Joe Barbat – CEO of Wireless Toyz

Know the Price Tag of Your Franchise

The first question a franchise candidate must ask is “how much does it cost?” The answer is almost always more than you think.  Often new franchisees get in trouble if they don’t have enough money to get off to a running start. We call that “undercapitalization.”

“Undercapitalization” – a big word that means “not enough money is put into the business” – is one of the main reasons that business start-ups and new franchisees fail.  You must have adequate funds to get started and keep the business going through the first year.  This is in addition to having enough money to keep your household running.

How do you know how much you need?  Most franchisors spell out all the initial expenses in the Franchise Disclosure Document:

• Franchise Fee
• Expenses During Training
• Lease (deposit and monthly costs)
• Build-out of location
• Signage
• Inventory
• Furniture, Fixtures, Equipment & Supplies
• Utility deposits
• Business licenses and insurance
• Training costs
• Technology
• Staffing
• Grand Opening & Other Marketing Expenses

You must also calculate ongoing expenses and marketing costs if you want a viable business.  Make sure the math works.  You can work hard and follow your passion, but if the math doesn’t work, neither does the business. T hose are just the business expenses. You can’t live on passion alone, so calculate your living expenses too.  When buying a franchise business, I recommend having one year of living expenses in reserve as it can take up to that long before the owner can take a salary from the business.  Use a budget worksheet, or online budget calculator to help you determine the amount you’ll need for living expenses.

It Takes Money to Get Money

In the “good old days” before 2009, bank loans were easy to come by.  Post- recession, there is no guarantee of readily available business start-up loans. Lenders are wary of taking a chance on a business start-up. Chances improve if your franchisor is on the SBA Registry.

Why Franchisees Fail

It seems contradictory, but to get the loan, you need to be able to show that you have assets to cover the loan. Banks are businesses too. They’re not going to just give you the money — they want it repaid, with interest.  For this reason, franchisors ask for a lot of personal financial information.  This serves to both qualify you as a serious candidate and protect you by making sure that you have the resources to cover the necessary expenses required to succeed.

Be prepared, and know what qualifies as acceptable assets.  Some examples include:

• Cash on hand
• Savings
• Home or other owned real estate equity (value minus liabilities). See note.
• Investments (stocks, bonds, , IRA & 401K)
• Life insurance cash value (not the same as the death benefit)
• Outstanding loans owed to you

Note: When calculating equity, lenders allow just 80% of the appraised property value.

Also, if your state has a Homestead Act, the bank may not accept a primary residence as collateral on a business loan.  At this point, you may be asking yourself, “Why is this business that I am creating not listed above as part of the assets?” Simply put, the bank can’t finance a business that doesn’t yet exist.  The bank is only moderately interested in the ability of the business to repay the loan. While the bank secures the assets of the business, it does not rely on the liquidation value of the business to repay the loan if the business fails.

The bank makes a loan based on your credit history and personal assets. They must determine your ability to repay the loan. They are making sure that there is enough in assets that can be liquidated to recover the loan.

Also consider your liabilities, for example:

• Home mortgage balance
• Credit card debt
• Outstanding loans you owe
• Accounts payable from a current business that you may own

Any monthly obligations must be calculated into your expenses to determine your ability to pay on the loan.

Making Ends Meet

Now that you have a clearer picture of what it costs and how much you have to spend, you can compare your resources to the franchisors requirements.

Be sure to consider all the start-up costs, not just the franchise fee. Discuss with your family, too, the financial implications of buying and owning a franchise.

What if a franchise is a great fit but your financial situation does not meet the franchisor’s requirements?  Don’t despair.  First, know the exact size of the gap.  Then you have several options:

• Look for potential partners.
• Create an aggressive savings plan to fill in where there are financial gaps.
• Consider working for a franchisor’s corporate unit until you are ready.
• Ask the franchisor or the Small Business Administration (SBA) for advice.
• Research creative financing.

Given the complicated nature of financing a franchise business for sale, be prepared for the financing to take longer than expected to come through. That’s par for the course whether you take a loan or take on partners.

You may be able to reduce the time required to secure a bank loan if the franchisor is on the SBA registry. Franchisors on the registry have gone through a “prequalification” process so that each individual bank does not have to review the franchisor in order to qualify the franchisee for an SBA loan. There are certain requirements a franchisor must meet to be approved by the SBA. The registry ensures that the franchise brand has complied with these requirements.

Show Me the Money

Franchisors ask for a lot of personal financial information. Why? They want you to succeed.

