Franchise Equity Opportunity with My Current Company (1 Viewer)

[Johnny Rock]

Current situation: I've been at current job 19 years at #2 in a privately-held company. We own and operate multiple stores across the US out of our corporate office. I have no company stock although it was "dangled" when I started. Never happened.

We're close to starting a new LLC spinoff company in a different industry with a solid franchise in the food business (we fully know the risks of restaurants). Probably sign on for 4 stores to start then expand. Could grow to 10 or 50 stores. Our main business will cover the back room support. We're at the point of structuring it and it looks like I'll be heading it up from an Operations standpoint if we can agree on a deal.

I want 5% stock in the current parent company so all the goals of shareholders are aligned. He balked strongly. Boss loves his money and can be hi/low on mood swings to say the least. Sometimes the office environment is unworkable. He's low balling IMO with offering 5% of only the new venture for sweat equity. We will be having more discussions.

This will be a big deal in many ways - great opportunity but also a ton of work and professional risk too. Training, opening stores, stress on family, emergencies, extra travel, starting a new company. I've got extensive experience in doing this in the two fields our businesses are in now.

He needs someone he can trust and I believe I'm the one he wants; we're also ready to move on this quickly so there's not much time for delay according to him, which I believe helps with any leverage I may have. Of course he holds the cards but I can say no and I've shown in the initial discussion that I'm not going to commit to this unless it works for me and my family. I see this as "My chance," similar to when you jump to a new job; that's when you get the most.

Other items I'm looking at asking for:

25% raise

Franchisee Training Bonus

New COO title for current company and new venture

What percentage ownership would you be willing to accept? Any and all related input is welcome. In before "Look at me!"

 

[-jb-]

What's your leverage? Are you significantly more qualified than someone else in the company or off the street? If so, I would hold on the 5%

 

[Aquaman]

What does the 5% really represent? He's giving you something for sure but is it -$50,000 or $5,000,000? 5% by itself doesn't mean much.

Are you a profitable 100mm company or a breakeven 10mm company? Does the owner hold 100% of the stock or are there other investors or financing? Assets/Liabilities? Contributed capital? Financing the new business from cash flow of the old or new loan?

 

[Johnny Rock]

Leverage as I see it is:

1) Trust and Track Record. Very, very unlikely to hire off the street to run this. His brother is capable but I don't know if he has the desire at this time and he has a toddler and a newborn. Brother has been deferring to me for the most part. He is the best option if we can't work out a deal.

2) Timing - Let's get this thing going.

3) Willingness to go to a month's training at Franchisor.

4) Anybody with the wherewithal and cajones to take this on in what can be a "difficult" environment to work in will likely want compensation similar as me, so why not let the 20 year loyal employee benefit?

5) There are risk factors to him having someone else do it that I don't believe he'll be willing to entertain.

During initial discussions owner was a bit defensive and it was mildly contentious. He respects my brother who is a CPA and deal maker. I asked him if he would negotiate on my behalf much like an Agent so he can play bad cop. Not sure how the owner will like that but it all needs to be drawn up eventually and structuring it correctly to protect my own interests is warranted and a valid reason to include him. A lawyer to review would be later.

Owner is VERY adamant about no parent company stock. If it's only the Franchise (which would include language to protect against conflicts) what percentage is worth it, but not so much that it's greedy? 20%?

 

[sbonomo]

Wow...20% seems like a lot if he is putting all of the capital into the new venture. How much of your time is going to be spent on the new venture? Are you gettting into a tier 1 concept or one of the smaller one's? Having financed franchise concepts for several cycles be prepared to work a ton without much in the way of compensation until you can get to the 10-15 unit threshold (assuming lower tier concept).

 

[Johnny Rock]

Strong margins. Capital intense (less than $100M PPE) but good cash flow. Let's say for round numbers I'm looking for $1M of value I'm stock in the Parent Company. Forget the 5% for now as I just threw that out there as surely the value is open to debate.

Privately held by one family with one majority owner.

I'd call it a tier one, desirable concept. Financed by the current company. Part of the reason for doing this is we have all the structure in place for payroll, AP, Operations, IT, Management pipeline, etc.

Say each new concept store will cost $300,000 and Cash Flow $100,000-$175,000 after debt for the first few stores. As they fill in I don't know what a 10th store or 50th store would CF. But this could be a very valuable franchise if we continue to grow it hard. In my mind I'm trying to reconcile the $1M number vs what it would take to get $1M of stock value from just the franchise side. For instance, if 10 stores do $100,000 CF each and say they're valued at 3x to 5x CF, 20% equity equates to $600,000 - $1,000,000 in value.

I agree it will be a ton of work which is why I'm prepared to say no to maintain life balance if the price isn't right. One positive of course is that I won't be starving like many start ups as I'll continue with my salary and benefits, etc. from the current company as I will continue with many of my current duties.

Part of why my number appears high is because I see it as somewhat making up for the last 19 years with no equity helping build the business. It's a little insulting to think I will help build another multi-million dollar chain for him without equity. It was a MAJOR mental hurdle for him to consider any equity at all, even in the franchise. So it's a start.

I distinguish between Financial Equity and Sweat Equity. He brings up his Financial Equity quite a bit and rightfully so. But in this case where he will totally rely on me and others to do the labor (again) in the trenches and frankly do the things he doesn't want to do, that makes that function more valuable. I've done this for him already.

Without the sweat equity guys that you can really trust to start, maintain and grow this then the capital is more at risk. Plenty of people throw money at good businesses that fail. I don't believe only the Financial Equity side should prosper.

 

[Abraham]

A million is a lot if equity. Put another way, couldn't he hire someone at 50k per for each of the first 2 0 stores to run each shop and get superior results ?

