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Finance

Access to capital is the lifeblood of franchise growth. Restricted lending policies of the past few years continue to be a challenge for franchisees, who need access to capital, whether to survive or expand. Lenders today are searching for solid franchisee organizations to do business with, but what exactly are they looking for? Learn what bankers, franchise lenders, private equity firms, and other capital sources want to see in a borrower - and make sure you are managing your organization in ways that make you attractive to lenders.

Learn more about the franchise finance and capital marketplace, and what factors are affecting your chances to borrow the capital you need to grow.

Feature Story:

Danger Signals?: 20 Signs Your Business May Be In Trouble »

By Steve LeFever

In business, owners often become trapped because they don't heed the messages their business sends and don't pay attention to basic principles.
The following checklist represents a clear set of danger signals (situations and issues) that have a clear and negative effect on cash flow. Take a few minutes under the harsh, cold light of reality to ask yourself how many of the following danger signals exist in your business. Then evaluate carefully their implications.

Feature Story:

Show Me The Money: 5 Questions To Ask The Franchisor About Financing »

By Mike Rozman

Thinking of buying a new franchise? Here are 5 questions to ask the prospective franchisor in order to determine if they will support you with financing.

1. How do you help me build my financing request?
The first challenge you’ll face in seeking a business loan is to prepare a bank-ready package. Banks want to work with serious borrowers and nothing shows you are serious like having all the documents a banker needs to see to move forward. Furthermore, banks look for very specific information to understand if your business is a fit for their very specific lending criteria. The best franchisors recognize that many of their current and future franchisees would benefit from assistance when seeking a business loan and therefore, they step up to support them...

Feature Story:

Guaranteeing Personal Assets On A Commercial Loan »

By Steve Huntley

The inevitable risks and how to avoid them
Franchisees, business, and property owners who have personally guaranteed commercial loans face a challenging situation when banks seek repayment, especially in today's state of economic distress.

Lenders typically classify guarantors into three categories: (1) Well-capitalized guarantors with an expected profitable future relationship; (2) Guarantors with the potential for positive future business; and (3) Guarantors with a downside risk.

The relationship with lenders often becomes negative when guarantors fall into the third category. Guarantors in this category may experience a contentious situation with lenders and may find themselves in litigious circumstances in which money is wasted on legal fees and property values decline significantly...

Feature Story:

Did Someone Say "Profits"?: Understanding The Financial Operating Cycle »

By Steve LeFever

It happens every year, usually in February or March. Business owners across the country meet with their accountants to review the previous year.
The accountant says to the owner: "Congratulations, you made a profit." Of course, with the recession of the last four years, they are saying that less often.
Regardless, what are the two most common responses from owners? You're correct if you said the #2 response is: "If we made a profit... what's the line from Jerry Maguire? 'Show me the money!'" It's the profits versus cash flow issue...we'll discuss that later.
Consistently, the #1 response is: "Make the profits disappear... I don't want to pay any tax!" Of course, the accountant says: "Watch carefully, the fingers never leave the hands! Poof...

Feature Story:

When It's Time To Sell: How To Boost The Value Of Your Business »

By Mike Handelsman

There's no arguing that banks, potential investors, and creditors look heavily to a company's financial statements to determine its value. However, past financials often aren't the whole story. Here are some additional factors to consider as you seek to maximize your company's value - whether you plan to sell soon or simply want to be ready when that day comes.

Proven Potential for Increased Profitability
Perhaps the most important aspect of making a business attractive to a potential buyer is building their confidence that the business has the potential for increased profitability. Of course, step one is to produce documentation showing steady, reliable revenues and cash flow, but other steps can help paint a picture of untapped potential...

Feature Story:

Tax-Deferred Exchanges: A Creative Financing Tool For Franchisees »

By Andy Gustafson

Smart franchisees are always looking for ways to increase cash flow and reduce expenses. One strategy to consider for improving the bottom line is to replace a franchise property with one in a better location or to upgrade franchise equipment. Franchisees can use a creative financing tool, 1031 exchanges, to defer capital gains and recaptured depreciation taxes when purchasing real and personal property of equal or greater value. Savings on deferred taxes represent interest-free loans for higher-yielding acquisitions. Successful completion of a 1031 exchange depends on finding eligible replacement property and meeting identification and transaction deadlines.

How a 1031 exchange works
Tax-deferred exchanges, also known as 1031 exchanges, are enforced by the IRS...

Feature Story:

Looking Back, Looking Forward: Investing Insights For The 21st Century, Part I »

By Carol Clark

As we've seen in high-definition in the past few months--from the natural and man-made disasters in Japan, to the rolling upheavals across North Africa and the Middle East, to the volatile whipsaws in food and energy prices--the factors that must be accounted for while structuring financial affairs are much more complicated than ever before. Plus, the information is coming at us much more quickly, and the potential ramifications for our financial affairs are much more dire than in the "good old days."

