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Finance pros reveal how to attract capital, with ‘leverage’ the deal-killer


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Leverage. Leverage. Leverage. Three panelists said that word at once when asked to name the biggest deal-killer when they consider making loans.

Ryan Palmer

Ryan Palmer, Monroe Moxness Berg, moderated a panel about franchise lending to start the second day of the conference.

“It’s high leverage that’s the issue,” added Armando Pedroza, RBS Citizens Restaurant Finance. “But you have to drill down further to find why is it high leverage.” If the borrower has made an acquisition or remodeled restaurants, that’s a positive. If debt has increased because sales are down and cash flow is down, that’s not.

Five experts in franchise finance shared advice on how to convince lenders to commit money to franchisees. The analysis starts with the brand for Dan Holland of Cadence Bank. “You’ve got to understand the brand. Where’s the growth coming from?” is a key question he asks.

Mike Record of Wells Fargo starts with the brand as well, then digs into behavior. “How does the franchisor behave when things go bad in the sandbox? How focused is the franchisor on store level profitability?” Jim Ellis of CapitalSpring takes a “slightly contrarian” view, as he put it. “We spend a lot more time with a specific borrower. We do a very granular analysis,” he said.

Franchisors can help franchisees get loans by focusing on three points, said Dennis Monroe of Monroe Moxness Berg: What are the unit economics, what is the investment to sales ratio, and what kind of volatility in performance exists. “Start talking with lenders early. That doesn’t mean they’re going to make a loan to you, but get on their radar screen,” he advised, and ask financiers for feedback.

“Find out what they think about your unit economics. Find out what they think about your initial investment, your cost of capital. Start building your system around doing those things that will attract capital,” Monroe said.

 

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