Case Study: Funding Japadog’s Growth Phase with Franchise Lease Finance

Famed for its meteoric rise in popularity, Japa Dog has become the envy of every street food vendor in Canada. If you haven’t already tried one, chances are, you will soon.

Already with 4 locations in Vancouver, they’re poised for growth (via franchise) in LA, Toronto, and New York City

In light of this coming growth, this case will discuss and compare 3 different financing strategies for high-growth franchising models: Cash Purchase, Bank Loan, or Equipment Lease

Background

Adapted from Maclean’s, 2007

“Behind the spitting grill, Noriki Tamura keeps up with the crowd, dressing still-sizzling turkey dogs with pale brown miso mayonnaise, sesame sauce and a layer of crispy green radish sprouts. Through the smoke he looks like a natural. But just two years ago Tamura was a Tokyo ad salesman. In 2005, he and his wife, Misa, both 32, decamped for B.C. with dreams of opening their own food business. Tamura had always liked to cook, and his ad clients had included successful restaurant franchises. Before leaving Japan he’d never even seen a hot dog vendor.

The City of Vancouver has 120 spots for sidewalk food vending.  When there’s more than one application for a site, the winner is decided by lottery. Tamura hoped to set up a crepe stand, but was foiled by a civic bylaw limiting him to a beggarly list of soft drinks, ice cream and pre-cooked hot dogs.

There, he realized he needed a trademark to set him apart from the city’s 100-odd sausage sellers. So he spent his spare time cooking up Japanized hot dogs — and testing the results on a group of friends.”

——–

Tamura has become something of a folk hero in downtown Vancouver. Landing in Canada speaking very little English, he and his wife navigated complex paperwork and redtape, and managed to grow their business to more than 30 employees at 4 locations around Vancouver.

During the 2010 Olympics, his Burrard and Smithe flagship location had lineups of more than 100 people – all waiting to try one if his signature hotdogs. It came as no surprise then, to find out that Japadog is planning its expansion by franchising to owners in New York, Los Angeles, and Toronto.

Japa Dog is not only an encouraging story for fellow entrepreneurs, but it’s also a great chance to discuss the value of equipment leasing in a franchise-based business model.

Analyzing the cash-flow projections below, it becomes obvious that leasing is the preferred alternative. On top of financial gains, there are other benefits to leasing for franchisees and franchisors alike:

In addition to the tax savings, leasing also offers a great deal of other benefits, such as:

– Diversification of lending sources
– Builds franchisee and corporate credit profile
– Credit turn around within 1 business day, online
– The proposed funding is asset specific and does not tie up personal or corporate lines of credit
– Smooths acquisition costs of equipment over time, and improves scaleability of the business model

Let’s look at the numbers.

General

1 Hot-Dog Cart: $10,000

Capital Cost Allowance (Restaurant Equipment): 20% per year

Marginal Tax Rate: 30%

Bank Loan

Bank Interest Rate for Loan: 4.00%

Bank Interest Paid on Savings: 1.80%

Lease Option

Monthly Lease Payment: $360

Term: 36 Months


PAY CASH BANK LOAN
Initial Cost of Equipment $10,000.00 $10,000.00 $10,000.00
Borrowing Costs based on monthly reducing balance $0.00 $628.63 $2,960.00
Total Cost before taxes: $10,000.00 $10,628.63 $12,960.00
Deductions allowable over term
Bank interest over term $0.00 $628.63 $0.00
Total CCA Deductions over term $4,240.00 $4,240.00 $0.00
Total rental payments over the term $0.00 $0.00 $12,960.00
Total Allowable Deductions $4,240.00 $4,868.63 $12,960.00
Benefit of allowable deductions
Total allowable deductions $4,240.00 $4,868.63 $12,960.00
Deductions based on Marginal Tax Rate $1,272.00 $1,460.59 $3,888.00
After-tax cost of the equipment $8,728.00 $9,168.04 $9,072.00
Add the Loss on Value of Capital
Value over term at Bank Interest Rate on Savings $554.42 $0.00 $0.00
When taxed at Marginal Tax Rate listed above, loss is: $388.09 $0.00 $0.00
TOTAL OVERALL COSTS (after taxes) $9,116.09 $9,168.04 $9,072.00
Overall Costs/Savings to Acquire Equipment ($883.91) ($831.96) ($928.00)
* Figures are for illustrative, conversational purposes only. SAVED BY PAYING CASH SAVED BY BORROWING SAVED BY LEASING

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