Franchise Finance
Franchising in New England a blog of the New England Franchise Association (NEFA) is publishing a series on Franchise Finance, Series 1 is entitled: Utilizing Retirement Savings as a Funding Source.
With small business loans and second mortgages scarce these days, some middle age entrepreneurs are starting companies using their retirement savings, a novel financing method that is helping people get into their own business.
Jon Wilson and Larry Blasier discovered the retirement financing option when together they decided they wanted to open a MAACO Franchise in San Luis Obispo, CA.
Jon and Larry shared a passion for restoring cars and were excited when they were approved to build a MAACO in their community. Jon has worked 21 years for the California Department of Corrections and Larry has worked 27 years for Long Beach Transit.
They both knew that this was what they wanted to do. The investment required to open a MAACO was approximately $296,500.00. That was more cash than they had available so they needed to assemble a financing plan. IRA Rollover Solutions of Kirkland, WA a NEFA Member set up a C Corporation for them, a designation which allows a company to issue private shares of stock. Then a profit-sharing retirement plan was created within the corporation, making it eligible to accept pretax retirement contributions, without penalty or tax consequences.
Both Jon and Larry rolled over $75,000 each from their retirement savings, into the profit-sharing plan. As a result, the C Corporation could then use the money to invest in a MAACO franchise. They were also able to secure an additional $350,000 thru a SBA Loan provided by Small Business Loan Source, of Houston TX. The SBA Loan came in at 2 ½ points over Prime for 10 years 6 months, with the first six months interest only.
Jon Wilson knew right away when he contacted IRA Rollover Solutions, “this company was the right one for us. Rick Cox and Tom McDonald knew exactly what we wanted to do and handled the whole process with ease. We were never in the dark about anything and they were very professional in all aspects of getting our corporation established and us getting the start up money we needed.”
Jon and Larry have worked hard other the last few months is getting their MAACO franchise off the ground they signed a lease in August at 770 Capitolio Way, San Luis Obispo, CA 93401. They are scheduled to open by December 1st.
US Treasury Issues New Dollar Bill
The United States Treasury has issued a new $1.00 Bill. They are calling it the “Oy Vey”
TCBY Franchisee Association Objects to Mrs. Fields Reorganization
Several parties, including the Internal Revenue Service and a group of frozen-yogurt franchisees, are objecting to Mrs. Fields Famous Brands Inc.’s prepackaged plan of reorganization, which the cookie company has considered its fast-track ticket out of bankruptcy-court protection.
Rachel Feintzeig writes in the Wall Street Journal that a bankruptcy judge is set to consider Mrs. Fields’ plan, which it filed alongside its bankruptcy petition Aug. 24, at a hearing on Thursday. And while Mrs. Fields said in August that a sufficient number of claims holders already had accepted the plan, the TCBY Franchisee Association and the IRS are urging the court to reject it unless it is amended to include added protections for the groups.
The independent association of frozen-yogurt store owners has numerous contracts with Mrs. Fields — whose retail empire includes TCBY — and claims that the company hasn’t committed to upholding those agreements.
"The Association has requested assurances from the Debtors that they will not seek to reject…franchise agreements between the Debtors and their franchisees," the TCBY Franchisee Association said in court documents filed Thursday. "The Debtors have failed to provide such assurances as of this date."
In addition, the IRS, a creditor that says it is owed more than $216,000, called the plan "infeasible."
It objected to Mrs. Fields’ treatment of its priority tax claims in the plan and insisted that the company pay the claims "in full in cash with interest."
With 1,268 franchises in the U.S. and 21 countries abroad, Mrs. Fields is one of the largest retailers of specialty baked goods and frozen yogurt in the country. But the company was highly leveraged and had warned as early as June that it might need to seek bankruptcy protection if unable to negotiate a restructuring agreement with its senior noteholders out of court.
Franchisors Sweeten the Deal to Woo Franchisees
Raymond Flandez writes in the Wall Street Journal that franchise companies, facing what many say is the toughest economic environment they’ve seen, are offering two-for-one deals, reduced fees and financing help to woo new buyers. They are also paying existing franchisees to help spread the word.
The economy has made many would-be franchisees wary of taking big financial risks, while others simply can’t get the necessary loans. Meanwhile, competition among franchisors is growing, giving investors a lot more choices.
In a survey released last week of some 150 franchise companies, respondents said their franchise sales were about 72% below their 2008 goals, with inquiries from prospective franchisees down about 48%, according to Franchise Update Media Group, San Jose, Calif.