 

[Aquaman]

What kind of value do you bring to the parent company at this point? I get that you feel you built a lot of it and it wouldn't be what it is today without you...but what is the downside to him in just the parent company if you leave?

It seems to me you might be negotiating a piece of the company for past performance. He may already consider your past performance as "paid off". So let's look at present/future value in both organizations. Not to say you should discount previous contributions but it might give you an idea of his mindset.

 

[mr roboto]

I agree that you have a better chance at the equity in the franchise company. Seems like after 19 years you've lost the opportunity to ask for stock in parent company. Your relationship and role are pretty defined.

If you get equity in franchise startup, would you be willing to sign a guarantee with Franchisor?

 

[Johnny Rock]

What kind of value do you bring to the parent company at this point? I get that you feel you built a lot of it and it wouldn't be what it is today without you...but what is the downside to him in just the parent company if you leave?

It seems to me you might be negotiating a piece of the company for past performance. He may already consider your past performance as "paid off". So let's look at present/future value in both organizations. Not to say you should discount previous contributions but it might give you an idea of his mindset.

Great points. No doubt everybody is replaceable including me. I agree about looking toward future value as justification for equity. Just trying to figure out a percentage that works for us both. Who knows? We could open 4 stores then stop? What's that worth? The reason I asked for equity in the parent co. is because then all company goals are aligned and we're in this together. Having different shareholder percentages when everything is commingled can create problems. Does my mobile phone count against the franchise or parent? Does the parent invoice the franchise for payroll and accts payable services? We have a location at one of our other businesses that might be a good fit for a franchise store so we'd be "renting" from ourselves. There's talk of paying $1 rent. Is the franchise, and thus me, artificially enriched by not having to pay rent and subsequently hurting the shareholders that own the building?

It's not like I'm going to run this whole thing myself. We've both been analyzing all the docs, went to a franchise day, and he'll be final say on many items like location, budget, etc. But I will be the one who will know everything about how the stores will operate. I'll be the one who will be on call all the time to take calls and solve problems and clean up messes and keep it all running while we add store after store.

I bring broad knowledge, multi-store-multi-state remote store operations expertise, opening new locations, closing non-performing locations, hiring/firing, cultivating management and identifying leadership for internal promotions, Loss Prevention and Investigations, operational efficiencies, location identification, Leasing, contracts, negotiating, both big picture vision and handling details too, handle all Insurance, Risk Management, company leadership and ethics example, ability to work with all levels from part-timers to construction to Sales Reps to CEO's, stick-to-it-iveness, check signing, financial statement analysis, 401k Fiduciary, Social Media, spearheaded lots of initiatives such as complete overhaul of website, vendor changes, trusted advisor on major Agreements, etc.

Downside is he doesn't trust almost anyone and I'm a constant he can rely on to make sure everything will be ok. I'm the detail guy where he doesn't have the patience for it. I don't want to overplay my hand but I want to maximize the opportunity because I'm giving up a lot too. While he worships money, I want to stay sane and be happy. If I'm going to give up much of those two things it's got to be worth it.

 

[Aquaman]

You bring up a very good point of expense allocation, and have clarified even though this is a new business in many respects it is not truly independent and that cuts both ways. Have you had that discussion with him? Or does he only see that as a positive for you and reason you should take equity in the new company only? Of course, in a correct equity valuation those items would be considered and impact the value much like an owner paying himself too much/too little. That brings up some other questions. Who would value the equity? Are financials audited? How would this be structured? Full shares, phantom stock?

I apologize for the seemingly endless barrage of questions. But there is a lot to consider.

 

[Johnny Rock]

I agree that you have a better chance at the equity in the franchise company. Seems like after 19 years you've lost the opportunity to ask for stock in parent company. Your relationship and role are pretty defined.

If you get equity in franchise startup, would you be willing to sign a guarantee with Franchisor?

Yes and it's been discussed.

 

[mr roboto]

I have a lot of experience in multi-unit franchising. Just FYI, many times a franchisee or area developer bites off more than they end up developing. Whatever valuation you settle on in your head, aim lowish re:# of outlets. Also, whatever multi unit development you are going to agree to (lets say 5 units in 3 years) just assume that's the most that will happen. Any internal discussion about more in the future is nothing more than a dream.

Every single multi unit candidate and franchisee I've signed has said 'and of course, if the first one or two go well, I'd love to do many more.' They tend to commit to multiple units to grab territory and keep others out.

 

[Johnny Rock]

You bring up a very good point of expense allocation, and have clarified even though this is a new business in many respects it is not truly independent and that cuts both ways. Have you had that discussion with him? Or does he only see that as a positive for you and reason you should take equity in the new company only? Of course, in a correct equity valuation those items would be considered and impact the value much like an owner paying himself too much/too little. That brings up some other questions. Who would value the equity? Are financials audited? How would this be structured? Full shares, phantom stock?

I apologize for the seemingly endless barrage of questions. But there is a lot to consider.

Love the questions as this could be life changing for me. My brother will be very helpful in this regard as he has a lot of expertise in valuing businesses and structuring deals. Financials are audited. Valuing equity, structure, share type and a lot of other things are TBD. See, again that last sentence brings me back to a bit of leverage I perceive. I believe he thought we would just "simply" sign a development agreement, train, find a location, do the build-out and open a store, then more. That's what we did when we started the second company. Although he hinted at ownership I believe he's surprised that I'm pushing for more. It gives me more control in when it happens and slows it down. Now slowing it down isn't something I'm trying to do as it benefits us all to get it moving. But I was very clear that I need this to work for me too as it's such a huge commitment. I told him, if you don't trust me enough then maybe there's someone better to do it. Could he call my bluff and just hire someone or promote someone else or fire me if I don't take the job? Yes. But I see it as unlikely. If it happens or if the situation becomes unworkable due to conflict, I'm prepared to do what I have to do. I'm not desperate and he knows that.

