“Simple Planning for Syndicated and Securitized Financing”		«BACK
	by Randy B. Evans
	from Krass Monroe, PA

As always, a well run organization with strong capital, experienced and successful management, good cash flow, stable earnings, and minimal leverage will attract more and better financing proposals than other organizations. In the commercial banking industry, the federal bank regulatory agencies use the so-called "CAMEL Rating" system to rate the overall strength and condition of commercial banks. Under this system, each bank is rated on a scale of 1 to 5, based on a composite analysis of the following factors: Capital, Assets, Management, Earnings, and Liquidity. A similar analysis can be applied to any business, including a restaurant franchisee.

In the case of a business seeking to make itself more attractive to syndication or securitized lenders, the appropriate acronym should be "SIMPLE." The various factors involved in the analysis should include Structure, Income, Management, Properties, Leverage, and Earnings. In other words, it is important to have strong sales revenue, experienced and successful management, good locations, minimal leverage, and a history of net earnings in order to attract the best financing proposals. However, in order for a business to attract large amounts of financing in the syndicated or securitized arenas, a critical additional element is Structure. Simply said, the Structure of the franchisee organization should be SIMPLE. Many franchisee organizations are structured as multiple corporations, partnerships, and/or limited liability entities with varied ownership interests by a number of different partners or investors. While there are always solid legal, business and tax reasons underlying a complex organizational structure, it makes the business less attractive to potential syndication lenders. SIMPLE is better.

First, it is easier from a lender's perspective to lend money to a single borrowing entity than to multiple borrowers or a combination of borrowers and guarantors. A lender must be able to trace the loan proceeds to the entity or entities that are obligated on the loan or have pledged collateral to secure the loan. An organizational structure that involves a holding company and multiple operating companies does not facilitate a clear tracing of the loan proceeds.

Second, a lender needs to understand the cash flow of the borrower and be able to determine exactly where the funds to service the loan will come from. Again, it is much easier to identify the source of repayment if there is a single borrowing entity than if there are multiple entities involved. Third, a lender will be concerned about legal issues in making a loan to multiple borrowers and/or guarantors. For example, if a lender makes a loan to a single borrower, which is a holding company, and obtains guarantees from the subsidiary operating companies, the lender will be concerned about the legal consideration for, and the enforceability of, the guarantees from the operating companies. Likewise if the loan is structured so as to require the holding company and all of the operating companies to become co-borrowers, the lender will be concerned about the loan proceeds flowing to each co-borrower and the enforceability of that company's obligation to repay the loan. In addition, the loan will be secured by a security interest in favor of the lender in the assets owned by the various operating companies. The lender must ensure that there is adequate consideration in the form of loan proceeds to each company, whether it is a co-borrower or a guarantor, to support the pledge of its assets as collateral for the loan. A simple rule of thumb is that a lender will always prefer to make the loan directly to the entity that owns the collateral for the loan.

For these and many other reasons that are beyond the scope of this article, a SIMPLE organizational structure that facilitates a single loan to a single borrowing entity that will utilize the loan proceeds and owns the collateral will be most attractive to a lender, particularly where the lender anticipates syndicating or securitizing the loan. The goal of the franchisee should be to achieve this SIMPLE objective without compromising the legal, business and tax planning objectives of the organization.