The 1980s and 1990s were great times to be an investor. Interest rates were falling dramatically, instigating a huge and lasting bull market in fixed-income investments. Credit became easy to obtain and even our tax policies encouraged consumerism...

Feature Story:

Expansion Analysis: Sales Are Only Half The Answer »

By Steve LeFever

Growth: the all-American measure of success. But what kind of growth? And how do you measure growth in relation to success? For too many businesses, intelligent and well-intended owners settle for sales volume alone as the primary indicator of achievement.

Don't get me wrong, sales are important. I'm not trying to appear un-American or anything, but my premise here is that often growth--or expansion--occurs without an effective analysis or understanding of the underlying costs.

For most businesses, growth means expanding existing facilities or opening additional outlets. However, expansion costs money and the analysis has two aspects: financial and marketing. Financial answers the question: "What do we need?" Marketing answers the question: "What will we get?"

Here's an example from the folks who are best at this: the Golden Arches...

Feature Story:

Well-Coordinated: Balance Your Portfolio With Complementary Brands »

By Tracy Staton

The inspiration for Randy Elias's expansion into a new franchise concept came from a restaurant he'd been frequenting for years. In a prosperous area of Atlanta, a Mexican eatery called Jalisco sat next door to a Baskin-Robbins ice cream shop. With the help of customers looking for something sweet after a spicy meal, that Baskin-Robbins location was the number-one shop in that company, says Elias.

"Scott Paton, my business partner, and I saw the success with those two restaurants, and we modeled our business plan after that," says Elias. Good plan: today the two operate a very successful Moe's Southwest Grill in the Atlanta area, consistently coming in among the top 5 percent of the franchisor's 70 locations in the area. When a space opened up a few doors down from that restaurant, they decided it was time to expand...

Feature Story:

Capital Ideas: Bridging The Lender-Borrower Gap »

By Eddy Goldberg

Access to capital has been a bane to franchise growth for nearly three years. Much of the blame has been placed on lenders, who have been notoriously gun-shy since the September 2008 financial debacle. Stricter underwriting policies, the result of increased regulatory oversight, bankers say, is to blame. Of course, that's not the whole story. Other obstacles are involved, many of which can be eliminated by franchisees--but not without help from their franchisors.

That's one of the major takeaways from the IFA Small Business Lending Summit in April, which brought together about 200 bankers/lenders, franchisees/franchisors, and government regulators/officials seeking to improve the lending environment for franchisees.

While it shouldn't come as news to any savvy franchisee seeking capital, bankers at the event repeatedly spoke about a communication gap between the lending community and the applicants who approach them...

Feature Story:

Entitlement "De-Programs": Ensuring Your Children Inherit Your Wisdom, Not Just Your Assets »

By Carol Clark

A financial legacy can provide an incomparable "leg up" to offspring--if they are adequately prepared. However, inelegant handling of the training stage can create generations of enmity, or breed unmotivated individuals with an entitlement attitude. A family business (especially if some offspring participate in day-to-day operations while others do not) presents even more complexity, particularly in the area of "fairness." Following are a few things to think about as you grapple with starting the preparation process.

Unveil your own financial management beliefs--the sooner the better. In the frenzied intersection of building a business and raising a family, it can be overwhelming to take time out to discuss the emotionally laden subject of "money" with your heirs...

Feature Story:

Is Private Equity Right For You?: FAQs For Multi-Unit Operators Seeking Capital In 2011 »

By Eddy Goldberg

You might not know it from reading the news, but there's a lot of money out there looking for a good home, and high-performing multi-unit franchise companies have become targets for private equity investors. Estimates of available private equity peg the pent-up funds at about $500 billion, more than enough pie for most multi-unit franchisees to get a slice--if they have what it take to appeal to investors.

Developments in the mergers and acquisition universe, along with the growth in large multi-unit organizations and a stabilizing economy in 2011, have combined to produce what experts predict will be a favorable environment for franchise sellers with the right stuff: a strong national brand; a positive cash flow for the trailing 12 months; an infrastructure able to leverage the investment; and an organization large enough to make the deal worthwhile in terms of the costs and time involved for both buyers and sellers during the due diligence/courtship process, which can take six months to a year or more...

Feature Story:

Understanding Bankers: Basic Rules To Boost Your Odds Of Getting A Loan »

By Steve LeFever

Back in 1981, with the prime borrowing rate at an all-time high of 21 percent, most bank customers felt that those cameras they have in banks to photograph robbers should, in all fairness, be pointed at the "real" crooks: the lending officers. At such rates most companies found it difficult (if not impossible) to borrow money. Actually, it wasn't so hard to borrow money--it's just that no one could repay it.

Those days of exorbitant interest rates are gone now, at least for the time being. In fact, interest rates are at all-time lows. However, the problems of finding capital and repaying loans remain, and many business owners have feelings of animosity and bitterness toward banks and bankers as a result of their bad experiences...

Feature Story:

The Lever Works Both Ways: Manage The Balance Sheet... And The Income Statement »

By Steve LeFever

Our next financial concept? OPM (other people's money).

