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The franchise industry has gone through many changes over the last two to three years. There has been a total collapse of the specialty lender community. There have been numerous defaults and failures. There have been well-publicized bankruptcies, spin offs and consolidations. In general, there has been an industry slow down, but this industry, much like the stock market, seems to be ahead of the overall economic down turn. It appears the major shake-ups, retooling and restructuring of the financial aspects of this industry have all lead to the beginning of a recovery cycle. Therefore, now is the time for lenders and investors to come back into the franchise investment world. Here are nine reasons to come back.
1. Huge Sector. The franchise community is a huge sector. Depending on how it is segmented in the economy, there are approximately one million franchise locations in this country. In addition, the franchise sector represents a disportionally large percentage of the retail sector, and as we all know, the retail sector drives our economy and cannot be ignored. The retail sector has been here forever and will continue as long as there are consumers.
2. Reasonable Values. The downturn in the franchise community has resulted in lower values. The values are now at multiples of two to four times cash flow. This presents a huge opportunity for lenders and investors. The type of returns shown from these multiples are far in excess of what can be obtained from more speculative aspects of the investment community.
3. Down Point. As stated above, the industry seems to be at its low point and just beginning an up swing. It is always best to buy low and sell high, and now is the time to look at the current state of the industry.
4. The Bad Apples Are Gone. Most of the bad operators, over leveraged franchisees, and consolidators who have grown too fast have been either restructured or shaken out of most systems. Most franchise systems have now culled out bad franchisees and are positioned for retooling and growth.
5. Balance Sheet Problems. Many of the problems in this industry have not been operational or a result of bad concepts. The problems have been balance sheet related with over leveraged franchisees, over leveraged franchisors, and franchisees and franchisors not able to withstand downturns in sales. The underlying fundamental concepts have remained strong. One thing investors and lenders can do is help fix balance sheets.
6. Return On Investment. The present return on investments afforded an investor or lenders in this industry is extremely robust. The franchise debt community has always been able to charge higher than market rates. We hear of historic low interest rates but the franchise sector has always been willing to pay above market rates. This provides a unique opportunity to lenders. Further investors, because of the multiples discussed above, have a greater opportunity for return on investments. Leverage in this industry is down, prices are down, and as a result, return on investment is up.
7. Cash Flow. More than any other aspect, the franchise community is a cash flow business, and cash flow is definable and predictable. Sales may go up or down but cash comes in. Issues other industries have, such as receivables and creditor type concerns, do not exist in most franchise operations. I still believe the franchise industry is a wonderful industry for investors who are looking for high yield cash flow.
8. Safety Net. One thing franchising has always provided the franchisee and franchisee investor is a safety net. Franchising is no panacea to success, but a proven system with a viable concept that has been tested for a number of years always provides a safety net. No matter what happens, the business still produces cash flow. Franchise systems of any size always have enough resources, both at the franchisor or the franchisee levels, to prevent an overall melt down of the entire system.
9. Hedging. Franchise systems further provide an opportunity to hedge. In many cases, an investor or lender entering a system can benefit not only from the franchisee and the actual assets which produce income, but also from franchisor support. There is a community of interest with enough commonality to provide a hedge against a free fall.
Conclusion: The franchise industry has been through tough times, but the retail segment is on the up swing. For compelling reasons, investors have returned or are starting to return to the industry.
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