Therefore, they are going to inquire about your personal financial resources. Some will ask for proof in the form of bank statements, brokerage account statements, commitment letter from a lender, or letters from family members or investors agreeing to assist with the financing required.

Keep in mind that it is just information and not a judgment about you personally. It is designed to protect you and make sure that you have the resources to cover your expenses.  A franchisor will not award a franchise to someone who does not have enough assets to succeed.

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Joe Barbat and Wireless Toyz were highlighted in an article by SCORE regarding ways that entrepreneurs can grow their business.  Among some of the top ways, SCORE suggests:

#5 – Turn Your Business Into a Franchise

Who wouldn’t love the idea of collecting fees and royalties while fellow entrepreneurs expand your business? Once you get past the startup costs—on average, between $125,000 and $150,000 for moderate initial growth of five to 10 franchises per year-franchising is an efficient way to expand brand awareness while pooling the business acumen, financial resources and buying power of multiple owners.

Don’t expect a motivated franchisee to make up for existing shortfalls, however. “Make sure there’s a market for your product, do your competitive analysis and be sufficiently capitalized,” says Andrew Loewinger, an international franchise attorney with law firm Nixon Peabody LLP in Washington, DC. Otherwise, franchisees can be a prickly bunch to deal with. “You might have franchisees who don’t want to follow the program, who want to break out on their own or don’t want to pay their royalties because they think you’re not delivering value,” Loewinger says. “It can be a challenge.”

Joe Barbat, 29, founder and CEO of Wireless Toyz Ltd., a cellular retailer in Farmington Hills, Michigan, keeps in touch with franchisees through store visits and a company-wide intranet detailing new cellular plans and promotions.  These contacts remind franchisees that the company is always there to help, says Barbat. It also helps the company, which brought in over $50 million in revenue last year, maintain sales and service standards.

About Score

SCORE, mentors to America’s small business, is a nonprofit association dedicated to educating entrepreneurs and helping small business start, grow and succeed nationwide. SCORE is a resource partner with the U.S. Small Business Administration (SBA).

SCORE is headquartered in Herndon, VA and Washington, DC and has 364 chapters throughout the United States and its territories, with over 13,000 volunteers nationwide. Both working and retired executives and business owners donate time and expertise as business mentors. SCORE was founded in 1964.  Content courtesy of S.C.O.R.E.

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Joe Barbat owes much of his success to Blockbuster’s national expansion.  Barbat was working at one of his father’s seven video stores when the big chain rolled into his small Michigan town.

“Within 30 days, we felt the pain that comes when a national retailer comes into town,” said Barbat said. “It really impacted us.  I had to quickly figure out a way that we could differentiate ourselves in the market.”

The year was 1995 and pagers and beepers were becoming a hot commodity.

“I had just bought a paging device and found it really fascinating,” Barbat said. “So I decided to buy some and put them up for sale in the store. A week later, we ran out of inventory.”

Under his direction, the video store where Barbat worked evolved into a mobile-communications destination under the new banner of Wireless Toyz.  More stores followed.  As cellular services expanded, Barbat helped pioneer the concept of offering wireless communications from multiple carriers both national and regional providers, under one roof.  Today, it offers one-stop shopping not only for cellular-phone service, equipment and accessories, but also for satellite TV and radio offerings.

“We are committed to connecting customers through any and every wireless device,” Barbat said. “If they can hold it in their hand, clip it on their ear or watch it on screen, Wireless Toyz is the place to purchase it.”

More than just selling high-tech devices, Wireless Toyz goes the extra mile in making sure customers understand how to use them.

“Customer service is our specialty,” Barbat said. “We teach shoppers how to use the products and check in with them on a monthly basis.”

Wireless Toyz began franchising in 2001, and in 2002, started expanding outside its Michigan home base.  It’s been growing at a steady clip ever since and the company still has plenty of expansion potential.

“We want to be a strong brand in the consumer’s mind,” he added, “so that when they think of cell phones, they think Wireless Toyz instead of, for example, Sprint or Verizon.  Because Wireless Toyz is where they can get those carriers.”

So what type of phone fits his lifestyle?

“A BlackBerry Pearl,” Barbat said. “It’s one of the best and most sleek tools out there. It has all I need.”

Although his BlackBerry makes work that much more accessible, Barbat said he’s learning how to shut it off.

“My wife is helping me with that,” he said, adding that he has two young daughters at home. “If you don’t have balance in your life, you won’t be as productive.”

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