But even as "closing deals is becoming more of a challenge," says Harold Kestenbaum, a franchise attorney in Uniondale, N.Y., franchise companies have to be careful not to alienate existing franchisees when they offer discounts and other incentives to new buyers. "How does it look for the guys who pay the higher price when they see the price is getting lowered?" he asks. Making the situation more sensitive, existing franchisees, especially in the retail and home-service sectors, are being hit by cutbacks in consumer spending.
Earlier this month, Seattle-based Emerald City Smoothie launched a "Buy One, Get One Free" initiative. Franchisees can purchase an 800 to 900-square-foot Emerald City Smoothie store for between $165,000 and $290,000 and get a free kiosk in a gym, airport or small retail space. For franchisees, "it’s a lot less money in terms of development and build-out," says Rich Folk, the company’s chief executive.
With many banks tightening their lending requirements, Gold’s Gym Franchising LLC of Irving, Texas, is giving prospective franchisees more time to get financing by expanding its development cycle to three years from two. "If we’re happy with the guy as a franchisee and the only thing between him and the Gold’s Gym is that he needs more time to line up the financing, then I think it’s in my interest to do that," says Keith Albright, senior vice president of franchising.
Interiors by Decorating Den of Easton, Md., says it has seen a 33% decline so far this year in the number of leads it has received compared with last year, including inquiries from interested franchisees and requests for information. In response, among other incentives, it is offering to finance up to 50% of the franchise fee (or up to $15,000) for qualified individuals with a minimum of $55,000 in liquid capital. People may have the skills but not the capital to launch a franchise, says Kevin Atkinson, Decorating Den’s vice president of program development.
The company has also set up an entry-level decorator program. Potential owners can join Decorating Den as commissioned decorators working for existing franchise owners. They get to see how the business works and attend special training sessions featuring sales, marketing and decorating techniques — and, the franchiser hopes, eventually open up a franchise of their own.
Decorating Den hopes to sign up 180 new franchisees in the next year. "By being creative," Mr. Atkinson says, "these measures will not only help us weather the current economic storm but will actually make us stronger as the pendulum swings up once again."
Pinkberry serves up lawsuits to six yogurt shops
Pinkberry is accusing the businesses of deliberately emulating its highly distinctive branding.
Tiffany Hsu of the LA Times, reports Pinkberry Inc. is seeking to freeze out imitators filed six lawsuits this week against what it contends are copycat frozen yogurt shops.
Pinkberry is accusing Yoberry in Ft. Lauderdale, Fla.; Yoberry in Washington; Yogiberry in Olney, Md.; Pingo Yogurt in Alhambra; Monkee’s Teriyaki in Venice; and Peachberry in Long Beach and Gardena of deliberately emulating its “highly distinctive branding.”
The businesses were either reproducing Pinkberry’s fruit-shaped swirl logo, duplicating the minimalist layout of its stores or filching parts of its name, said Mark Friedman, the company’s vice president and general counsel.
Some of Pinkberry’s promotional material was doctored with another store’s name, one lawsuit alleges. Another claims that photos belonging to Pinkberry were altered and displayed.
“Our brand and our logo really caught on,” Friedman said. “These businesses are copying Pinkberry’s success in order to ride our tailcoats.”
Ever since Pinkberry opened in 2005, it has developed a cult following with its simple menu of yogurt. Its three flavors – original, green tea and coffee – can be paired with assorted toppings such as blueberries, strawberries and coconut flakes.
Friedman says he hears about possible knockoffs about four times a week. There’s Pinksweetberry and Razzleberry in Japan, Myberry in France and others in locales including Taiwan, Singapore and Vancouver, Canada, he said.
Imitators are often discovered when customers ask if Pinkberry is affiliated with a similar-looking business, or when people send the company congratulatory notes for opening in an area where Pinkberry has no store, Friedman said.
The privately held company has 65 stores in California and New York.
Franchise Financing Crisis
NEFA Announces: Panel Discussion November 18th, Marriott Hotel Quincy
Keys to Financing Success in the Current Economic Climate!
The financial lending crisis has reached Main Street and NEFA is planning a panel discussion for the next NEFA Meeting November 18th, 2008 at the Marriott Hotel in Quincy, to explore the ramifications of the crisis and how to obtains financing for franchisees and franchise systems.
In today’s economy one of the biggest concerns of a franchise system is how and where to get capital for franchisees to start their business or ways for franchisees to keep it running or to finance their growth.
This panel discussion is very valuable for each member of your finance and franchise development team as well as for existing franchisees, or prospective franchisees interested in expansion.
You will learn how banks and other lending organizations evaluate franchisee loan applications, and the types of funding that is available, even in these unsettled financial times.