Yes we had the conflict discussion. He said we would put everything on the parent co. but I'm not sure he's thought that through yet. I even brought up the example where I unduly benefit so that shows good faith IMO. My brother had suggested that if it's franchise equity only, that all shareholders should have to agree on franchise expenses and if it's not unanimous, then the default is put it on the parent co.

Very good example about the owner paying himself too much or too little, not that he does. But those are the types of conflicts I warned the owner about that may take the focus off our mutual goals. Heck, even if my salary comes from the parent I don't want to be conflicted about choosing how to spend my time when I will be enriched more on one side. Companies can be torn apart when all aren't working toward the same ends. Much more complicated Agreement if we're not partners in everything. He said that's a non-starter though. My brother may be able to convince him why it's best for the owner too, but if not we'll work on the franchise percentage and other compensation that I listed above.

 

[Johnny Rock]

I have a lot of experience in multi-unit franchising. Just FYI, many times a franchisee or area developer bites off more than they end up developing. Whatever valuation you settle on in your head, aim lowish re:# of outlets. Also, whatever multi unit development you are going to agree to (lets say 5 units in 3 years) just assume that's the most that will happen. Any internal discussion about more in the future is nothing more than a dream.

Every single multi unit candidate and franchisee I've signed has said 'and of course, if the first one or two go well, I'd love to do many more.' They tend to commit to multiple units to grab territory and keep others out.

I'm with you 100%. Let's get one done. I'm not counting my chickens on having 10 or 50 stores, but we don't just want to dabble. We're still pretty young and aggressive. But if we do only 3-5 stores I don't know if it's worth turning my life upside down for a small percentage. Although, 3 stores worth say $900,000 ($100,000 CF x multiple of 3 x 3 stores) = $45,000 in equity and $15,000 in annual distributions @ 5% position if not reinvested. Surely nothing to sneeze at. But at 20% equity and more stores, plus higher valuations that can come from well-run larger operations, the numbers multiply nicely. We've built a 23 store chain and a 16 store chain, both independent (no franchises). Since it's less expensive to put these franchise units up than our big box heavy-real estate locations, maybe I would have a higher upside with a larger percentage of the franchise stores than a small percentage in the parent?

This is going to create problems. All the money goes into one pot right now. He'll want to commingle the cash I think. Not anything illegal. I'm just saying you can take profits from one chain to develop a store in the second chain now because it's one company. How are distributions going to work? If money is pulled from the franchise to fund a new store in chain 2, are there tax implications? We'll see what the CPA's say about various arrangements.

 

[Johnny Rock]

A million is a lot if equity. Put another way, couldn't he hire someone at 50k per for each of the first 2 0 stores to run each shop and get superior results ?

We will have Store Managers already. But what if they quit with no notice? Who will pick up the pieces? Who will open those 2 stores and others? Who will ensure they run properly, watch payroll, food costs, theft and customer service?The franchisor requires at least one owner to train for a month plus at least one other person. So if a Manager quits at least one person knows how to operate the store according to their rules and procedures. That would be me.

 

[Johnny Rock]

Financing the new business from cash flow of the old or new loan?

Probably finance with 1/3 cash from current operations and 2/3 loan to start. He's talked about 100% cash but why not use the banks' money?

 

[Baloney Sandwich]

You are never getting equity in the parent company

 

[Johnny Rock]

You are never getting equity in the parent company

What do you think is fair percentage-wise in the franchise start-up and why?

 

[Baloney Sandwich]

You are never getting equity in the parent company

What do you think is fair percentage-wise in the franchise start-up and why?

I would push for the title and bump in pay, look to get 10% equity on the new company and settle for 7.5%. At the end of the day, while the owner might have a hard time replacing you that works both ways. Where do you think you are going fresh and getting any equity offer?

 

[Chase Stuart]

It sounds like the parent company is an LLC. If that's the case, perhaps giving you profits interests would be a good compromise, since he would still keep the value created to-date but you would get a percentage on a go-forward basis.

 

[Johnny Rock]

You are never getting equity in the parent company

What do you think is fair percentage-wise in the franchise start-up and why?

I would push for the title and bump in pay, look to get 10% equity on the new company and settle for 7.5%. At the end of the day, while the owner might have a hard time replacing you that works both ways. Where do you think you are going fresh and getting any equity offer?

I'm not saying I would get another equity offer if I left as that is very, very doubtful. But I believe I could either start my own business or find employment in my industry or another multi-store operations position. My wife also wants to move to a warmer climate. I don't want to look a gift horse in the mouth but this needs to work for both parties.

 

[Johnny Rock]

It sounds like the parent company is an LLC. If that's the case, perhaps giving you profits interests would be a good compromise, since he would still keep the value created to-date but you would get a percentage on a go-forward basis.

S-Corp. I'll explore creative ideas with my brother too. If you or anyone else has creative solutions or negotiating points, especially if you've seen them work well in practice, that would be great.

 

[sbonomo]

It sounds like the parent company is an LLC. If that's the case, perhaps giving you profits interests would be a good compromise, since he would still keep the value created to-date but you would get a percentage on a go-forward basis.

S-Corp. I'll explore creative ideas with my brother too. If you or anyone else has creative solutions or negotiating points, especially if you've seen them work well in practice, that would be great.

with the s-corp be sure to talk to your bro about the tax consequences of your ownership. You will recieve a K-1 with your tax liability as a proportionate share of ownership. While this will probably be a nice loss in the begining, as you grow this could become a significant tax liability. Why not set up as a c-corp to avoid?

 

[sbonomo]

Strong margins. Capital intense (less than $100M PPE) but good cash flow. Let's say for round numbers I'm looking for $1M of value I'm stock in the Parent Company. Forget the 5% for now as I just threw that out there as surely the value is open to debate.

