“The Best Franchise Finance Ideas for 2003”		«BACK
	by Dennis L. Monroe
	from Franchise Times, August 2003 Issue

As we come to the fall (and the busy time of the year for franchise finance), let's reflect on what I believe are the ten best franchise finance ideas of 2003.

1. Joint Venture Partners. One of the things that has happened in 2003 is the influx of new equity into the franchise industry. This new equity is money that is looking for an ownership position. In most cases, this equity money is not provided by active franchisees or franchisors; it is provided by equity funds, wealthy individuals or institutions that have decided the franchise industry is a relevant and robust investment opportunity. The franchise industry has two key things to offer an investor: (i) true and proven concepts and (ii) cash flow. So whether you are a franchisor or franchisee, look at ways to incorporate sources of equity. This can take the form of (i) a franchisor investing with a franchisee; (ii) a private equity group investing in franchisor corporate stores; (iii) equity investors investing with franchisees; or (iv) a franchisee that invests equity in or with another franchisee. You need to be creative and clever in your approach but realize that equity investors are looking to own something. Equity investors are looking for (i) substantial appreciation (which may be more appropriate at the franchisor level) or (ii) definable cash flow (which may be more suitable for a franchisee investment).

2. SBA. Even with the contraction of available funds for the franchise industry from senior debt lenders, the SBA is still an available senior debt vehicle for the franchise community. Earlier this year, the SBA lowered its lending limits to $50,000 but then based on strong objections, raised the limit back to $1,000,000. An SBA loan is something that can be creatively used for the franchisee's first few stores or for a franchisor who is initially developing corporate stores. Paying off the SBA loans after the units have matured allows the SBA qualification to be recycled. Franchisors should make sure they are on the national registry with the SBA so that SBA money is available.

3. Local and Regional Banks. While most banks do not have formal franchise finance lending groups, banks are interested in strong, viable businesses. It is comforting the number of small and regional banks that see the credit value of a recognizable concept. In most cases small and regional banks do not look at franchise assets as valuable collateral, they do look at the financial strength of the owner and the cash flow of the business. With the proper type of structuring and a well thought out business plan that clearly provides for the understandable aspects of franchising, a local or regional bank can be convinced of the credit worthiness of a franchise business. It is a slow process and takes some education but it works. The key is to find an experienced commercial lender who is willing to listen to your story. In many cases junior lenders will not stick their necks out for a franchise opportunity.

4. Franchisor Backed Financing Programs. It is clear in today's tight credit market that franchisees cannot do it alone and therefore, franchisees need franchisor assistance. Franchisor assistance can take three forms:

A. Information Support. The franchisor can actively inform, sell and provide valuable support information to key lenders who may be interested in a franchise system. This is a public relations and communications process and does not require any type of economic support.

B. Credit Enhancement. The franchisor can go at risk for some portion of the funds that are lent by a third party to the franchise system. This can be in the form of a loss reserves, pledged assets or a guaranteed remarketing agreement.

C. Direct Loan Program. Franchisor assistance can be based on a direct lending program to jump start development or provide working capital. This direct involvement requires the use of the franchisor's balance sheet and possibly a liquidity commitment.

5. Your Landlord. Real estate is a tremendous asset and landlords are always looking for strong tenants. All franchisors and franchisees know how difficult it is to finance leasehold improvements. Lease rates are at historic lows and therefore, there is room to move up lease rates and still have a viable economic unit. The landlord should be approached with a proposal to include the leasehold and, if possible, the equipment into the rent factor for the leased premises. Obviously, the landlord has to have the appropriate return and be able to amortize the cost of these improvements or equipment. The beauty to the landlord is that if for some reason the tenant fails, the landlord has a fully furnished space for a like user.

6. Real Estate Investors. Many real estate investors enjoy the certainty of cash flow from real estate, and they may be good investors for a franchise business. Consider that real estate investors like definable cash flow and that the return from the cash flow for most franchises is superior to real estate. The investors who have the mentality of passive income from definable assets are ripe for the franchise world. Normally real estate investors are not expecting the high equity returns of a private equity fund; thus providing the franchise owner a lower cost of capital.

7. Equipment Leasing Companies. While senior lending has been tight, the equipment leasing world is still robust. There are a number of national and local equipment leasing companies to be pursued. Furniture, fixtures and equipment (FF&E) lessors can be sourced through banks, the franchise finance conference and this publication. FF&E can be liberally defined to include soft costs and other costs to be included in a lease package.

8. Restructured Debt. Even though many franchisees have found themselves in financial trouble in the last several years, all is not lost. Restructured franchisees with manageable debt can be viable businesses going forward and be candidates for a future refinance. We call this a "fresh look." Do not be afraid to approach your lenders to get a workable debt structure as this may be the best way to protect your business and the viability of your future. There is no guaranty the lender will help, but lenders want to see their credits perform and would rather hear sooner than later of troubles. Be open with your lender and look at what realistically works for you from a debt standpoint.

9. New Players. While sometimes we get too busy singing the blues about the shortage of franchise lenders, there are a number of new players who have gotten into the franchise market. These new players encompass national players as well as some older players who are again getting interested in the franchise industry. Keep your eyes and ears peeled to this column as I will be highlighting some of the new players in a future column.

10. Sale/Leaseback. The real estate sale/leaseback market is alive and well, particularly the like-kind exchange market. The lease rates charged by sale/leaseback groups are very attractive, ranging from 8% to 11% of cost. There are a number of great sale/leaseback groups that specialize in franchise lending. You may think it is preferable to own your real estate but consider, with the present rates on sale/leaseback, even companies like Wal-Mart lease rather than own their real estate.

The franchise finance industry is a fluid, evolving industry that demands creativity and "outside the box" thinking by all those involved in it. While the quest is to discover the next good idea, the above ideas will serve as a checklist for you for the remainder of the year and will help you to come to grips with a clear financing plan for your future.