SYMPOSIUM - Franchise SYMPOSIUM IFA’s 45th Annual ... PARTNER AND CREATING YOUR OWN FINANCING ....

IFA’s 45th Annual

LEGAL SYMPOSIUM

LEGAL SYMPOSIUM IFA’s 45th Annual

FINDING THE RIGHT CREDIT PARTNER AND CREATING YOUR OWN FINANCING

Lane Fisher, Esquire FisherZucker, LLC Ron Feldman Franchise America Finance

Kenneth Switzer Marco’s Franchising, LLC Daniel Waddell Papa John’s International, Inc.


FINDING THE RIGHT CREDIT PARTNER AND CREATING YOUR OWN FINANCING

• Direct Financing • Facilitation • Equity Investments • Public Funding


The Franchise Lending Opportunity

•Over 3,300 franchise brands

•Over 200,000 small businesses

•Over 500,000 units

If franchising was an industry it would be BIG

REQUIRING ALMOST $12 BILLION OF LOANS IN 2012


Loan Availability


4-10 YR: Farewell To Cheap Capital?

• Challenges for the dollar as the world’s currency

• S&P warning to downgrade U.S. government debt

• Developing countries are hungry for capital

• Some countries that bought our debt will need more of that capital for growth at home


Elements of Brand Credit Risk Analysis

Franchisor

System

Unit

TODAY’S SOPHISTICATED FRANCHISE CREDIT ANALYSIS BUILT ON


Franchise Brand Credit Risk

BCRs℠ analyze a brand’s unit, system and franchisor performance; then compare to peers

• THE RESULT -- PREDICTABILITY

Category Measure UNIT Same store sales growth 2.5% Average Op profit before owner comp $69,398 Break-even # months since start of operations 11.3 mos 80% variance around break-even # months 3.5 mos SYSTEM

Average 3 year unit expansion 27 units Continuity rate 94.5% Adverse closed unit rate 2.1% FRANCHISOR Management team franchise experience 8 years Under-performing unit program Yes Lender support in work-out Remkg agt

BCRs DELIVER PREDICTABILITY


3-5 YR: Increasing Info/Data Transparency

• You’re showing brands how to benchmark • Franchisors have important system performance info/data • BCRs analyze unit operational info/data across systems • The Franchise Registry allows information/data flow to lenders • Better info – more $

Unit Operational Data Across

Systems

System Wide Unit

Operational Data

Franchisee Unit Operational Data

Unit Operational

Data

Unit Operational Info Across

Systems System Wide

Unit Operational

Info

Franchisee Unit Operational Info

Unit Operational

Info


4-10 YR: Demographics — Age

• Older age groups increased their numbers the fastest

• “Retirees” not just getting older; also healthy longer working longer buying longer

• Over 82 million (27%) are under 20 and leaders of mass customization


Know What League You Are In…

Investment Size: Under $150K $150K - $1MM Over $1MM

System Size: 1-50 Units 50-100 Units Over 100 Units


Transactional Lenders vs. Program Lenders

Transactional Lenders

Community, Credit Unions & Local Banks

Regional and National Banks at the Branch Level

Program & Franchise Lenders

Bank

Non-Bank

Consultants Boefly, FAF ROBS Providers

Borrower Initiated Franchisor Initiated


Franchisor Loan Enhancements

• First Loss Guarantees – On Balance Sheet – Off Balance Sheet

• Limited Guarantees – % of Loan – Step Down Provisions

• Remarketing Agreements – Franchisor keeps debt current/not


Franchisor Loan Enhancements

• Equipment Repurchases – Guaranteed Values – Lien Purchase Positions

• Operating Agreements – Works when Franchisor Operates Stores

• Franchisor Operates Units while remarketing – Pays current debt service during remarketing period


Being the Bank

• Franchisor direct lending • Franchise Fees/ “Soft Costs” • Captive Finance Programs • Vehicles/Equipment (remarket able assets) • Usually in lower investment size concepts • Rates/Terms tend to be higher than the

market


Franchise Financing Vehicles

• Captive Lender

• Equity Investment

• Loan Loss Guarantee Program



• Captive Lender – Pros

• Flexibility • Knowledge of business • Capture revenue stream

– Cons • Risk not diversified • “Two Hats” • Non-core business/overhead



• Equity Investment – Pros

• Strategic synergies/opportunities • Knowledge of business

– Cons

• Control/ROI • “Two Hats”



• Loan Loss Guarantee Program

– Lender agrees to make p to $5 million in financing available to Papa John’s franchisees.