Privately held by one family with one majority owner.

I'd call it a tier one, desirable concept. Financed by the current company. Part of the reason for doing this is we have all the structure in place for payroll, AP, Operations, IT, Management pipeline, etc.

Say each new concept store will cost $300,000 and Cash Flow $100,000-$175,000 after debt for the first few stores. As they fill in I don't know what a 10th store or 50th store would CF. But this could be a very valuable franchise if we continue to grow it hard. In my mind I'm trying to reconcile the $1M number vs what it would take to get $1M of stock value from just the franchise side. For instance, if 10 stores do $100,000 CF each and say they're valued at 3x to 5x CF, 20% equity equates to $600,000 - $1,000,000 in value.

I agree it will be a ton of work which is why I'm prepared to say no to maintain life balance if the price isn't right. One positive of course is that I won't be starving like many start ups as I'll continue with my salary and benefits, etc. from the current company as I will continue with many of my current duties.

Part of why my number appears high is because I see it as somewhat making up for the last 19 years with no equity helping build the business. It's a little insulting to think I will help build another multi-million dollar chain for him without equity. It was a MAJOR mental hurdle for him to consider any equity at all, even in the franchise. So it's a start.

I distinguish between Financial Equity and Sweat Equity. He brings up his Financial Equity quite a bit and rightfully so. But in this case where he will totally rely on me and others to do the labor (again) in the trenches and frankly do the things he doesn't want to do, that makes that function more valuable. I've done this for him already.

Without the sweat equity guys that you can really trust to start, maintain and grow this then the capital is more at risk. Plenty of people throw money at good businesses that fail. I don't believe only the Financial Equity side should prosper.

I am very curious which concept cost only $300M to start up and is able to cashflow $100M. Outside of Chipotle, i can't think of any.

 

[mr roboto]

Strong margins. Capital intense (less than $100M PPE) but good cash flow. Let's say for round numbers I'm looking for $1M of value I'm stock in the Parent Company. Forget the 5% for now as I just threw that out there as surely the value is open to debate.

Privately held by one family with one majority owner.

I'd call it a tier one, desirable concept. Financed by the current company. Part of the reason for doing this is we have all the structure in place for payroll, AP, Operations, IT, Management pipeline, etc.

Say each new concept store will cost $300,000 and Cash Flow $100,000-$175,000 after debt for the first few stores. As they fill in I don't know what a 10th store or 50th store would CF. But this could be a very valuable franchise if we continue to grow it hard. In my mind I'm trying to reconcile the $1M number vs what it would take to get $1M of stock value from just the franchise side. For instance, if 10 stores do $100,000 CF each and say they're valued at 3x to 5x CF, 20% equity equates to $600,000 - $1,000,000 in value.

I agree it will be a ton of work which is why I'm prepared to say no to maintain life balance if the price isn't right. One positive of course is that I won't be starving like many start ups as I'll continue with my salary and benefits, etc. from the current company as I will continue with many of my current duties.

Part of why my number appears high is because I see it as somewhat making up for the last 19 years with no equity helping build the business. It's a little insulting to think I will help build another multi-million dollar chain for him without equity. It was a MAJOR mental hurdle for him to consider any equity at all, even in the franchise. So it's a start.

I distinguish between Financial Equity and Sweat Equity. He brings up his Financial Equity quite a bit and rightfully so. But in this case where he will totally rely on me and others to do the labor (again) in the trenches and frankly do the things he doesn't want to do, that makes that function more valuable. I've done this for him already.

Without the sweat equity guys that you can really trust to start, maintain and grow this then the capital is more at risk. Plenty of people throw money at good businesses that fail. I don't believe only the Financial Equity side should prosper.

I am very curious which concept cost only $300M to start up and is able to cashflow $100M. Outside of Chipotle, i can't think of any.

I know a couple outside of food.

 

[Johnny Rock]

It sounds like the parent company is an LLC. If that's the case, perhaps giving you profits interests would be a good compromise, since he would still keep the value created to-date but you would get a percentage on a go-forward basis.

S-Corp. I'll explore creative ideas with my brother too. If you or anyone else has creative solutions or negotiating points, especially if you've seen them work well in practice, that would be great.

with the s-corp be sure to talk to your bro about the tax consequences of your ownership. You will recieve a K-1 with your tax liability as a proportionate share of ownership. While this will probably be a nice loss in the begining, as you grow this could become a significant tax liability. Why not set up as a c-corp to avoid?

The parent company pays out distributions to cover the taxes. I'm not sure 100% how the franchise will be set up. Probably LLC but it's not up to me. The owner will do what he thinks is right and I'll try to maximize whatever he wants to do to my advantage.

 

[Johnny Rock]

Strong margins. Capital intense (less than $100M PPE) but good cash flow. Let's say for round numbers I'm looking for $1M of value I'm stock in the Parent Company. Forget the 5% for now as I just threw that out there as surely the value is open to debate.

Privately held by one family with one majority owner.

I'd call it a tier one, desirable concept. Financed by the current company. Part of the reason for doing this is we have all the structure in place for payroll, AP, Operations, IT, Management pipeline, etc.Say each new concept store will cost $300,000 and Cash Flow $100,000-$175,000 after debt for the first few stores. As they fill in I don't know what a 10th store or 50th store would CF. But this could be a very valuable franchise if we continue to grow it hard. In my mind I'm trying to reconcile the $1M number vs what it would take to get $1M of stock value from just the franchise side. For instance, if 10 stores do $100,000 CF each and say they're valued at 3x to 5x CF, 20% equity equates to $600,000 - $1,000,000 in value.

I agree it will be a ton of work which is why I'm prepared to say no to maintain life balance if the price isn't right. One positive of course is that I won't be starving like many start ups as I'll continue with my salary and benefits, etc. from the current company as I will continue with many of my current duties.