Panelist
Anne Rice Hunt, Finance Chief, U.S Small Business Administration
Barbara Arena, CIT Small Business Lending, Senior Regional Account Manager
Bill Rowland, Equity America Mortgage Services
Itamar Chalif, Atlantic Capital Solutions
Tom McDonald, IRA Rollover Solutions
Moderated by: Constantine (Dean) Fournaris, Partner, Wiggin and Dana, Franchise and Distribution
Sponsored by: 
Blockbuster is sticking to bricks and mortar
Swati Pandey writes in the LA Times that Blockbuster is sticking to bricks and mortar. Even with the instant gratification of video-on-demand and the novelty of movies by snail mail may get many a consumer more excited than an old-fashioned trip to the corner store, but for Blockbuster Inc., the store is still the thing.
The Dallas-based video rental and retail chain, which closed hundreds of stores over the last year, plans to revamp many of its remaining outlets, expand its movie and game offerings, and add more rental and download kiosks.
That $36-billion figure is the total market for DVD’s and game sales — where Blockbuster has been expanding — and movie rentals. Blockbuster has a 40% share of the $9.6 billion movie rental business, of which in-store rentals account for more than half the total revenue, followed by mail subscription and video-on-demand, according to the company.
Blockbuster reported a loss of $44.7 million, or 23 cents a share, in the second quarter, ended June 30, compared to a $34.2 million loss in the same period last year. But same-store revenue rose 9%, and the company reaffirmed that it expects a profit for the year.
“Traffic tends to transfer to a nearby Blockbuster whenever they close a store,” says Arvind Bhatia, an analyst at Sterne Agee & Leach, Inc., adding that he estimates a “normal attrition” of about 150 store closures in the U.s. this year and next. Blockbuster now has about 8,000 stores worldwide.
"Financially, they’re doing well," he adds.
Blockbuster plans to increase its stock of rental and retail movies and games at each store as well as pay for store refurbishing, from paint and carpeting to adding Blu-ray kiosks. Some stores have already undergone a broader remodeling, complete with gaming stations and cafes.
“Too many of the stores still look like the old blue-and-yellow 90s VHS stores,” Casey says.
And analysts think Blockbuster still has life left in its stores — particularly on the retail market — before the Internet or video-on-demand becomes the dominant delivery system.
GE Capital Curtails New Restaurant Franchisee Lending
Paul Ziobro of Dow Jones Newswires reports in SmartMoney that GE Capital’s franchise finance arm is becoming more stringent in pricing and issuing loans for new franchisees, a pullback by one of the largest lenders to restaurant operators in the latest sign that Wall Street’s turmoil is spreading to small businesses.
While GE Capital spokesman Stephen White stopped short of saying there was a total freeze on lending to new franchisees, he said the franchise finance arm has become more critical in initiating new loans but continues to do business with existing customers.
"We are still active in the restaurant industry and we continue to quote deals where it’s competitive and appropriate," White said. "In this environment, we’re taking a longer look and even a closer look than we have in different times and that just makes sense."
Stephen Vaughan, chief financial officer of Sonic Corp. (SONC), told Dow Jones Newswires Thursday that franchisees of the drive-in chain have been notified by GE Capital’s franchise finance arm that it will temporarily stop financing new loans to Sonic franchisees. GE Capital is one of Sonic’s approved lenders.
Other restaurant industry deal makers have said in recent days that they have been turned away from GE Capital’s franchise lending practice when seeking new loans.
Sharon Zackfia, a restaurant industry analyst, said in an investor note Friday morning that GE Capital has halted new franchisee franchising, although it will continue to honor pre-existing financing agreements.
The action by the financing division of General Electric Co. (GE) is the second major lender to the restaurant industry to pull back this week, following news that Bank of America Corp. (BAC) has declined to increase existing loans to McDonald’s Corp. (MCD) franchisees, whose U.S. base is in the midst of installing equipment for sales of lattes, cappuccinos and other drinks.
Such moves could impede plans by restaurant operators to remodel existing stores, install new equipment, open new locations or convert existing company-owned stores to franchised locations, Zackfia said. She cited Sonic and Panera Bread Co. (PNRA) as two chains with a heavy reliance on franchise growth that could be most affected.
"While clearly other sources exist for franchisee funding options, the recent pullbacks of two of the main lenders in the arena are disconcerting, to say the least," Zackfia said. GE Capital and Bank of America are two of the largest national lenders to restaurant franchisees and restaurant deals. Other major lenders include Wells Fargo & Co. (WFC) and Wachovia Corp. (WB).
Credit conditions have become tight in the restaurant industry over the last couple of years, as major lenders helped finance a hefty diet of loans backing leveraged buyouts and expansions. "Financing for the larger transactions is not as prevalent as it was a year-and-a-half ago," said David Epstein, principal at the investment bank J.H. Chapman Group LLC.
McD’s franchisees see tighter credit for coffee program
Wall Street’s credit crisis is trickling down to McDonald’s Corp. franchisees.
