Podcast | Franchises

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Transcript

Andrea
Franchise and small business owners, today is your day. We’re talking with one of our tax partners who is also a small business owner. He understands what it’s like wearing many hats firsthand and assists small business owners in all 50 states on various tax and financial planning matters.

Our guest today is Charles Dean Smith. He is a senior tax partner who enjoys working with small business owners throughout the entire life cycle of the business and watching their challenges change from how to make payroll in the early years to investing extra cash for retirement and expanding locations.

Hi, Charles Dean. Thanks so much for joining us. So tell us what the life of a franchise owner is like. It’s a fascinating part of business, I think.

Charles Dean Smith
Thank you, Andrea.

Charles Dean Smith
So thanks for the opportunity to talk about something I really do love working in and specializing in. And so a lot of people don’t realize that besides being the tax partner of PBMares and the tax CPA, I also own three UPS stores in the Myrtle Beach, South Carolina area. We got started in that 13 years ago, I guess, because I thought I had too much free time. I’m not sure.

Andrea
Ha ha ha.

Charles Dean Smith
So in my free time, I have these franchises. I’m involved more on the financial side, obviously, and some of the marketing stuff. But we have thoroughly enjoyed our franchise experience. I know firsthand it’s a great model. It’s a great opportunity.

It’s just really great for people who want to take that leap and open up their own business or that’s been their dream. And that was always my dream because I come from a family of entrepreneurs, self-employed individuals who started their own businesses. So that is in my blood and I always wanted to do that. And this franchise opportunity came up and that’s how I got involved in it.

Charles Dean Smith
But I’ve also spent the past 22 years or so working with various franchises across the United States in industry such as auto parts and restaurants, medical groups, grocery stores, stuff like that. And so I saw the opportunities they had and what a great investment they were. And so that also ran into this becoming a great option for me. So it worked out for the best. But it’s not a big deal.

Charles Dean Smith
People are shocked when they hear not only do I do taxes for franchises, I’m also one of you.

Andrea
Yeah, I mean, I’m impressed. It’s knowing how hard you guys work and then you go home and you start your second job. So hats off to you. For somebody that’s starting out or wants to open a franchise, tell us about some of the financing tools that would be available to them.

Charles Dean Smith
Sure. There are so many financing options now available for franchisees. And one of the most popular ones is the SBA loan program, which is done by the Small Business Administration. Almost 90% of the clients I work with, that’s the route they go. And these are a great option for a lot of franchisees who are just starting out. The terms are great.

Charles Dean Smith
It’s a relatively easy process. I’m not going to lie, there’s a lot of paperwork. But they will work with you. They encourage small businesses that they will do whatever they can to help you succeed. But there are so many options. They range from really small loans of like $50,000 all the way up to millions of dollars of loans that are available. So you can use them for real estate if you want to purchase the building or construction.

You just need it for working capital or opening expenses. There’s various options available for whatever the need is for the cash or the financing. The main thing I tell people, though, is make sure that you work with a bank that specializes in SBA loans. A lot of times, your local bank may not be the SBA loan expert. And so you may want to look at some nontraditional…

Charles Dean Smith
online banks or banks that specialize in franchise lending. And that’s what we did when we did ours. We worked with a bank in California that specialized in SBA lending for UPS stores. And most banks have relationships with franchisors in their industry. And so they will get it, they will refer, the franchisor would typically refer you to a lender who helps with those franchisees.

Andrea
Oh, okay.

Charles Dean Smith
And that’s usually the easiest way to go because a lot of the times the pre-approval is easier. The loan application process is much easier. Typically, you don’t have to do the business plan because they already know the model of the franchise. It’s just a lot easier. And I get a lot of people who want to work with their local bank. But when you first start out, that’s really hard if you don’t have business history.

Charles Dean Smith
A lot of local banks just will not talk to you until you have an established business history. And that’s where a lot of these SBA lenders come into play because they’re more willing to take, honestly, to take a risk on you as a new business owner because they respect the franchise model and they understand it. So, but like I said, it is a lot of paperwork. You’ve got to get financial statements, personal financial statements.

Charles Dean Smith
And you will feel like you have sent paperwork to everybody, the same paperwork over and over and over again. But you will get there and it does happen, but you just have to be patient on that.

Andrea
Yeah, so it seems like if they are familiar with the franchise model, that’s way better than having to train or sort of educate. So okay, that’s good. And we’ll put some of these resources in the podcast notes as well. Okay, so real estate. So you know, bricks and mortar.

Charles Dean Smith
Oh, I do want to mention one more thing in the financing area, just because it has gotten so popular, is a lot of people are doing 401k rollovers to start a business. And they’re called ROBS, which is a bad acronym for tax people. It stands for Rollover Business Startups. And these have been around for years.

