Acquisition of a Franchise/Business: Most Important Items to Review

Introduction

Steve: Hi, everybody. This is Steve Maggi. Welcome to Building your Bridge, where we talk to experts and professionals that work with international investors and international entrepreneurs that want to come to the U.S., and it’s my honor to have as my guest, Patrick Findaro, one of the founders of Visa Franchise. Thanks for coming on, Patrick. We’ve known each other for a while, so it’s nice to finally do this.

Patrick: Exactly. We’ve been hanging out for some time now. Thanks a lot, Steve.

Steve: Absolutely. So, tell us a little bit about Visa Franchise and also some of the brokerage work that you’re doing.

Visa Franchise and brokerage work

Patrick: Sure. So, a little bit about Visa Franchise. We started the firm back in 2015. I started it with my brother Jack Findaro. My background before that I was working at JP Morgan, then I worked at a fund that would lend money to franchisees. And my brother Jack worked for the parent company of Burger King, Restaurant Brands International. So, I kind of discovered the E-2 visa through some prospective clients as the fund I was working at was involved with the EB-5 investor visa program which you know more than me was $500k, now it’s $900,000. And I met a lot of Argentines and dual nationals from Brazil that had other passports back in 2014 that were asking about the E-2 visa.

So, we got like 50 of these inquiries, even friends of friends that were asking about help for the E-2 visa and given our background in franchising and knowledge of the franchise space, we thought that franchising made sense for a lot of people that are looking to start a business for the first time, and especially start a business in the United States for the first time. So, with that, the Visa Franchise was born. To date, we’ve had 360 clients engage our services from about 58 different nationalities. And we work with owner-operators, those that are looking to invest, you know, $100,00 to $300,000 and they’re going to work 20 to 50 hours a week.

We also work with high net worth investors that are really relying on us, not just to vet the business model, but also vet the business operator, and they’re going to work less hours than that. And then now we’ve started offering services to those that just want a self-guided approach through our sister company portal vettedbiz.com, where we have 7,000 businesses for sale, franchises. And that’s a good resource for those that don’t want to work necessarily day-to-day with an advisor, and maybe they’ve already owned and operated businesses in the U.S. and they know what they’re looking for.

Steve: Right. We’ve worked together and I’ve done hundreds of E-2 visas and what I’ve realized over the years is that the most important decision you can make is the business you’re using as the vehicle to get your actual visa. Because if your business fails, then you’re going to lose your status and so is your family, and American jobs might be lost. So, what are the most important items to review for a franchise or for an existing business acquisition?

The most important items to review for a franchise

Patrick: Sure. So, I guess, first, on the franchise side, you know, understanding the brand, how long has it been operating for, you know, is it a business that just started a year ago, two years ago or is it a franchise that started 15 years ago and only started franchising 5 years ago because they spent the first 10 years really refining the model and building out some corporate stores? So, understanding the background of the franchise and how they make money.

We want to see franchisors that make money from the royalties, the ongoing sales of all these franchise locations. And if it’s a responsible franchise system, they’re providing a lot of support day-to-day and they might be providing some of the operations. If it’s an education franchise, they might be creating and updating the curriculum. If it’s an accounting or bookkeeping franchise, it might be they’re actually doing the actual work and the franchisees doing more client service and sales. Or if it’s like an insurance franchise, the franchisors negotiate the terms with the different insurance providers and really curate the product that’s offered to the franchisees’ clients, the buyers of insurance.

So, understanding how the franchisor makes money and then talking to franchisees then to understand the unit-level economics. So, franchisors will disclose in the Item 7, the initial costs to start a franchise, including the franchise fee, any build-out furniture fixtures, additional capital for working capital generally for the first three months or so. And then Item 19, 60% of franchises will disclose some sort of financial information on how each location is operating or as an average the median figures. And generally, they look at franchises that have been operating for at least 12 months. And some of them break it down, you know, from franchises that have been operating from 12 months to 24 months, 24 months to 36 months, so you can really see the trend on the sales and potentially the profit, the net profit, and owner compensation if they show that information.

