franchise dilemma.
- Thread starter saxon22
- Start date
To the OP:
In terms of your agreement w/ your brother, you're NOT Getting a good deal at all.
First, let's say for this kind of risky investment, you'd need at least a 10% / year return on your bond (which is very low btw, look at where LBO bonds are trading now).
Let's just say it takes 3 years for you to get your money back. Assuming current rates on relatively safe investments, you can currently earn 3% a year.
Or you can buy corporate bonds in companies like goldman sachs, lehman, or other banks where the yields are pretty high, let's say 9%.
Another option is to buy junk bonds yielding 15%. Your chances of default with these types of products is probably around the same as w/ your brother.
At the end of year 3:
Safe investment: $109,273
Brother's investment: $100,000
Financials' bonds: $129,503
Junk bonds: $152,088
Assume your brother at the end of year 3 is making 80K profit a year, you get 20% of that for 5 more years:
At the end of year 8:
Safe investment: $126,677
Brother's investment: $180,000
Financials' bonds: $199,256
Junk bonds: $305,902
So you'd do better off investing in large financial firms' bonds (or even better, preferred stock), and a lot better in buying junk bonds, which isn't much riskier then investing in a startup franchise.
If I were you, I'd structure the loan to your brother like a junk bond w/ a more flexible call option:
You loan him $100,000 in a perpetual bond
He pays 15% interest on the bond, semi-annually (so $7500 every 6 months).
He may redeem the bond in part or whole @ 105% in $1000 increments (so he pays $1125 to remove $1000 from the principle amount of the bond, $75 for that 6 months' interest, $50 for the call premium), on a specified day in the year (you'll want to have that day on one of the coupon days for simplicity in calculating the interest he owes you).
Your debt is secured on his equity in the franchise, and he may not issue any further debt that is senior to, or on parity with your debt.
You're getting a better deal this way, and you're ensuring if he goes under, you're the first person to recoup any money from the sale of what's left of the franchise, so you'll most likely get most of your money back.
And btw, my rough calculations for the original investment you were proposed, is based off relatively optimistic numbers based off what I've seen in this thread. He could do much much worse.
In terms of your agreement w/ your brother, you're NOT Getting a good deal at all.
First, let's say for this kind of risky investment, you'd need at least a 10% / year return on your bond (which is very low btw, look at where LBO bonds are trading now).
Let's just say it takes 3 years for you to get your money back. Assuming current rates on relatively safe investments, you can currently earn 3% a year.
Or you can buy corporate bonds in companies like goldman sachs, lehman, or other banks where the yields are pretty high, let's say 9%.
Another option is to buy junk bonds yielding 15%. Your chances of default with these types of products is probably around the same as w/ your brother.
At the end of year 3:
Safe investment: $109,273
Brother's investment: $100,000
Financials' bonds: $129,503
Junk bonds: $152,088
Assume your brother at the end of year 3 is making 80K profit a year, you get 20% of that for 5 more years:
At the end of year 8:
Safe investment: $126,677
Brother's investment: $180,000
Financials' bonds: $199,256
Junk bonds: $305,902
So you'd do better off investing in large financial firms' bonds (or even better, preferred stock), and a lot better in buying junk bonds, which isn't much riskier then investing in a startup franchise.
If I were you, I'd structure the loan to your brother like a junk bond w/ a more flexible call option:
You loan him $100,000 in a perpetual bond
He pays 15% interest on the bond, semi-annually (so $7500 every 6 months).
He may redeem the bond in part or whole @ 105% in $1000 increments (so he pays $1125 to remove $1000 from the principle amount of the bond, $75 for that 6 months' interest, $50 for the call premium), on a specified day in the year (you'll want to have that day on one of the coupon days for simplicity in calculating the interest he owes you).
Your debt is secured on his equity in the franchise, and he may not issue any further debt that is senior to, or on parity with your debt.
You're getting a better deal this way, and you're ensuring if he goes under, you're the first person to recoup any money from the sale of what's left of the franchise, so you'll most likely get most of your money back.
And btw, my rough calculations for the original investment you were proposed, is based off relatively optimistic numbers based off what I've seen in this thread. He could do much much worse.
Here's a Franchise Info link for anyone who is curious as to how they work ... McDonald's costs $600k to $1mm to setup ... what a freak'in scam! 
What he said ... lots of room for potential disaster going down that route.
***
On the brigher side, here's another link to more franchise info.
P.S. It might be a dirty business, but laundromats look very interesting, and have caught my eye more than once.
Also, you said your brother makes 50K / year.
That's assuming 40 hours / week, and a job in an office environment, right?
That's not SO BAD. What does he do anyway? Not many 50K / year jobs are totally dead end.
If he buys some crappy pretzel business, he's going to be working 100 hours a week in a shitty kitchen environment.
For me to make that trade in his position, I'd want at least 150K / year. That probably won't happen.
200K of his own investment = foregoing 10K / year in interest income (assuming 5%).
If he hangs onto his current job, his 200K and gets a 5% annual return on it (which is not hard), he's making 60K / year already.
With the pretzel stand, he'll make 60K net of franchise fees if he's lucky, then he's gonna owe you $15K / year interest, AND have to work towards paying down a loan.
Unless he's sure he can earn 150K+ / year, don't bother.
That's assuming 40 hours / week, and a job in an office environment, right?
That's not SO BAD. What does he do anyway? Not many 50K / year jobs are totally dead end.
If he buys some crappy pretzel business, he's going to be working 100 hours a week in a shitty kitchen environment.
For me to make that trade in his position, I'd want at least 150K / year. That probably won't happen.
200K of his own investment = foregoing 10K / year in interest income (assuming 5%).
If he hangs onto his current job, his 200K and gets a 5% annual return on it (which is not hard), he's making 60K / year already.
With the pretzel stand, he'll make 60K net of franchise fees if he's lucky, then he's gonna owe you $15K / year interest, AND have to work towards paying down a loan.
Unless he's sure he can earn 150K+ / year, don't bother.
The ROIC seems too long with the pretzel deal. What happens if your bro gets you an apron for your birthday?
I think it has been said several times in different ways: this is buying a job with more hours and risk.
If he must do it and you want to help, I would make it a loan and stay out of the partnership. Secure the loan as best you can but I would also be prepared to possibly not see all (or possibly any) of it back.
Joe.
If he must do it and you want to help, I would make it a loan and stay out of the partnership. Secure the loan as best you can but I would also be prepared to possibly not see all (or possibly any) of it back.
Joe.