Part of why my number appears high is because I see it as somewhat making up for the last 19 years with no equity helping build the business. It's a little insulting to think I will help build another multi-million dollar chain for him without equity. It was a MAJOR mental hurdle for him to consider any equity at all, even in the franchise. So it's a start.

I distinguish between Financial Equity and Sweat Equity. He brings up his Financial Equity quite a bit and rightfully so. But in this case where he will totally rely on me and others to do the labor (again) in the trenches and frankly do the things he doesn't want to do, that makes that function more valuable. I've done this for him already.

Without the sweat equity guys that you can really trust to start, maintain and grow this then the capital is more at risk. Plenty of people throw money at good businesses that fail. I don't believe only the Financial Equity side should prosper.

I am very curious which concept cost only $300M to start up and is able to cashflow $100M. Outside of Chipotle, i can't think of any.

Using round numbers for illustration. A lot depends on the market, size of the space and how much you want to spend on buildout. If you have to gut a space, add 10 tons of A/C, vent hoods, grease traps, ADA bathrooms, multiple building signs and pylon signs obviously it could be a $100,000-$200,000 more.To be clear, when I posted above "less than $100M of PPE" I meant $100,000,000. Should've had an extra M in there.

 

[Grace Under Pressure]

I wouldn't expect any ownership stake unless I was personally investing money. That's the difference between an owner and an employee. An equity stake with no risk? Yes, you'll be working hard. Who doesn't think they work hard? Who doesn't think they're the only one who can do it as well? That has nothing to do with it. Any equity stake in the startup is a generous offer IMO, asking for a stake in the existing company is quite borderline. You may be a great employee, but what have you personally risked?

 

[Johnny Rock]

I wouldn't expect any ownership stake unless I was personally investing money. That's the difference between an owner and an employee. An equity stake with no risk? Yes, you'll be working hard. Who doesn't think they work hard? Who doesn't think they're the only one who can do it as well? That has nothing to do with it. Any equity stake in the startup is a generous offer IMO, asking for a stake in the existing company is quite borderline. You may be a great employee, but what have you personally risked?

That's why I started this thread, to stay grounded and get opinions. I don't believe I'm the only one who can do this but I do believe I'm on a very, very short list of people he "trusts" to do this.

Are you saying I should just take whatever he offers and not negotiate? I've helped him build a mini empire and yes I've been paid to do my job. For all the talks of incentives and other ideas, ultimately I was never allowed to buy in. That's in the past and I'm "paid up," as another poster clarified. Also of note is the owner reneging on a verbal agreement years ago whereby I would earn a cash bonus based on Cash Flow for any developed stores after Store X. When the numbers were in and I asked for the payment, he reneged. That's bush league.

So I'm not really interested in building another chain only for salary and all attendant negotiated benefits. That's my prerogative and when we're done negotiating me and my family will need to make a decision. I am free to go somewhere else if I don't like it and he is free to do what he wants to do. No delusions here.

Up until now I haven't risked enough apparently. But why do startups often offer shares to key employees who help build the business? Not everyone contributes capital. This franchise will not start up without people on the ground. That could be me or someone else.

The risk is the benefit not being worth the effort, added stress, family sacrifices, insane office environment at times and to some extent, opportunity cost. As I mentioned my wife is interested in warmer climes and this pretty much locks in my future for a while.

 

[sbonomo]

Strong margins. Capital intense (less than $100M PPE) but good cash flow. Let's say for round numbers I'm looking for $1M of value I'm stock in the Parent Company. Forget the 5% for now as I just threw that out there as surely the value is open to debate.

Privately held by one family with one majority owner.

I'd call it a tier one, desirable concept. Financed by the current company. Part of the reason for doing this is we have all the structure in place for payroll, AP, Operations, IT, Management pipeline, etc.Say each new concept store will cost $300,000 and Cash Flow $100,000-$175,000 after debt for the first few stores. As they fill in I don't know what a 10th store or 50th store would CF. But this could be a very valuable franchise if we continue to grow it hard. In my mind I'm trying to reconcile the $1M number vs what it would take to get $1M of stock value from just the franchise side. For instance, if 10 stores do $100,000 CF each and say they're valued at 3x to 5x CF, 20% equity equates to $600,000 - $1,000,000 in value.

I agree it will be a ton of work which is why I'm prepared to say no to maintain life balance if the price isn't right. One positive of course is that I won't be starving like many start ups as I'll continue with my salary and benefits, etc. from the current company as I will continue with many of my current duties.

Part of why my number appears high is because I see it as somewhat making up for the last 19 years with no equity helping build the business. It's a little insulting to think I will help build another multi-million dollar chain for him without equity. It was a MAJOR mental hurdle for him to consider any equity at all, even in the franchise. So it's a start.

I distinguish between Financial Equity and Sweat Equity. He brings up his Financial Equity quite a bit and rightfully so. But in this case where he will totally rely on me and others to do the labor (again) in the trenches and frankly do the things he doesn't want to do, that makes that function more valuable. I've done this for him already.

Without the sweat equity guys that you can really trust to start, maintain and grow this then the capital is more at risk. Plenty of people throw money at good businesses that fail. I don't believe only the Financial Equity side should prosper.

I am very curious which concept cost only $300M to start up and is able to cashflow $100M. Outside of Chipotle, i can't think of any.

Using round numbers for illustration. A lot depends on the market, size of the space and how much you want to spend on buildout. If you have to gut a space, add 10 tons of A/C, vent hoods, grease traps, ADA bathrooms, multiple building signs and pylon signs obviously it could be a $100,000-$200,000 more.To be clear, when I posted above "less than $100M of PPE" I meant $100,000,000. Should've had an extra M in there.

Ah, that makes more sense.