– Approved franchisees may borrow up to 80% of new unit build-out costs, up to a maximum loan of

$200,000 per unit.

– Franchisee and loan must be approved by both lender and Papa John’s.

– Papa John’s guarantees the first $250,000 in losses in the loan pool, and 20% of losses in excess of

$250,000, up to a maximum of $1 million.

– Loan rates are indexed, but generally comparable or favorable to market.



• Loan Loss Guarantee Program – Pros

• Frees up capital by reducing lender’s risk • Favorable terms • Cash free

– Cons

• Risk without direct return


Marco’s Pizza

• 33 Year old Pizza Carry Out/Delivery concept • 21 states plus Bahamas • Branded as “Authentic Italian” • Phenomenal focus on product quality • 30% of new stores opened by customers


Marco’s Pizza

• $250,000 to $300,000 to build a store • Same Store Sales up 8.5% in 2011 • 280 stores. • 61 new stores in 2011, 33 in 2010 • Expect to open 75-90 stores in 2012



Captive Insurance Models • Domestic true insurance captives • Foreign true insurance captives • Pseudo insurance captives


Domestic Captives

• File 1120-PC (c-corp) return • Accrual basis accounting • Potential significant tax benefits • Max. $1.2MM premium annual limit • 80% of S&P 500 companies utilize


Foreign Captives

• Typically “Off-shore” (Bermuda, etc.) • Considered domestic for tax benefits • Generally well accepted by IRS • High degree of expertise needed to start


Pseudo Captives

• NOT a true insurance company • Simple to start (relatively) • No special tax benefits • Marco’s Assurance is example


Marco’s Assurance, LLC

• Key element in Risk Mitigation Strategy • Reduces lenders risk • Reduces franchisor risk • Reduces perceived risk of business model to

franchisees


Marco’s Assurance, LLC

• Guarantees $50,000 new store financing • Guarantees must be requested/approved • Audited entity • Funding also made available to relocate weak

locations


MA Guarantees

• Unconditional • First dollar loss after collateral liquidation • Guarantee resembles an insurance policy


MA Funding

• Portion of franchise fee and royalties • Escrow (not yet income or expense) • Actuarially sound • No funding from franchisees (state law issues

in most states)


MA performance

• 2 years old • No losses to date • Resulted in unknown number of additional

franchise sales • Resulted in 20% plus more loans granted


MA benefits

• More loans • Reduced risk profile • $50,000 not a “game changer” to banks • “What this means is that you stand behind

your franchisees”. (loan officer quote)


MA future

• Potential conversion to domestic captive • Potential increase in guarantee amount • Potential tie into Personal Guarantee

Insurance


PGI as Alternative

• (PGI) Personal Guaranty Insurance • Guarantees 70% of net loss after collateral

liquidation • Premiums: 1.5- 3% of loan, paid annually • Potentially a replacement to SBA • Brand and applicant must be approved • Huntington Insurance 419-720-7965


Captive loan loss entities

• Reduces Risk to Franchisor/Franchisee • Improves perception by lenders • May help in growth strategy • PGI is alternative • Analyze needs and numbers carefully


Other Methods • Operating Leases • Matching • Flexibility in Structure of Franchise Ownership • Discounts/Financing Initial Fees • Crowd Funding

Date post:	10-Mar-2018
Category:	Documents
Upload:	vuthuy
View:	215 times
Download:	0 times

SYMPOSIUM - Franchise SYMPOSIUM IFA’s 45th Annual ... PARTNER AND CREATING YOUR OWN FINANCING ....

Documents