“Finding Financing in the Cracks”		«BACK
	by Dennis L. Monroe
	from Franchise Times Articles, January 2002 issue

I would like to propose eight financing sources or techniques for your consideration:

1. Seller Financing. It is more crucial than ever in today's environment for a seller of a franchise business to carry back a significant portion of the financing in a sales transaction. In fact, it may be necessary for the seller to carry all of the financing with the idea that when the senior debt financing market opens up, a portion of the seller financing can be taken out. Seller financing, in many cases, will have favorable rates and will always be subordinate to a senior lender. Also, seller financing will probably have easier payment terms than would normally be the case if a third party subordinate debt financing source is used.

2. Landlord Financing. Landlords are interested in strong tenants and consequently, they may opt for providing financing, not only for the real estate aspects of the transaction (like leasehold improvements) but also for fixtures and equipment. The hope is these contributions will assist in creating a viable tenant. If the landlord holds title to most of the personal property on the premises, and if the tenant defaults, the landlord can quickly gain control of the site, and hopefully, find a new tenant with all assets in place. Also, the landlord can take over and run the business, particularly if the landlord has secured from the franchisor an intercreditor arrangement whereby the landlord has the right to operate the franchise for a period of time until a new franchisee/tenant can be found.

3. Creation of a New Entity. Many times existing franchisee assets are fully secured, and the lenders who hold the security interests will not allow for any type of secondary financing or release of collateral. Therefore, new store development or acquisitions should be dropped into a new corporation and hopefully, with this "newco" structure, there will be an opportunity to secure investor monies which provide the necessary equity to secure senior debt. This approach leaves the old assets as 100% owned by the borrower but provides the new investor an equity interest in newly developed assets. An equity contribution is crucial, and this "newco" strategy allows for an optimum capital structure with the least amount of baggage.

4. Sale/Leasebacks. Even though many types of financing are tight, sale/leaseback financing is available. The rates and advance amounts (sale price) are very good. In addition, the proceeds from a sale/leaseback arrangement may even provide funds for the personal property necessary to operate a franchise site as well as many soft costs.

5. Niche Equipment Leasing Companies. Franchisees often look to national players for equipment leasing, but in many cases, local niche equipment leasing groups owned by small banks or investors may provide an opportunity. These groups can be found in the yellow pages or by contacting a local banking institution.

6. Franchisor Lending. The franchisor is a key source of financing. Franchisors are interested in development and strong franchisees. In many cases, franchisors may provide for financing for growth, development or re-imaging. Therefore, push your franchisor.

7. Vendor Financing. Vendors and suppliers are also possible sources of financing. Vendors and suppliers are interested in maintaining relationships with franchisees because of the underlying goods and services they sell. Vendors may agree to extended terms, provide money for marketing and financing for fixtures and equipment.

8. Private Placements. While the public market for most multi-unit franchise operations is fairly limited, there is still an active private placement market. These placements are derived through wealthy individuals interested in a more substantial return on investment versus publicly traded stocks and bonds. The downturn in the market has stimulated a desire to invest in entrepreneurial businesses. Many investors have formed funds known as buyout or sponsor funds (previously discussed in this column). The private placement market is alive and well and should be considered.

In summary, even though the financing market may be difficult, times call for guerrilla tactics. The key is to consult with people who understand the marketplace and know how to search the nooks and crannies to find optimum financing.