 

[sbonomo]

I wouldn't expect any ownership stake unless I was personally investing money. That's the difference between an owner and an employee. An equity stake with no risk? Yes, you'll be working hard. Who doesn't think they work hard? Who doesn't think they're the only one who can do it as well? That has nothing to do with it. Any equity stake in the startup is a generous offer IMO, asking for a stake in the existing company is quite borderline. You may be a great employee, but what have you personally risked?

That's why I started this thread, to stay grounded and get opinions.I don't believe I'm the only one who can do this but I do believe I'm on a very, very short list of people he "trusts" to do this.

Are you saying I should just take whatever he offers and not negotiate? I've helped him build a mini empire and yes I've been paid to do my job. For all the talks of incentives and other ideas, ultimately I was never allowed to buy in. That's in the past and I'm "paid up," as another poster clarified. Also of note is the owner reneging on a verbal agreement years ago whereby I would earn a cash bonus based on Cash Flow for any developed stores after Store X. When the numbers were in and I asked for the payment, he reneged. That's bush league.

So I'm not really interested in building another chain only for salary and all attendant negotiated benefits. That's my prerogative and when we're done negotiating me and my family will need to make a decision. I am free to go somewhere else if I don't like it and he is free to do what he wants to do. No delusions here.

Up until now I haven't risked enough apparently. But why do startups often offer shares to key employees who help build the business? Not everyone contributes capital. This franchise will not start up without people on the ground. That could be me or someone else.

The risk is the benefit not being worth the effort, added stress, family sacrifices, insane office environment at times and to some extent, opportunity cost. As I mentioned my wife is interested in warmer climes and this pretty much locks in my future for a while.

You mentioned earlier that he really does not have another good option to run this endeavor. I would definately expect some form of increased pay/equity if you are going to build this for him. Sounds like you are willing to walk away so i think that you have all of the leverage at this juncture. Start at 20%, figure out what you think your bottom line is then settle somewhere in the middle. Demand a nice pay raise. Live happily ever after.

 

[Johnny Rock]

Had a 1 1/2 hour discussion. He's still offering 5% of the franchise. I asked for 25%. He was pretty taken aback and it was a very odd (though expected) conversation. Bottom line for now is he's still at 5%, no salary increase, no bonus structure (although he did concede that a Training Bonus would be possible due to training for a month but no numbers on that). He had more of a take it or leave it attitude, not even negotiating.

He's being greedy and I told him so. Lots of irrational argumentative points.

Any advice on approaching this as if the owner has Aspergers? I'm researching new angles to communicate in this environment but it's been difficult over the years and this conversation was no different.

 

[sbonomo]

Had a 1 1/2 hour discussion. He's still offering 5% of the franchise. I asked for 25%. He was pretty taken aback and it was a very odd (though expected) conversation. Bottom line for now is he's still at 5%, no salary increase, no bonus structure (although he did concede that a Training Bonus would be possible due to training for a month but no numbers on that). He had more of a take it or leave it attitude, not even negotiating.

He's being greedy and I told him so. Lots of irrational argumentative points.

Any advice on approaching this as if the owner has Aspergers? I'm researching new angles to communicate in this environment but it's been difficult over the years and this conversation was no different.

Paging Johnnycakes:

Can you decline and keep your current position as is? Does not seem worth the hassle for 5% and no pay increase. Actually seems as though it could be detrimental to your current position if the endeavor fails. Do you have any back up plans other than this job? Sounds like your boss is putting you in a tight spot, i would try to keep everything status quo.

 

[Drifter]

I'd look for a golden parachute or some type of guaranteed role in the parent company should the new venture go south. Otherwise, as the deal stands now I don't see that there is all that much upside for you with lots of risk.

 

[Johnny Rock]

Abbreviated version. Had another conversation with him and his brother, and their dad popped in near the end but didn't say much. They're both minority shareholders. Went better.

I've already made it clear that I'll just do my current job to the best of my ability as the new venture isn't worth it at 5%. I kept reiterating that restaurants are a ton of work and he doesn't fully understand what that will entail. Owner has never worked at a restaurant. Brother understands both sides and is rational.

He would say things like, "Here's an opportunity to get your foot in the door." I said, "That was 19 years ago." I fully appreciate the opportunity and I'm all in on this. Let's make a ton of money together. If your net worth goes from $50MM to $100MM, why are you so concerned if my net worth goes from $0 to a few million?

He dropped the "Don't come crying back to me if this is worth $30MM down the road and you turned down 5%." I said I understand that. He goes, "If someone else goes to the training you're probably going to be doing a lot of the franchise things anyway but without the 5%." I smiled and said ok, but unspoken they knew, why would I stay around and do that?

Twice he said he was having chest pains. I believe he knows 5% is lowball. He also stated many times that we need to get started on this. I agreed. I said, "You just want to write a check and have stores open and make money. I believe the people in the trenches dealing with the bs, people quitting, constant hiring, computer problems, etc. deserve a higher percentage than 5%.

He asked his brother if he would go to training to head this up and he said if I'm going to go through training why wouldn't I just open my own stores?

We shall see.

 

[Johnny Rock]

I'd look for a golden parachute or some type of guaranteed role in the parent company should the new venture go south. Otherwise, as the deal stands now I don't see that there is all that much upside for you with lots of risk.

I'll add Golden Parachute to my list.

 

[mr roboto]

How big would this development have to be to get to 30MM? As a franchisor, we are targeting a long term valuation of 30-50 MM for the whole system. It's not food and a lower initial investment, but still.

 

[sbonomo]

You have all the chips here.....hold steadfast and get what you want out of this. The owner knows that he does not have the time or people he can trust.

 

[Johnny Rock]

Had a 1 1/2 hour discussion. He's still offering 5% of the franchise. I asked for 25%. He was pretty taken aback and it was a very odd (though expected) conversation. Bottom line for now is he's still at 5%, no salary increase, no bonus structure (although he did concede that a Training Bonus would be possible due to training for a month but no numbers on that). He had more of a take it or leave it attitude, not even negotiating.

