Episode Transcript
WEBVTT
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It's time for another episode the Franchise
Business Radio Show, broadcasting live for their
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pro business channel studios in Atlanta,
sponsored by franchise intellect. Knowledge of the
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franchise community for franchise selection. More
Info at franchise intellectcom, also made possible
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in part by franchise dot city,
a better way to buy a franchise.
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More Info at franchise dot city and
France serve the world's largest franchise consulting and
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expansion organization. More Info at Grand
Servecom. Now here's your host, certified
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franchise consultant, Pamela Curry. Good
Day, this is Pamela Curry, host
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of Franchise Business Radio, coming to
you live from the pro business channel studios
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in Atlanta. The Franchise Business Radio
Show was put together to have a platform
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to bring business professionals together to connect, educate and collaborate to serve the franchise
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community and those considering franchise ownership.
Today I've asked John Kutchatsky to come back
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and be a guest on the show
because a very important topic for anyone that
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is considering franchise business ownership is the
finances of that business. Understanding what the
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return on investment is what the financial
value to you could possibly be as a
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business owner. So we're going to
be hitting on a lot of very important
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topics to understand and of equal importance, a strong understanding around some of the
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financial jargon that is thrown out there. It's important to understand financial terms jargon
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as a business owner, but also
as someone who's considering franchise ownership, because
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the franchise or is going to be
sharing a lot of different financial data with
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you and you want to understand how
to interpret that data and will help to
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understand those financial terms. So,
with that being said, I'd like to
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go ahead and introduce our guests,
John Could Trotchki, also known as John
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Q. Welcome back, John,
very good to be here. How's everybody
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doing? Excellent. Thank you.
John is a CPA that works with restaurants,
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franchise ors and franchise's. The crown
jewel of his services is complete and
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to end outsourced book keeping, accounting, taxes, offering CFO level financial management.
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He is an affordable and effective solution
for busy and expansion minded business owners.
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John Q is always willing to adjust
his services to the meet the needs
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of his clients. Basically, John
is out there to guide you on making
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solid business decisions based upon good financial
facts and of identifying how to use this
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financial data to better manage your business. Well, hearing that, I know,
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I know why I'm so tired of
yes, it's exhausting. Right,
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John, I'd like to just got
to start off as a really basic terms.
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Well, what was some of US
might consider basic. They all kind
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of sound alike and that's why I
can get a bit confusing. Look kind
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of kick it off when we think
about gross revenue versus gross net. What
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are we talking about there? But
gross revenue is total sales, you know,
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the total amount of money you bring
in. That in the house.
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Net profit is how much you're allowed
to keep, or how much is left
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to be kept at the end of
the day after paying all your bills and
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your expenses. Okay, and an
another fancy, fancy acronym that is frequently
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put out there is Zeba. Right, Evida is very simple. Its earnings
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before interest, taxes, depreciation and
amortization. That's a very important tool because
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it analyzes how much income you're getting
from the business without counting the acquisition cost.
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So it's sort of a normalized year
cash flow. And let me say
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about total sales and net profit.
Is An important thing to understand when you're
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dealing with franchises, because the franchise
ors, they set their royalties based on
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your total sales, so they get
paid off of the top line and then
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the business owner gets to keep in
profit off of the bottom line number,
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which is that, which is the
net income number or the cash phone number.
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Makes Sense, and that's an important
point for anyone that's selecting a franchise
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and trying to build out that performa
right. Yeah, that that's correct and
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we want to make sure that that
well your franchise. Or maybe encouraging to
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spend money on advertising, spend money
on doing this and promotions and and and
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the like. You you have to
kind of evaluate in that term of how
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it affects your bottom line. All
right, spending two dollars to get one
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dollar on the bottom line doesn't make
sense for you, but it might make
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your total sales look better. I
follow you. And and so is there
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they, I guess? Is there
a difference between a bit of versus net
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profit? Well, like I said, net profit is what you make after
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all the expenses are considered. Abada
is just the profit on the operating part
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or the operating segment of the business. That doesn't count taxes, interest and
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depreciation, which are sort of acquisition
costs that are spread out. So a
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franchise or will frequently tell a perspective
franchise if if they have it, you
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know, disclosed in the FDD,
obviously they have to see treated their franchise
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is disclosure document. But they said, well, you should be able to
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break even in five to six months. Generally that's what we see. What
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what are they saying exactly there?
