As the purveyor of O’Leary Fine Wines, Kevin O’Leary loves wine. As a photographer of 40+ years, he loves art. As a Shark Tank star and a prudent venture capitalist, he loves women and money. Thus when Harriet and Patrick Mills pitched their franchise of wine-imbibing, paint-and-sip studios in the season 8 finale of ABC’s hit business reality show May 12, 2017, it was a match made in heaven.
The wine, nude model and feather boas they brought to simulate how a bachelorette party would go at a Wine & Design franchise location didn’t seem necessary. But it sure didn’t hurt. O’Leary was smitten by their rapid, estrogen-powered growth.
In just five years, Wine & Design went from one location to 75 — all owned by women — across 14 states. Five more locations are on the way. Franchisees did $10 million in revenues in the past year (at the time of taping) earning the company about $600K from a 6% royalty. Also, the company collects a $25K startup fee. Revenue is projected at $12 million to $13 million in 2018.
“If a company has already proven its model, which Wine & Design certainly has, let me pour the gasoline of Shark Tank on top of that and accelerate its growth,” said O’Leary during a recent visit to the Wine & Design studio in Burbank, Calif., owned by franchisee Lisa Flett. “It’s a very successful model because if you can get more franchisees to open faster, everything works for everybody. I want the franchisees to become rich. That’s the whole point of this.”
The Mills went in asking for $500K for 10% equity. O’Leary offered $150K for 10% equity and a $350K loan at 12% interest, bringing down the original valuation of $5 million to $1.5 million. He bested Robert Herjavec’s offer of $500K for a third of the company. Harriet says they opted for O’Leary partly because of his extensive knowledge and connections in the wine industry.
Wine & Design not only offers O’Leary a new outlet to sell O’Leary Fine Wines but also a chance to bet on women-owned businesses — his bread and butter. A deal was sealed, but the actual terms are secret.
“I’ve got in my portfolio over 40 private companies. Not some of my returns but all of my returns have come from deals run by women,” said O’Leary, who’s affectionately known as “Mr. Wonderful.” “Lots of data support women executives performing better in 1. Risk mitigation 2. Time management skills 3. Goal setting. They achieve their goals 90% of the time, which means morale is high. Personnel turnover is low, and that supports the return of capital.”
The Art of Building a Wonderful Franchise
Harriet, CEO, and husband Patrick, chief commercial officer, started the business after she was laid off as a fine china wholesale sales rep in 2010.
“A friend and I heard about this concept ‘Paint and Sip’ in Charleston, South Carolina, and we heard it was booming there,” Harriett said. “We drove down there, went to the class and fell in love with it and knew we had to bring it back and start the concept for Raleigh.”
They opened their first studio in Raleigh, N.C. four months later with $8,000 borrowed from friends and family. Business boomed thanks to Groupon. They started franchising a year later. Wine & Design charges an initial franchise fee of $25K, a 6% royalty on gross sales and 2% marketing fee. Franchisees need an initial investment of $52,800 to $105,000 to start, depending on the location.
It only takes four days of training at headquarters and two employees to run a studio. Customers pay $35 for a two-hour class in which they’re taught how to paint any of the hundreds of masterpieces on the walls and catalog. A nude model, however, runs $55 per class. Wine costs $7 a glass or $23 a bottle.
Burbank, Calif.-studio owner Lisa Fletts holds mostly team building events during the day and offers public classes at night from 7 pm to 9 pm. “Girls night out” and other private parties (with a 10-person minimum) fill the weekends. Flett also teaches painting at clients’ location. Flett majored in art in high school and college but never got to pursue it as a profession until she found Wine & Design.
“When I was in college, I got sucked into a job in the mental health field. I stuck with them for 29 years,” Flett said. “I decided before I turn 50, I needed to do what I wanted — my passion. This studio is baby. I found Harriet. I was all about the girl boss. They needed an LA location. We needed each other. I was on board. It’s the best thing I’ve done.”
Tina Farman of Oakland, Calif. flew down to attend an informational event, aka “Discovery Day,” at the Burbank studio at the insistence of her husband, who saw Wine & Design on Shark Tank. The couple is considering opening a franchise in an upscale Oakland neighborhood called Montclair.
“They’re always looking for experiences like this, and that’s why I thought it would be really great,” said Farman, who has 20 years of experience in sales and marketing. “I think it’s a great opportunity for a business that I can work but not really work because you’re around a lot of creative people who want to paint.”
Wine & Design ranks No. 434 in Entrepreneur magazine’s Franchise 500 list for 2017. It trails behind three other competitors in its class: Painting with a Twist, the largest with 324 franchises; Pinot’s Palette, 175; and Bottle & Bottega, 18. All charge about the same franchise fees and royalties.
Patterns of Success in Franchising
Franchising makes up about one in 12 businesses in the U.S., according to Franchise Direct. It counts 780,000 franchise opportunities across the country. Franchising is a win-win-win proposition for the franchisor, franchisee and venture capitalists. Franchising helps founding entrepreneurs scale their businesses without having to manage each location although they have to give up some control, says Tom Wells. He serves as vice president of Atlanta-based BIP Capital and BIP Franchise Accelerator.
“According to FranNet, several studies have shown that more than 90% of start-ups fail within the first three years,” Wells said. “Franchises, however, already have a proven model, brand recognition, operational backing and marketing support that make the risk of failure much lower.”
Wells added: “Franchisees likely may have higher profit margins [than independent competitors] because they have a franchisor constantly looking at ways to make franchisees more profitable and marketing on their behalf. Ultimately, if franchisees don’t make money, neither does the franchisor.”
What’s more, franchisees benefit from the parent company’s brand recognition and track record of success, which could take years to build when starting from scratch. Considering that most new businesses go to startup heaven, the odds of success are exponentially higher with franchising.
Well’s venture capital firm, which specializes in taking franchisors to the next level, invested in Tropical Smoothie Cafe, headquartered in Atlanta, in 2012 when it had 300 locations. BIP helped the company expand to 500 locations in 43 states over four years.
“There’s no guarantee that a franchise will succeed and franchising means that founders have to give up a lot of control to their franchisees,” said Wells. “Building a franchise system takes a long time — often over 10 years to gain scale. As a result, the parent company has to invest heavily in identifying strong franchisees, as well as training and support.”
Critics argue franchisees are paying hefty royalties and buying themselves a job with a company whose brand they can’t control. However, the appeal for franchisees is that they are purchasing the rights to use a brand name with a proven business model that includes corporate staff support for everything: advertising, operations, real estate, marketing and product development.
“There’s a saying in the franchise industry that franchising allows entrepreneurs to be in business ‘for themselves, but not by themselves,’” Wells said. “Franchising lays the framework for a successful business opportunity whereas start-ups must develop that framework themselves.
“But with any business, there’s no guarantee of success and a lot of hard work is required. Franchisees historically have had higher success rates than independent businesses.”
Kevin O’Leary says it typically takes three years for him to tell whether a Shark Tank deal will be a success. But he expects profits to flow from Wine & Design thanks to the massive exposure from the show and cross-promotion with his other portfolio companies.
“The outcome is unknown yet,” said O’Leary. “But you can look at the successes of other women-driven businesses. Sarah Margolis of HoneyFund: She’s now originating half a billion dollars of wedding gifts. We’re making a fortune from that. I expect the same thing out of this.”