• Related Content

    Here are the 7 key indicators lenders look for in a restaurant franchise financing. [Article]
    Financing a POS system could be fiscally prudent for restaurant chains. [Article]

    Franchisees who own multiple units enjoy many advantages, such as spreading their fixed costs across more stores. If you are a franchisee looking to expand your portfolio, you will require financing to realize your growth goals. Having a sound, strategic growth plan and a track record of operational success can help owner-operators to secure the financing needed for expansion.

    Here are three quick tips to consider for your financial plan:  

    cafe 300x233 1. Expand with a plan

    Lenders need to understand why expanding makes sense. Will the market tolerate multi-unit expansion? Will expansion be profitable?

    2. Partner with the right lender

    Talk to other multi-unit owners and they'll tell you to pick your finance partner carefully. A great partner becomes an extension of your company. They can help you to know which finance structures to deploy and when to use them.

    3. Get your papers in order

    You need to demonstrate your past successes and the expected impact of future growth on your company. While income statements and balance sheets show past successes, you'll use  pro-forma financial statements to demonstrate your financial situation over the next several years as you add more stores.

    When deciding to take on a larger portfolio, it is time to seek more structured financing. By working with a single, specialized partner, franchisees can be better assured that they will meet the capital requirements to fund their growth plan and achieve their long term plans.  

    http://www.franchisetimes.com/pdf/2017/CIT-WhitePaper.pdf

    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. 1

    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.

    Franchise 350x226 "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. 2 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.

    1 http://www.franchisedirect.com/information/foodfranchiseindustryreport2015/?r=4927
    2 http://daniels-pull.universityofdenv.netdna-cdn.com/assets/research-hg-parsa-part-1-2015.pdf