Well, what what they they are implying
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is that there's a sixmonth ramp up
to proper profitability and you can expect that
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you will be able to take no
money out of the business in the first
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six months while you're getting your sales
volume up to what it needs to be.
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Of course that's also tainted by how
hard you work and a lot of
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other factors such as location and things
like that, and I think that's the
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reason they call it a franchise opportunity, not a franchise guarantee. Right,
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absolutely well, said they had no
guarantees and there are a lot of variables
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that that right can create that what
we call performance gap within a franchise system.
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So I know that you know the
franchising crosses ever so many different industries.
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You know most of us think of
food related concepts on do you work
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with a lot of restaurants, but
you know there are service face business that
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a retail based businesses, there are
office space businesses, and you know those
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different businesses have different levels of overhead, different expenditures, different cost I know
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it'd be difficult to give exact percentages
because there are a lot of variables when
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you think about what your return on
investment could be, but could you just
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talk to us a little bit about, you know, what you've seen as
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a CPA that works with a lot
of different small business owners and franchise's across
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different industries. You're just some some
general returns and and expectations and I know
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we can't get specific there. Yeah, we can't get specific, but one
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of the first thing to consider is
that we generally think of expenses in terms
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of variable expenses. So if your
your gross is a hundred percent in your
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net is fifteen percent, you've got
eighty five percent. But a lot of
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those expenses are fixed too. So
somebody, you'll may come to me and
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say, you know, my rent
is too high, it's fifteen percent of
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sales and so well, your rents
fine, your sales volume is too low.
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Everything is and you know, I
had somebody come to me once and
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said, well, I spent half
of what I spent last year on advertising
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this year, and I said no, you spent the exact same amount,
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but your volume doubled because your advertising
was more effective this year. So a
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lot of that, you know,
does get skewed that way. And there
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are expenses. You know, in
some service industries almost all the expenses are
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fixed. So once you get above
paying all your all your overhead expenses,
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it's almost a hundred, a hundred
percent profit. You know, like somebody
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that might be a manufacturer's rep or
in the brokerage business or somebody like that
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might you know, they know that
their total expenses for the year are going
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to be a fixed amount so that
that profit increases exponentially once they pass that
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point. That said, in the
restaurant industry, you know, we look
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at ten or fifteen percent bottom line
profit or Abada. You know, I
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was talking to a service industry that
were saying service retail store that was saying
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that they're they're looking at close to
forty percent on the bottom line, obviously
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again triggered by the amount of volume
that they're able to obtain. HMM.
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So you mentioned some fixed costs it. That's just kind of gives some examples
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of fixed costs. Rent. Rent, yes, others. Well, even
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look at when you're talking about a
restaurant. You know you think your Labor
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is variable, but you know you
can't have, for example, your dishwasher
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clock out when there're no dishes to
wash. Write. Your host is is
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going to be there, whether she's
seating one person or nobody or a hundred
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people. So some of those costs
and your maybe your general manager might be
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a my might be on salary rather
than on variable. We would love to
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tell him we're going to pay him
five dollars for every customer that walks in
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the door, but you just can't
do it that way. So those are
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those are fixed costs that have to
be overcome. Your utilities. Your rent
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would be another one. Obviously you
franchise, royalties and advertising. That's variable
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because it's paid on a percentage of
your of your gross sales. Usually and
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some some franchisers to have fixed but
just you're right, that is a general
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terms. Yeah, general terms,
and that's a common formula percentage of gross
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sales for royalties. So when number
one raise our key reas. Why many
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decide to become a business owner is
because they do want to not only make
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a healthy income. That's really I
think of income is more for your corporate
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corporate environment, but they want to
make money. Let's just leave it at
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that. Sure, but there are
different ways that you make money as a
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business owner. It's not your classic
w two any longer. It's what we
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call business owner benefits. And when
we think about business owner benefits, what
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are we talking about there? How
does a franchise business owner receive benefits and
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get those tax advantages? When a
individual, you will, becomes a business
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owner, he instantly kind of morphs
into two people. He is the owner
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that has to be compensated and he's
actually the employee in the business that has
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to be compensated. So he might
have officer salary where he takes out a
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salary and a compensation there and then
he gets paid on the bottom line profit.