David Sterrett of Crains reports that McDonald’s executives told franchisees last week that a lending program with Bank of America has reached its limits, and franchisees need to look to other banks for financing, according to a memo obtained by Crain’s.
The tightening credit markets could slow McDonald’s introduction this year of latte and mocha drinks in its 14,000 U.S. restaurants. McDonald’s wants franchisees to spend upwards of $100,000 each to buy the equipment and remodel restaurants to accommodate the new specialty coffee machines.
“Banks are nervous about lending for the (specialty coffee program),” says Dick Adams, a McDonald’s franchisee consultant who has seen a copy of the memo.
Bloomberg News first reported the memo on Monday. A McDonald’s spokesman said in a statement that the company’s “national beverage strategy is on target and progressing as planned.” Bank of America officials couldn’t be reached for comment.
The memo says Bank of America was looking to extend the program but “its announcement last weekend of its intention to acquire an investment bank and the volatility in the debt markets, especially this past week, have impacted B of A’s ability to get the quick solution originally anticipated.”
The memo says that McDonald’s is taking steps to minimize the impact of the credit crunch on franchisees and provides some tips about finding financing.
“Franchisees should consider using excess cash to pay down existing loans or pay for new equipment needs,” says the memo. “This will save on interest costs and reduce their exposure to bank failure if they are over FDIC insurance limits. The opportunity to refinance at a later date on more favorable terms may be available when the market settles down.
“McDonald’s Treasury Department is identifying new sources of liquidity and loan programs for our franchisees. We expect to have announcements on this in the coming weeks.”
Irwin Kruger, a longtime New York franchisee who hasn’t seen a copy of the memo, doesn’t expect the tightening credit market to effect McDonald’s specialty coffee program.
“It always seems that if McDonald’s requires capital to be spent to make improvements, McDonald’s makes sure those funds are available to franchisees,” he says.
No More Item #19 Excuses!
The time has come for all franchisors to disclose financial performance!
Darrell Johnson of FranData posted an article in Franchise Update that the time has come for franchisors to step to the plate and stop making excuses for not making an Item #19 Financial Performance Representation (FPR) in their Franchise Disclosure Documents (FDD)..
The FTC’s new Franchise Rule “permits a franchisor to provide information about the actual or potential financial performance of its franchise and/or franchisor-owned outlets.”
Darrell refutes many of the arguments that franchisors use for reasons not to make an Item #19 FPR:
- “We just don’t collect such data.” How does it look to prospective franchisees that a franchisor doesn’t collect such data? Keep in mind that half of all franchised units are in the control of experienced multi-unit operators. Two very reasonable conclusions candidates could make are that (1) the franchisor doesn’t have very good systems in place, or (2) that they don’t have very good data. Neither is a very good reflection on the franchisor.
- “We don’t have enough units to develop useful FPRs.” Could a prospective franchisee conclude that it’s too early to consider a brand that hasn’t developed enough company or franchise units from which to make a reasonable assessment of their performance?
- “Collecting such data would not be meaningful in our system.” The implication to be drawn here then is that this franchise system is so complex or so scattered or so somethingthat the franchisor can’t make sense of what the units are doing. That’s not exactly a good starting point for a prospective franchisee either.
The arguments against the use of Item #19 FPR are now out of date and mostly pertained to he previous disclosure rule which was formerly called “Earnings Claim”.
I am hopeful that more franchisors will stop making excuses and make Item #19 Financial Representations. It’s about time they did.
Jim Coen, Mr. Franchise
I have learned franchising from the ground up. I’ve been a franchisee for a bad franchisor. I’ve worked for good franchisors and I’ve worked for marginal franchisors. I’ve helped many franchisees succeed.
I provide a consulting process that saves you time and money in your franchise search and provides you with the tools to make the right choice for you and your family.
Call Toll Free: 877-469-3002
BlogRoll Or Other Links of Interest
Directory of Franchises
- Blue MauMau Franchise Directory The webs most comprehensive franchise directory
- Franchise Showcase Directory of Hundreds of Franchise opportunities
Franchise Associations
- American Association of Franchisee and Dealers The AAFD is a national non-profit trade association.
- American Franchisee Association The AFA is a national trade association of franchisees and dealers.
- New England Franchise Association NEFA mission is to share information and ideas for success.
Franchise Perfection
- Home Page At Franchise Perfection we are franchise consultants and advisers, helping those interested in buying a franchise business opportunity.
Government Sites
- Franchise Rule Facts for Consumers The FTC Franchise and Business Opportunity Rule.
- Small Business Administration The SBA ia a US goverment agency to aid, counsel, assist and protect the interests of small business concerns.
