Overview of Bank Lending to Multi-unit franchisees
National institutions are lending into the franchise arena again for expansions, acquisitions and re-financings, but only franchisees of the top restaurant systems have a ticket to the show.
Several national lenders, including First Franchise Capital in Park Ridge, NJ, formerly known as Irwin Capital (see chart) are lending only to multi-unit franchisees on a specific list of top restaurant brands. Others, like New York-based CIT Corporate Finance, have no list, but impose other parameters. Bob Bielinski, managing director of CIT's Corporate Finance office in Chicago, said, "We serve multi-unit franchisees with annual EBITDA of $7.5 M. Only operators of Tier 1 restaurant brands fit into that category."
"A lot of concepts have struggled during the recession. Larger brands are less volatile," said Quinn Hall, managing director of Wells Fargo Restaurant Finance in Carlsbad, CA.
An Illinois-based institution, Wintrust Financial Services in Lake Forest, has mitigated risk even further, by lending only to McDonald's franchisees. Sandra McCraren, president of Highland Park (IL) Bank and Trust, who oversees the national program, said, "When things dried up at larger banks, we were still liquid and continued to provide financing to McDonald's franchisees." Unlike lenders that sell loans into a syndicated marketplace, McCraren's bank holds all the McDonald's loans in its own portfolio.
The difference from last year, when all lending was scarce, is that multi-unit franchisees that do fit the parameters of national lenders now have choices and can negotiate terms. When Sunny Ghai, of Fremont, CA, for example, wanted to add eight Oregon Burger Kings to the 16 he operates in the Sacramento area, he applied to two national lenders, and accepted an $8.4 M deal from GE Capital, Franchise Finance in Scottsdale, AZ. "The other terms were too difficult," he said.
When lenders did have capital last year, they deployed it to help existing clients expand, re-model or refinance. Today, some of them are taking chances on new operators. Zak Samaan had worked for Jack in the Box corporate in San Diego for 28 years before deciding to become a franchisee himself. He partnered with his brother, Maher, a five-year franchisee of another brand, and applied to three banks for financing to purchase six corporate Jack in the Box stores, including one near the chain's headquarters. He made a 30 percent down payment from his own savings and reached a deal to borrowed $2M from First Franchise Capital. Samaan says. "The First Financial agent explained everything to me throughout the process."
As they begin to compete again for borrowers, national lenders are becoming more user-friendly. First Financial Capital's vice president of franchisor relations and marketing, Sharon Soltero, who works out of Columbus, Nebraska, says that lender has offices in several states and credit and sales staff across the country to assess large deals in person.
"GE is trying to humanize the lending process," said GE Capital, Franchise Finance's senior managing director, commercial leader Trey Brown. "We've adopted a regional and local coverage model with more feet on the street. Operators who hope to borrow money in a year or two when their balance sheets are stronger should reach out to us now and build a relationship."
And because lenders are still wary of risk, those extra feet are being used for site visits. Dan Holland, managing director of the Restaurant Finance Group of Bank of America in Atlanta said, "We like to kick the tires of a mulit unit franchisee's existing operations before making a deal. How do the stores run? What are the unit economics?" Holland advises prospective borrowers to let banks look around casually in the back and front of the house. Don't make it into a pre-planned event, he said.
Franchisees of restaurant concepts that fall short of Tier 1 and Tier 2 status may still manage to borrow from the larger lenders, said Randy Schultz, managing director of Regions Restaurant Group in Alpharetta, GA. "We will do deals with operators not on our approved list, depending on their individual operating history and personal and business credit strength."
Otherwise, operators of smaller restaurant concepts and non-restaurant businesses must seek financing from regional or community banks, institutions that are skittish about risk and have little experience in franchise lending. According to GE Capital, Franchise Finance's "2010 Chain Restaurant Industry Review," loan activity across the nation's banks started increasing at the end of last year, but new loan volume for 2009 was $75 B, far below the previous low of $139 B in 2001. Lenders, the report says, are balancing their residential and commercial real estate exposure with "stricter underwriting parameters for new loans."
"It's a nervous climate," said Ghai, who is also building new Burger Kings, two of which are co-branded with gas stations, a category that GE does not fund. "My deal with GE took two months," Ghai said, "but it took me six months to borrow $3.6 M from a local bank, and I have my personal savings there. And when I contacted local banks, they wanted a 30 percent to 40 percent down payment, while GE only requires 20 percent."
John Graham of Birmingham, Alabama, is a franchisee with BrightStar, a medical and non-medical care and healthcare staffing company in Gurnee, IL who was turned down by local banks when he tried to borrow working capital and funds for expansion. "We've been open two and a half years," he said, " and profitable for 15 months, but they still wouldn't touch us. I have 50 to 60 people working for me and I pay them every week, but reimbursements from long term care insurance companies and the Veterans' Administration can take up to six weeks. I was at the point where I needed financing just to take on new clients."
Franchise Finance America, a division of Siegel Financial Group of Conshohocken, PA, and Bancorp Bank of Philadelphia are filling that gap, by providing expansion funding to select franchisees. Siegel CEO Ron Feldman said that BrightStar, which was awarded a $6 M credit facility, was the first of an estimated 30 brands to be approved for the program. Franchise Finance America will screen franchise systems for "great unit economics," he said, and invite them to participate and pay a fee of one point of the money loaned to franchisees. BrightStar CEO Shelly Sun said Graham will be one of her program's first participants.
Until lending loosens, existing franchisees of top systems will expand faster than their peers. None of the bankers we talked to would comment on the impact of this on the general franchise community. Samaan, the new Jack in the Box franchisee, is happy to be in the select group. "I've had my stores for a month," he said, "and I really enjoy what I'm doing. In the next five years, I want to have 30 restaurants."