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But in reality there are also other
certain advantages that we take maybe on
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the tax side and I like to
divide my tax expenses into three basic categories.
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There's ordinary and necessary rent, utilities, repairs, salaries and wages,
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and those that you know would kind
of easily be understood. Then we have
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what we call the hybrid expenses,
or at least I call it that.
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These are expenses that we all have
as individuals, but because you are self
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employed, you might be able to
deduct some, most or all of them.
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That would be things like your car
expenses, your cell phone, maybe
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your computers, personal computers, your
Internet at home and things of that nature
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that you do have but you also
use partially or mostly in your business.
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And then we have other tax advantage
situations that that call the third category and
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their expenses that come into play simply
because as they are tax deductible. The
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most basic would be putting in a
retirement plan. Retirement plan for a self
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employed guy is basically where you take
money out of one pocket, you put
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in another and you get a tax
break for it. Obviously you can use
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that money till you retire and but
it's a tremendous tax savings that actually does
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not take any money, takes money
out of your out of your operating capital,
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but it's there permanently for you.
And then there there are certain conventions,
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business trips that may have certain pleasure
aspects to it that are also included
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in a business. If you look
for a new business to buy somewhere,
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maybe it's in a prime location,
or you go to a seminar or a
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training course or the annual convention that
your industry has and that might have certain
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taxeductable economic benefits to it. Let
make sense. So they in that third
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bucket is basically expenses that were creating
first helps for the business for the better.
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Yeah, for the better. I
mean they're obviously have to be some
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sort of business benefit to it as
well to make the justification. So we
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think about rideoffs and tax advantages frequently. What someone will hear if they're looking
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at a franchise that has equipment,
and we mentioned restaurants. Your restaurants have
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a lot of equipment. Or if
you were to get into, let's go
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into some other industries. Maybe you
get into some kind of junk lugging type
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franchise. Right, you're picking that, you're picking up chunk. You know
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you've got special equipment there. Trucks, vehicles, maybe water or store damage
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restoration. Again, that's requires specific
equipment. And we hear about the I
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think it's the one hundred and seventy
nine dot org. Talk to us a
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little bit about this equipment right off. What's the value of that? How
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does that work? Essentially, what
you are able to do with a certain
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amount of equipment is treated as an
expanse, rather than depreciate it over over
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its useful life and normal course of
business. We depreciate most equipment over five
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or seven years. With the section
one hundred and seventy nine debduction, we
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can take that all at one time. So let's say, for example,
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your drunk junk calling company, let's
say it buys two trucks that are sixty
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thous each on December thirty one.
We can expense the entire hundred and twenty
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thousand dollars and possibly finance that over
five years. You get a huge tax
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right off this year, but you're
not actually laying out the cash until you
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know the next five years to a
very good way to catch up on your
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cash flow there. HMM. Yeah, it'd so there's a real strategy that
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comes with this. Absolutely the reverse
of that strategy is that as your business
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continues to grow and develop, we're
going to hope that we're in increasingly higher
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tax brackets as as things go on. So it might be more efficient to
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use use deductions in years where your
tax rate is going to be the highest.
