There has been no small amount of discussion, and hand wringing, related to the current conditions in the credit markets.  Not as much has been said about equity markets in our industry.

This month’s column will give you some ideas of what you can expect in the 2008 financing market.  It is no secret that all financing has tightened and the amount of time it takes to get a financing deal closed has almost doubled. 

Last month’s column dealt with getting ready for a downturn.  Much of the column discussed appropriate steps to take to minimize issues if, for some reason, the franchise business has to go through a restructure. 

The franchise world is getting older.  Most of the major franchise systems were developed at least 20 to 30 years ago, and the average franchisee has aged along with the franchise.  The aging of the franchise systems and the franchisees have converged to create a significant need for franchisors to embrace the issue of exit planning for their franchise community. 

The franchise world (particularly franchisee expansion development) is driven by the availability of credit.  We have seen significant cycles over the years, from easy credit in the mid through late 1990s to the proliferation of lenders into the franchise market using securitized lending and then the withdrawal of those same lenders.

This article is truly a work in process about the technique of securitization.  As I write about this month’s topic, there are significant pending transactions utilizing the franchisor’s cash flow and royalty streams as a collateral source for low interest debt financing which may further define this topic. 

In the world of franchise finance, it is always wise to reflect on what has happened over the previous year and see how the past can create opportunities for the coming year.  2006 was a year filled with significant activity in the franchise community: (i) an unprecedented number of new franchise concepts were created; (ii) an impressive number of franchisors were sold; and (iii) a large number of franchisee to franchisee transactions were closed.

The selling price of franchise businesses has significantly increased.  Nearly every week someone asks us if it is time to sell.  Even though it may be an appropriate time to sell in terms of the market, it may not be the appropriate time to sell in terms of your business cycle or being prepared for selling.

Over the years this column has addressed the use of sale/leaseback as a franchise finance vehicle.  While interest rates have been moving up fairly quickly and the prime rate of interest is now above 8%, the cap rates or effective financing cost of using sale/leaseback have stayed pretty flat.

For many years franchise financing has been effectively illustrated as a continuum.  On the far right of the continuum is the most conservative type of financing - senior debt.  Senior debt is dominated by banks and large commercial finance companies (e.g., GE, Bank of America, Wells Fargo and other groups).

Many sectors of the real estate market continue to remain strong and attract significant attention in the financing markets.  Notwithstanding the recent slow down in the housing market, demand for and the valuation and financing of commercial real estate continues at a strong level.

“Can I raise money when I have only one location?” “Can I start franchising with one location?”  These are questions our firm is regularly asked.  In the past, our answer to both questions has always been “no”, but we are not as convinced today, especially as to the first question.  This article will address these two questions.

Two key words in the franchise finance world for 2006 will be “multiples” and “activity.”  It is apparent, through recent and pending transactions, that the valuation Multiples (the cash flow from the target business times a multiple) are at historic high levels.