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SPARTANBURG, S.C. — Denny's Corporation announced last week that it has arranged loans for domestic franchises to grow. The national lending program will be brokered by Pinnacle Commercial Capital, which in turn is working with BancAlliance, a bank-controlled cooperative that is managed by Alliance Partners, and with other lenders that are willing to provide up to $100 million for new Denny's restaurant units.
Denny's senior vice president responsible for global development of the 1,670 unit chain, Stephen Dunn, declared: "We are positioned to accelerate our domestic development and seize valuable market share for Denny's at a time when other brands are scaling back on their growth plans." Dunn added that Denny's is providing additional incentives for franchises in emerging markets in the United States. From the company's viewpoint, emerging markets can include large markets such as New York City, Boston or Atlanta. It can also include smaller cities such as Louisville, Kentucky. Denny's Corporation (NASDAQ: DENN) defines an emerging market as one where the brand does not have the top market share in terms of family dining dollars.
"Under our New and Emerging Market Incentive Program, we will reduce fees for franchisees that develop four stores over a reasonable period of time," says Steve Dunn. "The more stores our franchisees develop in new and emerging markets, the more they will save, due to a reduced package of fees and royalties, in addition to credits for development services including market planning, store design, training and development expenses."
Consultant Randall Hiatt, president of Fessel Internatioal Hospitality Consultants, thinks this is a good step for Denny's. "Many of their potential franchisees can secure financing in an environment where they might not otherwise find sources. It should also expedite this process and get the new Denny's units up and operating more quickly," he adds.
John Gordon, principal of Pacific Management Consulting Group, agrees. "This is a key indicator to the robustness of the Denny's franchisee assistance program," states the expert of restaurant unit economics. "Getting cost effective access to capital is one of the primary economic challenges for franchisees, particularly for concepts like Denny's, where the new unit build-out cost might be $1.5 million. Since company unit refranchising (selling existing company-owned restaurants to franchisees) is essentially finished, unit growth must come from new units, where capital costs are higher."
John Miller, CEO of Denny's Corporation, is backing up his franchise owners. "We strongly believe in Denny's long-term growth potential and are making a commitment to our franchisees through our New and Emerging Market Incentive Program, which we believe can significantly increase the number of markets where we are the number one or two family dining brand in partnership with exceptional Denny's franchisees."
The company believes enough in the program to act as a limited co-guarantor. Denny's will provide operating loss support if a franchise owner defaults on its loan for up to the lesser of $12 million or 12 percent of the outstanding loan.
Gordon is delighted for Denny's franchise owners by such news. "This is exactly what I had hoped more franchisors would do — to partly guarantee failure of a franchisee to pay back a loan," states the restaurant unit financial analyst. He thinks that by having Denny's Corporation there to partly pick up for loan failure that banks will in turn reduce the loan rate because of extra collateral and reduced risk for the lender. "Even if you end up only saving 300 basis points on debt, that works out to be a lot of money for a Denny's operator," he declares.
"I have to give credit to the few who do this — Jack in the Box, Papa John's, Burger King and Denny's. This is something very positive to happen in the franchise world," exclaims Gordon.
"Our commitment to Denny's and its franchisees continue to grow stronger through successful loan programs like this one designed specifically for their system" declared the president of Pinnacle, Bill Wildman.
Hiatt thinks that having one loan broker package loans nationally for the chain is easier to deal with for the franchisor. "The national program is much more manageable from the Denny's perspective and should have strong impact on their growth than one-off local based lending," states the Costa Mesa, California-based hospitality analyst, referring to some bankers who lately have shifted to the practice of community-based relational lending, where banks are reluctant to engage in national franchise accounts.
Lee Sachs, co-founder and co-chief executive officer of Alliance Partners, states: "We are excited to work with Pinnacle and Denny's to provide our BancAlliance members, some of America's greatest community banks, thrifts and regional banks, access to Denny's franchisees looking to grow the brand in new markets across America."