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That makes sense absolutely. What about
the franchise fee is is that something
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you're able to write off? Yes, well, that is again supposed to
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be amortized over the term of the
franchise fee. Some, some franchise stores
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break out the franchise fee. They
break out a territory fee. Would a
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territory fee be something that could be
written off like a franchise fee and amortized
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over the term? Well, yeah, and and that can be kind of
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treated as a deposit where you you
buy, you pay for your franchise fee,
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but you also pay the rights to
add additional stores, and so that
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would be amortized over the the opportunity
period again and then as soon as you
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I guess the side you're not going
to do it, you can write it
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off completely at that time. But
we're hoping that you go from one unit
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to five units, two more and
you build your legacy. So we hoping
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that doesn't happen. Yeah, and
you and I've had discussions about this,
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building out that business portfolio out and
how do you leverage that first unit to
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get to that second unit? Talk
to us about that. The development,
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I call it a development matrix,
can be a very, very complex thing
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because it is going to maybe,
on some level, if you are working
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for someone else and you're building this
business on the side, maybe you're going
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to build a model and say,
by the time I have three units up
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and running, I'll be able to
leave my job and work out at full
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time and then get get higher and
higher and then continue to grow. You
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know, there's only one of you. There's only so far you can stretch
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yourself out, and a lot of
that goes to the skills and the abilities
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of the individual. Some people are
very hands on by nature and some people
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know how to set and forget right
so understanding what the working capital requirements are
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and how much easier it is to
obtain financing for your second, third and
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fourth unit is another way to consider
that. Say, once I have proof
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of concept, but oath on the
franchise level and on my individual level,
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then we should be able to bank
and leverage leverage the expansion. You know,
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it's interesting. You and I were
talking earlier. You've got you know,
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there's different types of ownerships. You've
got tractive owner operator, you have
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your semi aps and tea and your
very often you start off having that full
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time job and trying to figure out
that transition strategy. But certain franchise ors
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do require you to be an active
owner operator out at the gates and that
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means that there's going to be some
time before you do hit that break even,
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before you do start cash flowing.
But you, as that new business
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owner, you still need to pay
the bills. Any any advise suggestions on
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how to manage that? I guess
ramp up effort. One of the saddest
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things that I see is somebody that
starts a business, franchise or not,
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that puts every dime into getting the
door opened and business started with the full
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expectation that they are going to be
profitable from the first day, not only
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to meet the obligations of the business
but to live out of. And I
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think those people of the ones that
come in with unrealistic expectations. I would
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say if if you can obtain your
initial financing for the business to to last
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in a period of time that's equal
to what your your franchise disclosure document says.
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You can expect, like you said
earlier, six months and then realize
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that you're going to be negative cash
flow in that business for six months,
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to the tune of Fiftyzero dollars,
and you got to start with that much
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in the bank. Then the whole
other equation is what your personal finances look
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like and say, all right,
if I'm not going to be able to
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draw money out for the first six
months and then after the six months it'll
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slowly ramp up and it'll really be
month eighteen where I'm taking out that salary
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that I know that I need to
survive on. Then you have to have
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that money in reserve in advance.
So having I think the whole thing is
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about planning realistic expectations and understanding what
you think is going to happen. Right,
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and they're kind of two ways you
can ramp up right. You can
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kind of go for a soft opening
and let your reputation gradually grow the business,
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or you can invest a lot in
advertising or marketing to try to get
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a lot of income in more quickly
and then, based on what your product
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or service is will determine which,
which extreme you should go or somewhere in
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the middle. Yeah, great advice. Did the having and you, most
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people usually hear if you're underfunded.
Right, that's one of the greatest reasons
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behind the failure of a business.
So proper planning and understanding not only the
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investment on the business side but your
personal expenses while you're ramping up that business.
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You know what it and it's very
difficult to go in and see a
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guy that has a grand opening and
you go in and you shake his hand
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and he said Hi, I'm account
I can help you increase your level of
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financial salvy. And then they said
no, I'm good, I'm fine,
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I got it, I get it, I understand, and then the next
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time you drive by that street you
see a for rent sign on his front
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door and you know, maybe I
didn't do do a good enough job explaining
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him how how important it is and
how much knowledge that you do need to
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have and what your expectations need to
be. There's a lot of different hats
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do you have to wear as a
business owner. Right and having self awareness
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of what you should be outsource,
seeing right where you should putting your time
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and your energy based upon your skill
set. I think that's a that's a
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big piece of being a solid business
owner. Well, and that, again,
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I think we've talked about it a
lot before. Choosing a franchise that
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is good at what you're bad at
and you're good at what they're bad out
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is a good marriage. So where
your compliment each other. You know,
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if you consider yourself a marketing guy, you don't need it. You don't
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need a franchise necessarily that does all
the marketing for you or has such a
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good reputation that marketing is last.
