Financing Becomes More Competitive for Franchisors, Urged to Report More Clearly

Jonathan Maze of Franchise Times and The Restaurant Finance Monitor is reporting from Las Vegas, where the Franchise Finance Conference is underway through Wednesday. (www.restfinance.com)

He noted a new tone of lending competition seems apparent, where lenders are chasing both franchisees and franchisors (must be qualified, however, more equity, strong brand, etc) but also that franchisors are receiving much more scrunity on strength of the brand, franchisor practices, strength of the franchisee base, etc. We heard the same at the 2010 Restaurant Finance Conference and via other conversations.

One of the recommendations there was to report more meaningful metrics. We have written about FDD disclosure in Blue Mau Mau in the past and will publish a white paper on same soon, but a high level summary follows.

What every unit, facility or point of distribution based franchise concept and franchsor must have is:

• annual net sales,  Franchisors must have this for royalty calculations..      
• store level earnings before interest, taxes, depreciation, amortization and rent, (EBITDAR). This is before owners return, bank debt. etc. We excluded rent since it is so variable and such a large fixed expense that must be modeled individually. Every bank or funding source in the world wide focuses on this number.

Of course, rent, interest, taxes and depreciation as a proxy for capital spending are real economic outflows, but the EBITDAR approach does best to standardize the raw cash generating ability of the location, before owners return.

The individual rent value can be plugged in during the proforma process.

These US values could be disclosed, perhaps via a 20/20/20/20/20 array in the FDD, from the highest 20% to lowest, with sales as the primary sort. This would be a meaningful display accompanied with the necessary cautionary language. This would be updated annually, to focus on full year data, and placed in that respective FDD version.

This could take some mystery out of the process, and might  work towards more efficient franchiseee screening and financing decisions.   

John A. Gordon

Chain Restaurant Earnings and Economics Experts

www.pacificmanagementconsultinggroup.com