After 14 years of writing this column for Franchise Times, I am going to take a break from the publication’s monthly deadlines. But first I want to reflect one last time on some of the ways financing has changed over last 25 years that I’ve been heavily involved in the franchise finance industry, as well as writing about it for various publications, specifically on restaurant finance.
Below are my 13 highlights.
- Franchise Finance. Franchise finance is now recognized as a unique and specialized financing area. Twenty-five years ago this area was regarded as no different from other forms of business financing. Little recognition was given to the tri-party nature of financing the concept, which involves the franchisor, the borrower and the lender. Twenty-five years ago lenders were still looking at asset value vs. cash flow.
- Franchisor’s Involvement. As recently as five years ago franchisors were reluctant to get involved in the financing game for their franchisees, as they felt obtaining financing was the franchisee’s responsibility. That changed in 2008, when financing totally dried up, and it was then not a question of if the franchisor would participate but how the franchisor would participate.
- Multi-Unit Operators. When I first began working in the franchise finance area, large multi-unit operators were emerging. These operators brought a whole new level of financing to the industry. They were not just financing one-off development; they were financing large, multiple developments, because they had deep financing needs and sought national lenders for securitization.
- Securitization. Securitization was one of the best and worst things that ever happened to the franchise finance industry. These types of loans provided huge amounts of funding in the 1990s but also created some unrealistic matrices for that funding; and consequently, when there was a downturn in sales (as there inevitably is in every franchise business), the leverage was too great and there was a huge imploding of these loans. In fact, after all these years, I recently finished my last refinance of a securitized loan.
- Sale/Leaseback. Sale/leaseback was one of the first types of financing developed for the franchise industry, at a company called FFCA. The sale/leaseback included financing for furniture, fixtures and equipment. The pioneering work of Mort Fleischer and his team back in the 1990s led the way for effective use of sale/leaseback, which to this day is a big part of franchise financing.
- Players Coming and Going. The number of players who have come and gone in this industry could probably line a small stadium. I remember a statement by Lehman when they got in that the smart money was now in the industry. We can now see how smart Lehman was. On the other hand, there have been a number of consistent players, such as Bank of America, Wells Fargo and GE.
Lenders. This industry has been extremely fluid, and there are a number of key individuals who have stayed in the industry and have gone from opportunity to opportunity. These veterans seem to have different platforms in any given year for practicing their skill set, and they do provide some consistency for the industry. - Investment Banking. There are a number of great investment bankers who have been in business almost as long as I have been working in the industry. They have become pillars of the industry and have helped many people buy and sell their franchise systems.
- Private Equity. Private equity groups have become active over the last 25 years in our space. There have been ebbs and flows over the years, but right now private equity groups are at a peak and seem to be some of the most influential groups investing in the franchise world. While franchisors did not embrace them early on, most are now welcoming them, as they know private equity groups are where the capital is.
- SBA. The Small Business Administration has consistently been involved in the franchise industry with the creation of the Registry. Lately, the SBA has become even more of a player in our space. Ron Feldman and other SBA experts have helped bring the SBA to a new level of importance.
Data-Gathering. The data-gathering for this industry to help with financing has been greatly enhanced by people like Darrell Johnson, who has pioneered reports and data collection to help move our industry ahead. - Lawyers. Franchise lawyers for years avoided issues of financing, particularly if they were franchisor attorneys, because they considered it a source of additional liability. But now the American Bar Association has embraced financing. Ten years ago, ABA Forum had no topics on financing, but this year I bet there will be a number of sessions dedicated to the subject.
- Good People. The one thing I have always loved in my years of being in this industry is the quality of the people. Franchise people enjoy working together. There is always good competition. The franchise industry has been one of the most collegial industries I have ever been involved with. I look forward to many more years of being involved in this industry.
I want to give special thanks to Franchise Times for giving me this opportunity to express myself 10 times per year. Readers, thank you for all of your great comments.
From September 2013 Franchise Times
