Capital still flowing for construction, remodels
A Shoney’s remodeling campaign is underway, to revitalize the 70-year-old brand. Some franchisees will be able to complete a full interior and exterior re-do for under $200,000.
Despite signs that some lenders are beginning to tighten the pursestrings, capital remains relatively cheap and readily available for operators looking to build new or remodel existing stores.
The competitive lending market is good news for franchisors that have an active development pipeline, as well as those feeling pressure to revitalize stores in an increasingly competitive marketplace. “The environment has been good. We have not seen tightening of credit for those operators who are doing well and have a relationship with their local banks,” says Patrick Sugrue, president and CEO of Saladworks.
Saladworks is in the midst of a systemwide redesign and has been working with its franchisees to help facilitate the mandatory updates for operators across the nearly 100-store chain. “Our franchisees, collectively, are investing about $5 million in capital expenditures to get the locations up to a new standard, and we are very excited about that,” says Sugrue.
Saladworks’ new design features concrete floors, open ceilings, reduced seating and more communal tables that resonates better with today’s consumer, notes Sugrue. The redesign also includes new interior and exterior signage. “Frankly, the brand needed a major facelift,” says Sugrue.
Many brands are finding it is still a good time to accept capital. Even with the recent Federal Reserve hikes, interest and borrowing rates are still historically low. On top of that, the financing marketplace remains competitive with a variety of lenders ranging from traditional banks and credit unions to alternatives such as sale-leaseback investors and online lenders that are well capitalized and eager to do deals.
That being said, there has been some caution in the marketplace, notably among bank lenders that are more heavily regulated. Construction lending has tightened slightly with lenders that are wary of the maturing stage of the economic growth cycle, which is now entering its eighth year. Banks are becoming more selective in the deals they are willing to do and relationships are playing a bigger role.
A basic remodel for a Saladworks store costs from $35,000 to $150,000.
Franchisors lend support
Franchisors are providing compelling arguments on the benefits of updates that can generate a return on investment with increased sales and help to maintain a competitive edge. The big question for franchisees is how to pay for those improvements.
Shoney’s unveiled its new restaurant prototype earlier this year. The new design reflects the commitment from Shoney’s Chairman and CEO David Davoudpour to revitalize the 70-year-old brand and appeal to a younger generation of customers. “In essence, we want to make the brand appealing to more people, otherwise the brand will die,” says Davoudpour.
Costs on the Shoney’s re-design will vary depending on the individual location and some of the choices the franchisees make on the extent of the remodel. Some franchisees will be able to complete a full remodel of the interior and exterior for less than $200,000, while other locations that require more extensive work could run up to $500,000.
Shoney’s franchisees are tapping a variety of financing sources, such as SBA loans, preferred vendors and local banks.
Shoney’s accounting department also is working with its franchisees to help obtain financing to execute the rebranding that the company is promoting, notes Davoudpour. “We are trying to make it easy for our franchise partners to have access to funds and also to re-image the right way,” he says. “Bottom line is important. So, we don’t want to go about it in a way that is not going to be profitable for them.”
Saladworks taps TI dollars
The basic remodel for a Saladworks store, which ranges between 3,000 and 3,200 square feet, can cost from $35,000 to $150,000 depending on the size, type and condition of the space and the geographic market. “The best operators have realized that this has been coming for some time and have been putting away money to do it,” says Sugrue.
For the most part, Saladworks franchisees are seeking out traditional capital sources, such as SBA loans, bank loans and lines of credit. Operators also are trying to time store updates to coincide with a lease renewal that will allow them to negotiate for tenant improvement dollars from the landlord to help offset the costs. However, it can be challenging to get landlords to increase TI dollars, even on a 10-year lease renewal.
For example, the negotiation that Saladworks did for its corporate store remodel ended up with TI dollars that only covered about 15 percent of the total cost. “That was basically an advance, because our rent went up commensurate with the TI money,” says Sugrue. “So, I am not seeing easy or plentiful TI money.”
Saladworks provides its franchisees with support in accessing financing. For example, the company has a relationship with Boefly, a financing marketplace that helps business owners seeking small business loans, commercial financing and franchise financing from banks or other specialty lenders. “Ultimately, that streamlines the process, because Boefly and their participating banks know about our remodeling program and we update them on what’s happening,” says Sugrue. Saladworks also has been active making presentations to local banks on the concept and the remodel to help franchisees secure loans.
The first Saladworks remodel debuted in February 2016 and the company expects the majority of existing franchisees to have remodeling work completed by the end of 2017.
“There are a myriad of ways that this is being financed,” he says. “The most important thing that we can do as franchisors is be very judicious in what we require for the remodel.” To that point, the company value-engineered its new design and also gave franchisees lower cost options on items such as flooring.
Capital flows to strong credits
There is ample capital available for strong concepts and franchisees who have good credit. The flip side is those concepts with a more challenging business model or franchisees who are viewed as a bigger credit risk are finding it difficult.
“The lending environment is very healthy for us. Our franchisees are not finding it difficult to secure loans,” says Phil Harvey, chief development officer at New Jersey-based Lightbridge Academy. Lightbridge Academy expects to have 37 locations open by year-end with a healthy development pipeline that will add about 15 new childcare centers per year for the next few years.
Harvey credits that access to capital in part to the fact that childcare centers are in demand and performing well with a very low business failure rate.
The cost to build a new 10,500- to 11,500-square-foot Lightbridge facility ranges from about $1.5 million to $1.7 million. Most of its franchisees are securing financing from local community and regional banks, as well as specialty franchise lenders. “We also have found that there is considerable and growing interest among real estate development organizations that specialize in developing for franchise systems,” says Harvey.
The company has franchise locations under development in New York, New Jersey, Pennsylvania and Virginia, and the company recently opened new territories in Ohio, North Carolina and Florida. “I do think that there is an increase for lending appetite among different types of lenders and that is helpful to the general market, because interest rates are really low and I think everyone expects them to rise,” says Harvey. “So, a greater presence of lenders in this space will help us to maintain a competitive atmosphere for financing and for growth of new locations.”