Raising the dough: as money markets rock and roll, financing has become notoriously difficult. With the financial sector in flux, franchise operators are finding there are still deals out there. But at what cost?
Nation’s Restaurant News, July 20, 2009 by Mina Williams
On the heels of a lackluster economy and sagging consumer confidence has come the fight for investment funding. Whether they’re starting a business, adding a unit or renovating or replacing equipment, operators are on the hunt for the right fit in financing at a time when interest rates are higher and terms are less attractive in today’s lending market.
“There may be slightly more loose purse strings, but there are many strings attached,” says Robert Zarco, founding partner, Zarco Einhorn, Saikowski & Brito, Miami. “Borrowers’ credit scores need to be higher, fees are higher and the requirements of personal guarantees are higher.”
According to Paul Facella, of Inside Management a Lynbrook, N.Y.-based consulting firm, “What used to take two to three weeks now takes six to eight and requires 25 percent down. Established franchisors have money available to them, but even that is tighter. Some venture capital and angel investors are still out there looking for the next great idea, but they will want more equity stake in your company.”
David Nilssen, founder, Guidant Financial Group, Bellevue, Wash., explains, “With restaurant investments so heavily weighted in equipment, lenders are apprehensive. The restaurant category has taken a huge hit [in lending]. Money diverted to restaurant lending has shrunk.”
Franchise underwriter Tony Basile of West End Financial Advisors, New York, says that while lenders are still lending, they are looking for a higher yield than they have before. “Loans are being made, but made selectively. It’s harder for people who are borderline,” he says.
Operators agree and claim that building relationships with a bank, being a solid operator and selecting a solid brand may encourage underwriters to take the risk.
“There is money on the street; getting it is a lot tougher,” says Ken Caldwell, vice president franchise development, HoneyBaked Ham and Cafe, Detroit. “Standards are at an historic high, and government restrictions are there. There is a different environment. You have to prove your credit worthiness.”
“Financing is hard to come by, but we haven’t faced that problem, because we detail our earnings claim in discloser documents,” says Scott Iversen, director of franchise development, Toppers, a Whitewater, Wis.-based pizza group. “We have a great story to tell; $945,000 in sales in 1,600-square-foot locations and an EBTA of 14.5 percent. Lenders are more cautious these days. They want to see a great track record–and if you have a great earnings claim that puts you a leg up on a lot of franchisors. With lenders you have to speak to your successes.”
HoneyBaked recently partnered with Bruster’s Real Ice Cream to co-develop locations and bolster its position as an operator for all seasons. The move combines a typical HoneyBaked unit of 200 square feet with Bruster’s to present a 2,400-square-foot restaurant. Revenue is boosted, while real estate, construction and operation costs are reduced.
WHERE’S AN OPERATOR TO GO?
Most franchisors report that commercial banks are still the preferred lender for their business partners. However, the behemoth banks may not have the same affinity for small business as regional banks. Many franchisors bring relationship lenders to the table, making the rough road of financing a bit smoother.
“Large national lenders continue to fund projects, but they have stopped looking for new deals,” explains John Dikos, director, franchise development, O doba Mexican Grill, Denver. “Our 70 franchise groups have no challenge raising capital. They are multi-branded, multi-unit diversified operators. It is the single units that are harder to attract capital.”
For new and single-unit prospective owners, creativity is a must. There are private-equity types that specialize in mezzanine-style loans, but it depends upon the concept. “You do see lenders that like certain brands and individual borrowers within those brands,” says Dikos.
“Operators need to work harder and look off the beaten path,” suggests Mitch Jacobs, chief executive, On Deck Capital, New York