So, those are some of the items to look at on the franchisor side, as well as in the franchise disclosure document and you can see if there’s any ongoing litigation, if any of the executives or owners of the franchise system have ever declared bankruptcy. So, there’s a lot of red flags that at Visa Franchise we’re pretty akin to finding as we’ve reviewed like 7,000 of these FTDs not from a legal standpoint, but more just taking out the data that could be relevant for a prospective investor. And then on the business buying side, really understanding the intention, why are they selling the business?

Steve: I know that officials often will wonder, that’s the red flag that comes up, if this is such a wonderful business and it already exists and it’s profitable, why are they selling it?

Why are they selling it at a reasonable valuation? Knowing why

Patrick: Exactly. So, why are they selling it, and are they selling at a reasonable valuation? So, generally, a business that you’re going to buy for $100,000, $200,000, $300,000, it’s going to sell for two to three times the owner’s compensation. So, if that seller of the business was making $150,000, including salary, healthcare benefits, 401(k) plan, all the different types of benefits that they receive from that company, you might have to pay $300,000 to $450,000. If you see a business for sale online that the owner’s compensation or the net profit’s $150,000 or $200,000 and they’re selling it for $100,000, that’s a huge red flag because if the financials were that good, they should be selling that more of a market price. Obviously, you know, you can find a needle in the haystack, but you’re generally not going to find that online. And those types of deals are usually done between family members and existing business partners and inside relationships…

Steve: I was actually…you just anticipated my follow-up question, which was part of the ethic and the cultural fabric of an immigrant entrepreneur believing in what their family members and friends are doing. Oftentimes, you hear people overseas say, my brother has a great investment possibility or my cousin or my cousin’s friend, and they’re very tight-knit communities and they just take a handshake and they dive into these projects. What are the dangers in doing that? Just some of the explanations that you gave and we’ve been working together and I’ve looked at thousands of these business plans. It’s so complex that even I don’t comprehend all this because this is your base of knowledge. So, an inexperienced or even somewhat experienced business owner overseas will not have the foresight or the ability, the capacity to be able to analyze these things rationally, especially if they go into deals with people that they already know, right?

About ethics and the cultural fabric of an immigrant entrepreneur who believes in what his family and friends do

Patrick: Exactly. And we do get approached, especially from our clients from Latin America, where they want to bring in like their friends as partners and family, and these are small businesses at the end of the day. So, you know, if you’re investing $200k, you’re not going to be making $400,000, you know, in the next year. And if you want to have three business partners and they’re all going to be sustaining their livelihood through that business, you’re going to have to invest substantially more money. So, I think a lot is like expectation setting and if they’re a silent partner, great.

But what we find most common is besides clients coming from like Canada and like Singapore and some of these hyper-competitive markets, capital’s pretty easy to come by in the United States where there’s a small business administration. They lend out billions of dollars and at interest rates of 4.5%, 6%, and it’s relatively easy for Americans with a decent credit score and some capital to put 10% down, 20% down and then get a loan for the rest. So, there’s a lot more competition where, you know, in your native country, Argentina, you’re not getting loans. Maybe from a friend, but a bank, I don’t know what the rates would be with this crazy currency, but not 5% or 6%.

So, there’s a lot of capital in the United States, and you can make a lot of money in the United States, but generally, it’s at scale on having multiple locations, wherein some countries like Argentina, Brazil, Venezuela, even Russia, people might invest in a restaurant and in a year, they get their money back or in a year and a half they get their money back. Maybe it’s higher risk and there’s some currency huge fluctuations, but generally, in the U.S. you know, it’s going to take two and a half to four years to recoup your capital. If it happens in two years or year and a half, that’s amazing, but don’t have your friends tell you that you’re going to be getting your money back so fast.

And different industries like gas stations, logistics, convenience stores, yeah, they’re relatively easy to operate, but they don’t make much money.

It’s relatively easy to operate, so it’s a lot easier for people to do those types of businesses, and that brings a huge influx of operators into the market that maybe kind of do other businesses. And with gas stations, it’s like about a half of gas stations are actually operated by the owner. So, you can’t even have multiple gas stations because there’s not enough profit margin to have a day-to-day manager. Obviously, there is an exception…

Steve: All right. Yeah. The problem I had with gas stations too is you need to create jobs and you need to have a kind of business that can grow in order to continue to create jobs. Otherwise, you also won’t get the visa, right? It’s going to be considered a marginal investment.