You know, if you're an operations guy,
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maybe you need somebody that will help
you drive customers in the door,
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because you know once they get there
you're going to take care of them properly.
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So, yeah, that's a valuable
consideration to make before you make a
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franchise decision. Absolutely. What about
once you have made that decision? You
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are now a franchise you're that small
business owner. How do I get myself
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set up? I've got employees,
have got I mean again, there's the
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whole financial the book keeping, and
this is what you do. So can
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you give us some one hundred one
around what kind of infrastructure we need to
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put in place as a business owner
and thinking of it as kind of a
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pie chart, and you say,
well, you know, you can't spend
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money for a fulltime marketing guy.
I see O or a Cemo or CEO
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and a CFO. You know what
we need to do in small businesses by
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pieces of that. So, rather
than by a rather than pay a high
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salary chief marketing officer, maybe you
outsource your marketing or that's what you do
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yourself, or you do your operations
yourself and you let somebody else market.
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What we like to do is we
like to come in and help you on
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the side of your counting, in
your bookkeeping, in your financial management,
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making sure you get those numbers,
but turning those numbers back into tools to
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help you understand your business again with
looking at real percentages, looking at what
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you're doing relative to other people,
looking at what you can be doing and
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understanding what your cash flow requirements are
and having people in those industries or in
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those specializations that can help you get
where you want to be, because very,
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very few people are good at everything
right and it's the people that think
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they're good at everything are the ones
that have that for rent sign out in
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six months, you fear. Very
well said. There's a lot of self
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awareness that that goes along with this. Right it. WHAT'S THE CLICHE?
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It's what you learn after you know
it all that counts, and I love
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it. I love your cliches.
So, John, any I mean,
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any other advice thoughts that you would
give to a future perspective franchise e?
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Well, what? One of the
things we didn't discuss that maybe we need
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to is that each business model has
different sales cycles, and by sales cycles
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I mean some businesses have spikes in
income and they might have dry periods.
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You know, a retail place might
be a lot more consistent, where you
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kind of know what your gross revenue
is going to be every month, and
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then other ones, like service businesses, you know you don't necessarily know who's
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going to be knocking on the door
for for anything at any one given month.
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Now you had talked about and to
change the subject completely, you had
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talked about net income and I want
to talk a little bit about the difference
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between net income and cash flow.
Excellent, obviously we want a business that
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has good net income, that has
a good profit, but we always want
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to make sure that the cash is
there too. There are certain businesses where
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you might be get get paid on
a very delayed basis. So, yeah,
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we made a lot of profit this
month, but we're not getting paid
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for that for one month, two
months, three months down the road.
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You're paying your employees every week or
every other week. How are you going
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to survive till that check finally comes
in and how we're going to plan that
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and how were you going to manage
that? And having a bank or financial
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institution of some sort that understands your
situation as that that's going to help you
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get over those humps as a really
good thing. And I've talked to you
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know, subcontractors that don't get paid
until the project is completely finished. It
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might be a year, two years
after the project is done that they're paid
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their retainage or their final their final
installment, and the question is, can
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you survive until that happens? And
we would like to say is sometimes the
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terms of the deal are better than
the profitability of the deal, because you
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you you won't survived till they actually
turn around and cut you year check,
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send you your payment. You happen
to create that financial margin right to be
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able to you know, to,
I guess, survive those dry periods.
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It's really important because that also has
not only a financial impact, but it
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has a an emotional and a mental
and acts, they think can really impact
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your mindset rice a business owner.