Charles Dean Smith
But they’ve become more popular now, especially since COVID, when a lot of people got burned out in the corporate world, or they were unfortunately laid off, or they were just tired of going into the office every day. A lot of them had large 401k balances built up. And like me, they always wanted to own their own business or something.

These ROBS allow you to roll over your 401k tax-free and penalty-free into your new business. And so that’s the big thing, because as you probably know, if you cash out your 401k, you gotta pay taxes and a big penalty. So it can take away almost 50% or more of your balance. With a ROBS, if you structure it properly and you follow all the rules, you can roll over 100% of it into your new business.

Andrea
Oh well that’s pretty cool.

Charles Dean Smith
Yeah, now obviously you’ve put your entire retirement at risk in this new business. There is a risk side to it. But for the right type of person, depending on their finances, it’s a really great opportunity. And in the past three years, I’ve done more ROBS transactions than in my entire career.

Andrea
Oh, the pandemic effect.

Charles Dean Smith
All these 401(k)s grew with the stock market and they’ve got really big balances and people were just tired and they wanted a change, or they wanted to work for themselves – or they were just tired of working in business or corporate. So it’s simply an opportunity.

Andrea
With the 401k rollover, is that in lieu of a loan or can you do the two together?

Charles Dean Smith
You can do the two together. It depends on obviously what your 401(k) balance is and what your financing is. But what most people do is they do enough in the ROBS to cover the SBA down payment or the collateral amount because the SBA will count that amount as your equity contribution or ‘skin in the game’ is what some people call it. They’ll count that ROBS amount as that amount and then you go and do an SBA loan for the difference.

Charles Dean Smith
So most of the franchisees I work with do a combination together. But there are some smaller franchises that don’t have a lot of upfront costs where the investment is not as large. I have some that have done it all with the ROBS. It just depends on the balance and the requirements.

Andrea
Okay, so that kind of leads me to my next question about real estate. So you could do a ROB. So talk to us about real estate needs and if you need a brick and mortar store. I’m curious how the ROBS would work there.

Charles Dean Smith
Yeah, I mean, with the ROBS and the real estate, the main thing there is if you were doing an SBA loan, if you did want to acquire the real estate, you could do the ROBS in conjunction with the SBA loan to do that. Most franchisees, though, in their first years don’t acquire the real estate. They typically will lease it first until they get more established. At the end, at that point,

Charles Dean Smith
They may consider acquiring the building that they’re operating in if it’s a standalone building. That’s usually what I see happen with a lot of my auto parts franchise clients. As they get more established in the business, their cash flow increases, they go to the next step and they acquire the real estate as an investment. And they start paying rent to themselves instead of to a landlord. So it’s just it’s another investment return option.

Andrea
Yeah, okay.

Charles Dean Smith
You just step into the landlord role and pay yourself rent. So that’s what I see at the most. The issue we’re getting with franchises now, though, is in some parts of the country, commercial space is very tight, especially in strip malls. Your traditional strip mall that has small retail spaces, there’s just not the capacity. It’s just not there. And it’s really strange because during COVID,

Charles Dean Smith
when a lot of businesses unfortunately closed, there was a lot of this excess space and landlords were just given incentives for people to come in. But in the past two years, mainly with a lot of new franchises, there’s been this massive wave of new tenants in commercial space. And in Myrtle Beach and in Wilmington, finding a commercial space that’s grade A and a good location is really difficult.

Charles Dean Smith
And so you really have to work with a real estate broker who can approach certain landlords and ask is there a tenant that was considering moving or closing, or would you rather have us as the tenant of a national franchise other than this mom-and-pop setting.

There’s just different things you can do to try to get into a commercial space and that leads into my main comment that so many new franchisees think they can negotiate a commercial lease on their own. And I’ll be honest, we did on our first one and I regret that we did. You just can’t do it. You will miss out on so many benefits such as free rent or tenant improvement allowances or caps on maintenance fees. There are so many things that you don’t know about. Unless you get an expert involved, you’ll miss out.

Charles Dean Smith
And so when we did our second and third stores, we did use a real estate broker and we got a much better lease.

Andrea
Just to go back, I guess I’m kind of surprised to hear that because after COVID, there was this abundance of commercial real estate. And now, if you think about supply and demand, kind of to your last point there, if there’s more demand than there is supply, it’s premium rates. And then they may, if you do this on your own, they may not necessarily tell you about those perks.

Charles Dean Smith
Right. That’s the problem. I mean, there is still excess commercial office space, obviously, high rises and office space, with people not returning to the office. In these smaller 1,500 to 2,000 square foot spaces, that’s where the shortage is, in that unique niche market that most franchises operate in.

