You expect a few things when you visit your favorite fast-dining chain: cleanliness, prompt service, and consistency. The multi-location, same-flavor experience that defines food-based franchises has helped propel the industry to an estimated $340 billion in annual economic output, according to a 2015 report.
For prospective operators who want a slice of the industry, there are expectations that go beyond menu items and counter service. Securing the right type of funding and managing capital at every stage of business is as critical as the quality of the food.
"Whether they're operating one restaurant or dozens, franchisees need a financing structure that helps them grow and adapt to an unpredictable environment," says Doug McKenzie, commercial leader at
CIT Franchise Finance, a division of CIT Bank. "Franchisees rightfully put a lot of focus on operations, but they can limit their opportunities if they don't give the same attention to financing."
The restaurant industry is a notoriously tough business, with some 60 percent of establishments failing within the first three years, according to University of Denver Professor H.G. Parsa, an expert on food trends.
Franchises hold appeal in part because of brand recognition and a proven formula that keeps customers returning. For first-time franchisees, assembling the cash to establish and operate the business can be a hard-to-fill order.
For some would-be operators, tapping into the resources of their franchisors is the easiest approach to getting started. Many franchisors have relationships with lenders that can help to shorten the approval process. There is also the DIY route, utilizing retirement funds, lines of credit, and home equity loans, even bringing in business partners or investors. Federally backed SBA loans are also an option, and with the passage of the American Recovery and Reinvestment Act, the SBA now guarantees as much as 90 percent of the loan. However, as franchisees begin to expand their businesses, their financing needs may shift to a more complex legal structure comprising discrete entities taking on debt from multiple sources.
Once a franchisee takes on a larger portfolio, it may be necessary to seek a financing partner that specializes in structured franchise financing. A specialized finance partner can help a franchisee to arrive at credit ratios that complement the company's current performance, develop an arrangement that supports future acquisitions, and leverage existing equity in the business so they can grow.
For growth-oriented franchisees, there are best practices to keep in mind. The businesses should be producing consolidated financial statements, ensure their premises lease agreements have extension options, understand their capex requirements, and not be over-levered. "Over-complicated organizational structures can create financing challenges in terms of reporting, securitization, and flexibility" McKenzie says.
As franchisees add locations and expand operations, they may find that the ingredients that worked in the past fall short as they grow a business. Operations may be overextended, and in extreme circumstances, intervention may be needed. Creating a healthy capital structure is as critical as keeping the kitchen clean-maintaining order keeps trouble away and helps prevent surprises down the line.
So you need financing for your restaurants? Beyond the broad economic conditions, multiple factors weigh into the lender's credit decision. Here are 7 to consider.