That that's so true and it's sometimes,
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you know, I'll be working late
at night in the office and I'll get
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calls from clients and those those say
what are you doing at the office so
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late? And you know what I
tell them as I'm doing the same thing
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you're doing. I'm working on and
managing my business and we are here when
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we need to be here and we're
doing what we need to do and we're
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taking care of a lot of it
can be stressful because if you are a
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small business owner, quite often you
can be between a rock and hard place
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where your supplier might be a big
company and your ultimate comp customer is a
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big company and they have kind of
pinched you in the middle and understanding you
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can't dictate terms on this side and
you can't dictate terms on that side.
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So we do have that potential negative
float that we have to contend with.
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And and and obviously did the bility, the ability to pivot, manage this
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and we both are big believers and
being business owners, we bought, have
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chosen of this path for ourselves and
I obviously help those that want to move
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into franchise business ownership and I but
I always share with them it's not less
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work, it's just different because it's
more rewarding, because you're building something for
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yourself and it's a there's a different
mindset that the goat does go around that,
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but there are also different stresses that
go with it. To know,
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I did have what I asked one
guy once as a why did you decide
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to buy a franchise restaurant? And
he said I was tired of working so
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hard, right, yeah, yeah, he's going to be. He's going
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to be a ninety day wonder.
So, I mean it just kind of
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been closing here, you know,
for those I mean, this is the
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dream, right, this is the
dream to be a business owner, to
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have control of your destiny, if
you're going to work hard, to read
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the rewards of building something. What, what advice would you give to someone
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to help them fulfill that dream,
I mean, because it is the American
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dream. Give me, give me
a second of make up another cliche.
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Well, let's say your dream is
to sail around the world and you don't
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have a road map or you don't
have a chart and you don't have any
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navigation equipment, you know you're probably
not going to make it all the way
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around the world. And what I
want to be as your financial road map
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and I want to chart your financials
and let you know you can get from
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here to here. But this has
to occur and we have to define some
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of these variables. Well said,
planet and you know, don't put head
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get your havocator in place right looks. So, John, if want someone
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wanted to reach out to you to
get your advice, especially as a small
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business owner, putting the needed,
as you you said, putting or taking
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those financial facts, identifying how to
use that data to better manage their business,
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how would they go about contacting you? Um, usually pretty easy to
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find. You know, my office
number is seven, seven hundred, three
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hundred and nine five zero two,
two three. I am at CFO Atlcom.
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On the Internet, I'm in Linkedin. My cell phone number is seven,
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seven hundred six five to seven thousand. So if you're laying awake at
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four o'clock in the morning worried about
your business be sure to call myself.
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Thank you so much, John,
your wealth of information and you know the
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the accounting hat is not an easy
one to wear, financial and accounting,
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so we I appreciate you sharing your
knowledge with our listeners. It's tremendously rewarding
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when we can help people get where
they where they want to go financially and
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their dream does not turn into a
nightmare. Amen to that. Well,
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thanks again and again. For those
that are considering franchise ownership and really trying
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to identify the needed resources to be
effective and selecting that franchise and doing their
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proper due diligence, I would love
to be a resource for you on that
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00:33:30.869 --> 00:33:36.109
level. As a franchise consultant,
I do help bring into scope what's important
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to you in a business, help
align you with the right franchise and,
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00:33:39.230 --> 00:33:42.900
of course, provide you with tools
to help you be effective in doing your
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due diligence. Very, very,
very important. How everybody on your side
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00:33:47.259 --> 00:33:52.740
pick it. Helping you make the
right choices with the right information. Yeah,
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goal is to make an educated and
informed decision. Thanks again to our
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listeners and our sponsors. This is
Pamela Curry, host of franchise business radio.
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00:34:01.569 --> 00:34:05.450
If you need to reach me,
I can be contacted at eight four
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00:34:05.609 --> 00:34:10.159
seven nine seven zero, eight hundred
and seven six five. Signing off,
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00:34:14.800 --> 00:34:17.039
thank you again for joining Pamela Curry
and her guest for the Franchise Business Radio
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00:34:17.079 --> 00:34:22.000
Show sponsored by franchise intellect. Knowledge
of the franchise community for franchise selection.
395
00:34:22.320 --> 00:34:28.670
More Info at franchise intellectcom, also
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396
00:34:28.829 --> 00:34:31.269
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397
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