to Grow to 100 Units: Capital Ideas
Operators share how growing chains can gain access to financing.
By Maya Norris, Managing Editor -- Chain Leader, 9/1/2007
Whether it’s to pay down debt, open new units or improve operations, capital is vital for any chain looking to move to the next level. But while established companies have the clout and track record to obtain financing from large lenders, operators of upstart chains have to turn to other sources of funding to develop and grow their companies. Chain Leader spoke to several operators about how they gain access to capital.
Ken Reimer, chairman and CEO, Baker Bros., Dallas
If [franchisees] have pretty good net worth, then I’ve recommended they go to the private bank section of significant banks. That is a section that deals with what they call high-wealth individuals. And high wealth doesn’t mean $50 million or $100 million. It could mean $2 million. It’s a separate department of the bank that deals directly with the individual. They’ll do a loan on a signature basis, meaning that they don’t go through all the traps and all the requirements that the commercial section of the bank does.
David Rutkauskas, founder, president and CEO, Beautiful Brands International, parent company of Camille’s Sidewalk Cafe, Coney Beach and Freshberry, Tulsa, Okla.
We did it all through our business. We never borrowed a penny. We just grew our company. We cash-flowed it. We started selling franchises. And I use the franchise fees to build the staff, build the company. We were so successful that our royalty streams started exceeding our expenses. So all of our franchise fees were like capital. I mean you’re talking millions of dollars in franchise fees for Camille’s alone.
Wayne Lipschitz, CFO, Grill Concepts Inc., parent company of The Grill on the Alley and Daily Grill, Los Angeles
We’re a public company. For us the easiest thing to do is a secondary offering, which is what we just did. That’s how we raised money [$14.1 million] for the next 18 months.
In the past, when we haven’t been able to go out and raise capital, what we’ve done is joint ventures, where we have partners that put up [some of] the money and we manage the restaurants. So we’ve used that as a means of financing.
And the third means of financing is, we’ve done managed locations, where we have partners who pay for the whole location, and we manage it and take a management fee and share in the profits.
Alan Thompson, COO, Off The Grill, Franklin, Tenn.
I was quite lucky because I found some guys that really believed in my company and gave me the autonomy to run it and, at the same time, were willing to invest millions of dollars to see what we could do with it. So my way of raising capital was through equity—selling equity. But finding those guys is a hard thing, because not only do you have to find guys that have the wherewithal to do it, but then they have to believe in your chain. And most importantly, they have to believe in you, or else you’re just selling your company.
Dwayne Northrop, chairman and CEO, Garlic Jim’s Famous Gourmet Pizza, Everett, Wash.
Once we had a few franchises sold and a few stores open in Washington, and we wanted to expand into California…we sold some of our revenue stream in Washington. So if we’re collecting royalties of 5½ percent from all stores in Washington, we then said to an investor, “Here, you can have one-tenth of 1 percent or half of 1 percent of the Washington stores’ royalties in exchange for cash. So you can have that for, say, the 10 years of the first franchise agreement.” As we open stores and we go from 5 stores to 35 stores in Washington, and then the royalties are X amount, it’s a pretty good return on their investment. In that case it gave us the capital to go start franchise sales in California.
Kelly Harris, president and CEO, Times Grill, Jacksonville, Fla.
Instead of trying to secure commercial bank loans, restaurateurs can pursue investor capital by offering investors a convertible loan structure. Under that arrangement, a restaurateur pays a stated rate of interest, and the portion of the loan would be converted into equity for the investor. The incentive for the investor to invest is he or she gets equity in the restaurant.
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Capital Ideas, Part II: Operators share how growing chains can gain access to capital.
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