He's being greedy and I told him so. Lots of irrational argumentative points.

Any advice on approaching this as if the owner has Aspergers? I'm researching new angles to communicate in this environment but it's been difficult over the years and this conversation was no different.

Do you have any back up plans other than this job? Sounds like your boss is putting you in a tight spot, i would try to keep everything status quo.

No back up plan. When the tone was raised one time as if I was being ungrateful I said, "Are you saying if I don't agree to do this for 5% I'm not going to work here anymore?" He was quick to say no. As I've said, I fully understand I'm replaceable. But I did say if you're going to offer this to a District Manager of a restaurant chain or something they're going to need to get paid too. So if you're going to pay them why not pay me and reward me for helping you build two chains and helping make you rich? He agreed with that too.

 

[Johnny Rock]

How big would this development have to be to get to 30MM? As a franchisor, we are targeting a long term valuation of 30-50 MM for the whole system. It's not food and a lower initial investment, but still.

I just want to get a deal done and one store opened and not look too far ahead, but 40-50 stores?

 

[Johnny Rock]

You have all the chips here.....hold steadfast and get what you want out of this. The owner knows that he does not have the time or people he can trust.

sbonomo,I know you've chimed in on this thread before but I'm still wondering if this is schtick or not because it's really a pretty bold move in my mind standing firm for a counter offer and being so close to this today I need to stay rational and as objective as possible.

 

[sbonomo]

You have all the chips here.....hold steadfast and get what you want out of this. The owner knows that he does not have the time or people he can trust.

sbonomo,I know you've chimed in on this thread before but I'm still wondering if this is schtick or not because it's really a pretty bold move in my mind standing firm for a counter offer and being so close to this today I need to stay rational and as objective as possible.

I negotiate deal's for a living (large commercial real estate loans). Given the background you have given us, it seems very apparent to me that you are a very valuable resource to this company. While everyone is replaceable my opinion is that you can get more than they are offering. You are much closer to the situation than i am so let that be your ultimate guide.

 

[Warrior]

You are never getting equity in the parent company

This. And it seems pretty unreasonable to ask. If you want ownership, maybe you can buy it rather than asking for a $1m chunk of the pie.

 

[Johnny Rock]

You are never getting equity in the parent company

This. And it seems pretty unreasonable to ask. If you want ownership, maybe you can buy it rather than asking for a $1m chunk of the pie.

Parent co. equity is already off the table. I don't have the cash to buy in and he doesn't want more minority shareholders anyway. Our initial franchise agreement will be for 4-5 stores. So he's offering 5% of that. Could be worth nothing; who knows?

He tried to say let's try this and see how it goes. I was saying let's work it out in advance. Wait and see didn't pan out before. He said on the next development agreement we may do a different LLC. I'm like "what?" So we're going to open 4-5 stores, then you can start a new LLC where I don't have any equity going forward? He laughed like, "I wouldn't do that." Whatever. My legal will need to be solid if we ever reach an agreement.

I want this to be win/win but he's so hunkered down in win/lose it's sad. Let's get this thing moving! A rising tide floats all boats.

Things like this are why I'm standing strong. Grateful for the offer but pretty sick of the bs.

 

[Johnny Rock]

You have all the chips here.....hold steadfast and get what you want out of this. The owner knows that he does not have the time or people he can trust.

sbonomo,I know you've chimed in on this thread before but I'm still wondering if this is schtick or not because it's really a pretty bold move in my mind standing firm for a counter offer and being so close to this today I need to stay rational and as objective as possible.

I negotiate deal's for a living (large commercial real estate loans). Given the background you have given us, it seems very apparent to me that you are a very valuable resource to this company. While everyone is replaceable my opinion is that you can get more than they are offering. You are much closer to the situation than i am so let that be your ultimate guide.

Thanks for the opinion. If he goes with someone else I'd be surprised but I could live with it. I'm predicting an "I can't believe I'm doing this but I'll give you 10%” offer.

 

[Johnny Rock]

He came back with 5% again and no raise, making it clear that it's only for the first 4-5 store agreement. After that I would have the option to buy in to maintain my 5% if there are cash calls. We would also put as many expenses as possible on the parent company which would benefit me. I assumed we would keep profits in the business as we've always done and he agreed. I never expected them to subsidize my cash infusion in perpetuity.

After seeing the disappointment on my face he said what do you want?

I said we've had 3 conversations and you're still at 5%. He reluctantly raised it to 6% and I smirked.

He thinks there are a lot of hungry people out there that would take this in a heartbeat. Probably true. I said someone else may screw it up, steal, not run it properly, have personality conflicts, you may not trust them, etc. Then I said you're telling me you're going to offer the same deal to a guy off the street that you're offering me after 19 years? I also raised the issue that people have difficulty working with him.

Multiple times he said we need to get going on this. I said again that this is a big deal for me. I said without a raise to cover the income loss I'll have from not being able to fully operate our produce business due to this time commitment will make it hard to do but that I'd talk to my brother (CPA).

He's pretty stuck on how much cash needs to be added to cover my share. I'm considering whether I should borrow $ to get to a higher percentage, not that he'd allow it. Heck, for 6% I'm better off having a wealthy friend or relative finance me to open my own stores (easier said than done).

Or call his bluff and get my resume together. Any ideas? Am I crazy not to take it? Hell of a lot of work, professional risk, family risk and a pay cut to boot for 6%. I get that being an owner means sacrifice but his Aspergers has decreased the quality of my life significantly.

Maybe do the 4-5 stores and see if the agreement is drawn up that even if I leave I can maintain my ownership and move on?