But like your big box stores, yeah, there is a lot of space there, like malls and Bed Bath & Beyond closed, and certain retailers that have gone out of business, there are spaces for those, but most franchises don’t need that much space. You know, they’re in a much smaller space.

Andrea
You mentioned in the first year, you tend not to buy and you’re always looking at investments. So what has been your experience to protect those investments? I guess, saving for a rainy day or those sorts of things, how would you protect it?

Charles Dean Smith
The main suggestion I give a lot of new franchisees is before going into the franchise, sit down and honestly do a realistic budget for at least two years of how you would cover your living expenses. Especially if you’re moving from a traditional W-2 role, employee role, to being self-employed. So, you know, just project out what you would need to live on in case the business does not generate cash flow in those first years, which is the norm.

Typically, your first year, you will struggle with some cash flow, and you may not be able to pay yourself a salary. Or you do, and you have to loan it right back to the business. And that’s just, I mean, that’s not a bad thing, that’s the norm. So just making sure you have some backup plan to cover your living expenses. Either it’s with a home equity line, or…

Charles Dean Smith
What I tell a lot of people, especially if they’re married, is at least have one spouse continue working until the business is established. I know a lot of people want both husband and wife doing the business together, but if you can stagger it and have one spouse continue to work, especially if they’re getting health insurance and employee benefits, have them continue to work until the cash flow is sufficient to bring them into the business.

Charles Dean Smith
It just works much better, much, much better. That’s what we did. So it just takes a lot of the stress out if you can make that happen at the same time. That’s what I tell a lot of people.

Andrea
Marriages can thrive if you do that. It seems like that would be a stress on the marriage there. Oh, sure.

Charles Dean Smith
Right. And honestly, there are some people that just can’t work together. Let’s face it. And there are some people that don’t want to work in the franchise world. You do see a lot of husband and wife teams. Or father-son, father-daughter, mother-daughter. You see a lot of family groups doing franchises together, which is great. But again, in the same situation with the parent-child setting, say when the child comes into the business.

Just don’t cut it off completely and have everyone start into the business because honestly, that’s a lot of mouths to feed out of that new business on day one. You want to spread those out so that you’re not covering the entire family’s salaries the first year. That’s what I tell a lot of people.

Andrea
Yeah, that’s sage advice from a man in the trenches.

Charles Dean Smith
Yeah, it’s like everybody’s on board on day one.

Andrea
So a little bit about financial reporting. What should they be looking at? You hear P&L. So what should they be really familiar with and be regular with?

Charles Dean Smith
Yeah, so Andrea, finances are a major part of operating a franchise. And the problem I see is, and I know I’m biased because I’m an accountant and I love financials, it’s an area that gets put to the back burner a lot of times. Because their focus is more on marketing or getting their staffing set or the construction. But that doesn’t mean the financials can get overlooked. You still have to stay on top of them and analyze them and watch your cash flow.

And so for me, I think the cash flow statement is the most important because you can really tell where the cash is going in the business and monitor it more closely than you can with the income statement. It’s just a more powerful tool, I think, for evaluating your business. But the problem is a lot of people don’t know how to prepare one, or they just get the balance sheet income statement.

And so, I try to push people to work with a provider that does provide a cash flow statement monthly so you can see where your outflows are going, which ones you can control, how much is going to debt, different things like that. It’s just a better way to monitor your finances. And like I said about being biased, timely financials and accurate ones are very important for a business, especially a new business.

If you’re getting your financials once a year or when you do the tax return, there’s no way that you can properly manage that business throughout the year, especially now when things are changing so quickly. We have operating expenses that can rise in a week. I mean, costs changes and stuff. And if you’re not able to see that monthly in your financials and adjust appropriately to your pricing, you’re going to get left behind and your pricing is probably out of whack or out of date.

So you must stay on top of some of those changes. And I get it. I know accounting is an expense that some people try to go cheap on. I get it. But honestly, timely financials, great tax advice and tax planning can pretty much save you significant cash flow and almost always exceeds what you spent for that advice. It’s a great return on what you invest in those areas.
And I try, I mean, a lot of people still don’t get it and they try to go the cheapest route possible. There’s some areas you’ve just got to make that investment in. And in good financial planning, advice, tax planning is one area that you get a significant return back.

Charles Dean Smith
And I’m saying that as a business owner, not as a CPA, not as a CPA partner. I see it all the time because I see clients that come to me and they’re behind on their financials or, you know, they only talk to their CPA once a year or something like that. And then I look at their pricing and their margins and they’re just not even being profitable because they’re so behind on making adjustments.

