Finance

Massachusetts: SBA/Bailout Microcosm?
A Nov. 2 article in The Boston Globe puts numbers on what everyone in franchising and already knows: large national banks that received billions in bailout funds are not making SBA 7(a) loans to small businesses. Bank of America (more than $45 billion in bailout funds) reportedly made only eleven 7(a) loans in Massachusetts in the year (totaling $240,500) ending in September - down from 54 loans totaling $1.6 million the year before. While some smaller banks that received taxpayer funds were tarred with the same brush, the article also noted that "Some of the state's smallest - and most stable - banks have been filling part of the lending void."
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Franchising Gains in 3Q
The UNH Rosenberg Center Franchise 50 Index climbed 9...

SBA Eases 7(a) Resale Caps On September 1, the SBA announced revisions in its Standard Operating Procedure for financing of goodwill in resale transactions under its 7(a) program. The changes, which take effect October 1st, supersede revisions made in March that limited the amount of goodwill financing for resales to $250,000 or 50 percent of the loan amount, whichever was lower.

Ron Feldman, CEO of Siegel Financial Services, in a Tweet, wrote that the caps implemented last March "severely hampered the franchise resale market, hamstringing the ability for franchisees to sell their units to other franchisees or for franchisors to sell corporate units to new franchisees." Highlights of the new guidance, announced yesterday and effective on October 1, provide for the following, wrote Feldman:

Last year, our third quarter cover story on Item 19 urged franchisors to disclose more financial performance information in their FDD. After all, the FTC's amended Franchise Rule, which became mandatory July 1, 2008, contained language intended to make it easier for franchisors to make financial performance representations (FPRs; formerly known as earnings claims).

In that issue, Lane Fisher, a partner with the law firm Fisher & Zucker, wrote that changes: "...were made to encourage franchisors to make FPRs, remove impediments to a franchisor's ability to disclose performance information, and to provide franchisors flexibility to formulate such representations provided that they are truthful and reasonable."

Clearly, the goal was increased disclosure...

"How has the capital market for franchise financing changed in the last 3 to 6 months, and what are you doing differently in franchise sales in the next 3 to 6 months?"

Nikki Sells
Vice President, Franchise Development
Tasti D-Lite
People with money can still get working capital. It takes longer, but it's available to those folks with good credit and collateral; not so for folks on the bubble. We've seen a slowdown with SBA loans as well as much more scrutiny: what used to take three to four weeks can now take a few months, and the answer is not always "yes."

Candidates interested in 401(k) rollover funding seem to be much more cautious about letting go of what is left of their 401(k). For years, and as recently as several months ago, home equity loans were still the number one avenue for folks to finance a franchise...

Everyone knows the current lending environment is a challenge--especially if you're trying to finance a startup. Yes, there's still financing available for qualified people, but selecting the right funding strategy is more important than ever. It's time to get creative when thinking about financing options.

Despite what you hear on the news, money is available. There are institutions and individuals who haven't been affected by the housing market and still have money to lend. It's important to note, however, that we're seeing some big changes from traditional lending procedures in the franchise industry.

The first change is that it's more important than ever to start sourcing financing options before even choosing the franchise you want to buy...

The news reports that franchise lender GE Capital was halting new lending to potential restaurant franchisees was just another bit of bad news for operators feeling the fallout from the Wall Street meltdown.

Tightening credit markets have forced restaurant operators from all segments of the industry to put expansion plans on hold as sources of financing dry up.

Tony Vanjohnson, founder of the six-unit fast casual chain Margaritas in Cincinnati. Is already seeing the economic crisis put a damper on his company's expansion plans.

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 franchisers is growing, giving investors a lot more choices. There are now about 3,000 different franchise concepts, according to the International Franchise Association.

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.

As I write this, uncertainty crashes all around us like a violent hurricane. Now is the time to bolster your sales and marketing plans and get ready for disaster business planning. Lehman Brothers went under, Merrill Lynch was picked up in a fire sale by Bank of America and AIG needed government assistance to stay afloat. We're worried about the Chinese pulling their money out of our economy, sending us spiraling further downward. And nobody has figured out what to do about huge federal spending deficits. Then there's trade deficits (although the plunging dollar will help curb that problem), the sub-prime crisis, plunging real estate values, a crashing stock market, not much hope for venture capitalists getting money out of their investments for a while, and, wow, take a breath, what else?

Oh, yes ...

As the credit crisis and the economic downturn begin to bite on Main Street America, restaurant row is in for a shake-up. For the first time in nearly two decades, the $550 billion restaurant industry has suffered stagnant sales this year, creating painful cash-flow problems for restaurateurs who can't get credit lines to cover investment and operating costs even as food and labor costs have risen sharply. That's made it harder for chains and independent eateries alike to upgrade equipment, hire new staff and renovate facilities. "The credit crisis is having a devastating effect on nearly every segment of the industry," says Aaron Allen, CEO of the Quantified Marketing Group, an international restaurant-consulting firm. "This is the death knell for a number of restaurant chains...

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 franchisers is growing, giving investors a lot more choices. There are now about 3,000 different franchise concepts, according to the International Franchise Association.

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.

Before I answer your question I think a bit of historical background is important. Our economy is where it is today because we chose not to learn from what we did in the past.

I remember after the bubble broke following the dot-com meltdown we were faced with similar questions. And we moved through those troubled times to what became one of the best environments for the growth of small business and certainly franchising. It is a fact of life in our economic marketplace that business cycles happen. Business cycles in the United States have always produced a beneficial cleansing although living through the corrections is always painful in the short term.

There are clearly differences between the two periods. Then we were faced with a marketplace that suspended its understanding that a slower burn rate was not the same as sustainable success...