 

[sbonomo]

He came back with 5% again and no raise, making it clear that it's only for the first 4-5 store agreement. After that I would have the option to buy in to maintain my 5% if there are cash calls. We would also put as many expenses as possible on the parent company which would benefit me. I assumed we would keep profits in the business as we've always done and he agreed. I never expected them to subsidize my cash infusion in perpetuity.

After seeing the disappointment on my face he said what do you want?

I said we've had 3 conversations and you're still at 5%. He reluctantly raised it to 6% and I smirked.

He thinks there are a lot of hungry people out there that would take this in a heartbeat. Probably true. I said someone else may screw it up, steal, not run it properly, have personality conflicts, you may not trust them, etc. Then I said you're telling me you're going to offer the same deal to a guy off the street that you're offering me after 19 years? I also raised the issue that people have difficulty working with him.

Multiple times he said we need to get going on this. I said again that this is a big deal for me. I said without a raise to cover the income loss I'll have from not being able to fully operate our produce business due to this time commitment will make it hard to do but that I'd talk to my brother (CPA).

He's pretty stuck on how much cash needs to be added to cover my share. I'm considering whether I should borrow $ to get to a higher percentage, not that he'd allow it. Heck, for 6% I'm better off having a wealthy friend or relative finance me to open my own stores (easier said than done).

Or call his bluff and get my resume together. Any ideas? Am I crazy not to take it? Hell of a lot of work, professional risk, family risk and a pay cut to boot for 6%. I get that being an owner means sacrifice but his Aspergers has decreased the quality of my life significantly.

Maybe do the 4-5 stores and see if the agreement is drawn up that even if I leave I can maintain my ownership and move on?

Something just does not feel right here....you seemed fine with keeping your current job and letting him do this venture on his own. Call his bluff and let him test the waters. I assume it will take him a while to find a suitable outside person to run this endeavor (without specifically knowing the concept). Let him interview a few candidates and look at what that is going to cost him. Also, sounds like he is looking to get started sooner rather than later. Finding a qualified person is not going to happen over night. If he uses a search firm there is going to be a substantial cost as well. I would bring all of those points up.

As an alternative, why don't you offer up a 10% ownership piece with a deferred comp structure that vest once milestones have been hit (# of stores opened or profitability). Both of you would have "skin" in the game and would be motivated/compensated if the business succeeds.

 

[mr roboto]

5% plus the opportunity to purchase a franchise location or two, owner financed, at no interest, over 5 years. You could get a couple locations, he gets to sell them for fair value.

 

[Johnny Rock]

He came back with 5% again and no raise, making it clear that it's only for the first 4-5 store agreement. After that I would have the option to buy in to maintain my 5% if there are cash calls. We would also put as many expenses as possible on the parent company which would benefit me. I assumed we would keep profits in the business as we've always done and he agreed. I never expected them to subsidize my cash infusion in perpetuity.

After seeing the disappointment on my face he said what do you want?

I said we've had 3 conversations and you're still at 5%. He reluctantly raised it to 6% and I smirked.

He thinks there are a lot of hungry people out there that would take this in a heartbeat. Probably true. I said someone else may screw it up, steal, not run it properly, have personality conflicts, you may not trust them, etc. Then I said you're telling me you're going to offer the same deal to a guy off the street that you're offering me after 19 years? I also raised the issue that people have difficulty working with him.

Multiple times he said we need to get going on this. I said again that this is a big deal for me. I said without a raise to cover the income loss I'll have from not being able to fully operate our produce business due to this time commitment will make it hard to do but that I'd talk to my brother (CPA).

He's pretty stuck on how much cash needs to be added to cover my share. I'm considering whether I should borrow $ to get to a higher percentage, not that he'd allow it. Heck, for 6% I'm better off having a wealthy friend or relative finance me to open my own stores (easier said than done).

Or call his bluff and get my resume together. Any ideas? Am I crazy not to take it? Hell of a lot of work, professional risk, family risk and a pay cut to boot for 6%. I get that being an owner means sacrifice but his Aspergers has decreased the quality of my life significantly.

Maybe do the 4-5 stores and see if the agreement is drawn up that even if I leave I can maintain my ownership and move on?

Something just does not feel right here....you seemed fine with keeping your current job and letting him do this venture on his own. Call his bluff and let him test the waters. I assume it will take him a while to find a suitable outside person to run this endeavor (without specifically knowing the concept). Let him interview a few candidates and look at what that is going to cost him. Also, sounds like he is looking to get started sooner rather than later. Finding a qualified person is not going to happen over night. If he uses a search firm there is going to be a substantial cost as well. I would bring all of those points up. As an alternative, why don't you offer up a 10% ownership piece with a deferred comp structure that vest once milestones have been hit (# of stores opened or profitability). Both of you would have "skin" in the game and would be motivated/compensated if the business succeeds.

Can you flesh out the deferred comp idea a bit, either here or PM. Thanks. The reason it doesn't feel right is because he's not being realistic IMO. He thinks we'll find a location and then watch the bank account grow. Now I'm being a bit facetious but he doesn't understand that restaurants are a different animal than other businesses. It's 24/7 and you can burn out quickly. Gotta dangle that carrot to make it worth it. If 5 stores cash flow $500,000 and the family gets $470,000 and I get $30,000 that's not an incentive.

I still see my number as 20%. I'm going to ask him would you do it for 6% (He'll say yes). I'm going to be grateful and explain again why it doesn't work for me along with some of your points and see what he does. If the time is right I might say, "20% and I'm ready to go right now," but we're so far apart I think politely saying no will get his attention best. He may get pissed and throw me out. I want to keep the door open and I may throw out a few creative ideas such as you and Mr. Roboto mentioned but probably not until he comes back to the bargaining table.

You're right, time is on my side and no one else wants to do the training. I'm going to let him stew a bit.