Andrea
Do you think it’s fear? I mean, you think it’s sort of like, they kind of know and avoid it.

Charles Dean Smith
Right, some people are just scared of accounting or journaling trees and the terminology. And so I try to talk in layman’s terms, the best that I can in words they understand. I try not to overload them. I try to keep it as simple as possible so they can understand.

Charles Dean Smith
Yeah, with a lot of them it’s I’ll just put my head in the sand. Maybe it’ll go away. And maybe it’ll work out. But honestly, and with the franchise, there’s some people who say, oh, the franchisors will come in and save my day and everything. Not exactly. There’s certain things they’ll do, but some of these decisions are up to you as the business owner. And some people struggle with that. There’s certain things that franchisors control and there are certain things you have to control. You have to figure that out because if you’re gonna sit back and think they’re going to come in and fix your pricing, most of them don’t do that – it’s up to you to monitor sometimes within reason.

Andrea
OK. Well, I have one more question. You’ve been really generous with your time. And I know this is a busy time for you. Let’s talk about social media – you are very active in social media. What would you tell them as far as building that strong online presence?

Charles Dean Smith
For me, start out simple. Customize your Facebook page, your business Facebook page, and Instagram. And post consistently. I see so many franchise or small business pages where it’s obvious that it’s either a robot doing it, or there’s no human person touching some of these posts. So mix it up. Do photos. Do videos of your employees in the store.

Charles Dean Smith
Just anything that you can customize that makes it look like the business owner is involved in the page. And then work with your franchisor. A lot of them have social media calendars or they will give you content to post on your page. A lot of them have their own marketing groups. So just reach out to them and they’re more than willing to help train you on Facebook and how to do promoted ads and how to select your audiences.

I tell people, I did it myself. Go out there and just play around with it. You can’t screw it up. I mean, you can’t. You can’t. Do a small Facebook post ad and promote it. Use a small budget and just play around with the demographics and see what you get. You can do it with 20 bucks. I mean, just play around and see what it does.

Charles Dean Smith
The other thing I like doing is sharing other business pages that I do business with or post. And so if the restaurant next door to me does some special or something, I’ll promote that on my page. And it just gives you a way to get more exposure to their customers and vice versa. And I’ll comment on their posts. I do that a lot. Or if the local high school is doing a fundraiser, I’ll post that on my page and put a comment in.

Andrea
Sure.

Charles Dean Smith
So it just gives you a different way to highlight different things on your page. And like I say about LinkedIn, more people see your social media posts than you think, even if they don’t like or comment. There are also stalkers that read it, but they may not react to it, but they know it and they saw it. And that’s what I do, because some people say those Facebook ads aren’t worth it.

Charles Dean Smith
I was hesitant at first. I didn’t believe them either, but I can honestly tell when I don’t do a paid Facebook ad post in a month or a week our volume in the stores does fluctuate. So it is more powerful than you think, especially if you structure it right. But like I said, you can’t screw it up. And the other thing I suggest is encourage your customers to give online reviews.

Charles Dean Smith
You will always get some crazies who just had a bad day and will give you an awful review. The way I respond to it professionally is the best you can do. You know, try to resolve it the best you can, but close it down. Don’t try to get an up-fighting match with them online. Just be polite. Just say thank you for the feedback and move on. But encourage some of your better customers to post on your online reviews.

Charles Dean Smith
And what we’ve done is encourage our employees to ask customers to give us a review. Or we do a competition with our employees. If your name gets mentioned in so many online reviews, we may give you a bonus or something. Just to increase our online review percentages and stuff. So I’ve found that the time spent on social media is a significant return. And if you’re not comfortable doing it, ask your teenager or your somebody’s friend, they can probably do it better than you can. If you just want to let them handle it. We all know, I mean, just let them handle it.

Andrea
Yeah, that’s good advice. And now you’re speaking my love language. You’re talking about marketing. So if I ever have a slot open in the team, Charles Dean, let me know. I’ll let you know. Maybe you can moonlight your third job.

Charles Dean Smith
Yeah, I enjoy it. I really do because I’ve seen it from professional services with CPA firms. I’ve seen it in small businesses. I’ve just seen the power of it in so many areas. And that’s why I love it.

Andrea
It is very powerful. Well, this has been wonderful. I really appreciate your time today. And, you know, a man from the trenches giving some really good guidance. Owning a business is not for the faint of heart, but I think with some of the guidance that you provided, it could probably help people kind of get started. So thank you so much. Good luck with your businesses and then your day job during tax season and have a great weekend. Thank you.

Charles Dean Smith
You too, Andrea. Thank you.