As a former commercial banker, I've had the opportunity to see both sides of the "debt/leverage" issue. When you go to a bank for a business loan, your banker (whether they tell you or not) will quickly compute your debt-to-equity ratio. As bankers, we viewed debt as an equivalent of risk: the higher your ratio, the more debt you have in proportion to equity. Therefore, the higher your financial risk. Let me explain why this is so. It all goes back to the financial basics: Assets = Liabilities + Net Worth.

An asset is something you own, and you own assets to generate sales. But to own an asset, you must buy it, and someone must provide the money. Money is provided either by creditors or owners...

Feature Story:

History Matters: Learning The Lessons Of "The Lost Decade" »

By Carol Clark

On many occasions during the past year, I've seen and heard the past 10 years dubbed as "The Lost Decade." From a stock market perspective--with prices essentially flat between 2000 and 2010--it's not hard to understand why. Upon writing this article, the annualized return on the S&P 500 over the past 10 years was -0.68 percent, versus the average return of 6.28 percent since 1929 (according to FactSet Data Systems). Interestingly, over a similar time frame, aggregate corporate profits have doubled while total household net worth is about 50 percent higher.

While the stock market seems to say we've made no progress, economic statistics indicate otherwise. So why the disparity? For a better understanding, enter our lessons learned from the past decade...

Feature Story:

Roll Over: Investing In Yourself »

By Eddy Goldberg

Using retirement plans to fund growth

Refugees from corporate America seeking capital to open a franchise business are tapping into their retirement plans to fund their fledgling businesses. So are multi-unit franchisees seeking to expand.

Take Patricia Preztunik, a multi-unit franchisee in Northern New Jersey who signed on with BrightStar Healthcare in May 2009. With four territories today, she purchased two up front, then two more, one at a time.

Preztunik says she spent six to eight months doing research before starting her own business. "I'd been looking at doing something for a few years. I had friends who had, but I had not taken the plunge," she says.

She rolled over funds from her corporate 401(k) after speaking with a business attorney, who informed her of the possibility of using it as start-up capital to fund her new business...

Feature Story:

Building A Financial Road Map »

By Steve LeFever

Treat the causes, not the symptoms

Seat-of-the-pants management styles may be fine themes for business magazine articles and their Hollywood adaptations, but responding to the symptoms of problems instead of preventing problems in the first place is like taking aspirin to cure pneumonia.

In the financial world, we often see symptoms such as low cash, low net profits, or both. But those symptoms are caused by something--and that's where the "Road Map" (see diagram) becomes useful. It represents the financial skeleton of your business.

As you can see, it's a self-contained system, but, as with any system, it requires maintenance to function properly. It presents a "big picture" overview, and it also leads us through a process of analysis designed to pinpoint potential problem areas...

Feature Story:

Betting On American Ingenuity »

By Carol Clark

Entrepreneurial spirit will drive a slow recovery

Long ago, when I was a newly minted junior analyst at a local investment firm, a grizzled veteran noted that it was pointless to be in the investment business if you weren't a long-term optimist. To me, that time-worn piece of advice continues to ring true. Operating from this mantra, I've spent my entire career believing that whatever short-term morass the economy or the market found itself in could be fixed (eventually) by the drive and ingenuity of the American entrepreneurial spirit. I'm hopeful that this time will be no different--although I admittedly find my optimism being severely tested. In nearly 30 years in the business, I've never witnessed such a complex array of issues at play...

Feature Story:

Terms Of Endearment: Selecting The Best Lease Length »

By Dale Willerton

Often when I speak at franchise shows and conventions a tenant will ask me, "What is the best lease length?" The term, or length, of your commercial lease is an important part of your franchise business plan and ensuing lease negotiations. However, most franchise tenants do not take enough time to consider that one day they will eventually want to sell the franchise. Alternatively, they may want to expand/downsize, relocate, or close and so do not give the term of the lease the attention and consideration it truly deserves.

The industry standard lease term for a franchise tenant can be five, seven, or 10 years (but not shorter). For many of the more expensive franchise systems a 10-year amortization period is normally required on the initial term to justify that initial capital investment cost...

Feature Story:

Unit Management: Gulf Coast Multi-Unit Operator Talks Hard Numbers »

Multi-Unit Franchisee

Greg Hamer, Sr., worked in the oilfield service industry for two decades before dipping his toe into franchising. He knows about hard work and about managing assets. Today, he is the largest Taco Bell franchisee in the state of Louisiana. Hamer has operated B&G Food Enterprises out of Morgan City, La., since opening that first Taco Bell unit in 1982. In the 1990's, the company added KFC and Pizza Hut units to the portfolio and most recently, Teriyaki Experience.

After nearly three decades in franchising, Hamer oversees an empire of 55 units stretching from Mississippi through Louisiana and into Texas. It's a large operation that generates $64 million annually and keeps a payroll of more than 1,400 employees.
Hamer, who serves as chief executive officer, says that prudent financial management and unit economics oversight plays a pivotal role in how he manages the operation...



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