Capital Options – Unitranche Lenders

Established franchisees have seen financing and capitalization alternatives blossom during the past few years. Traditional capital using straight senior financing and embedded equity or external equity capital has evolved to become only one of many alternatives for companies looking to grow.

But it’s important for franchisees to have a firm understanding of their business’s goals and growth strategies, including generic growth plans, remodeling projects (required and elective), and opportunities to expand through acquisitions, says Carty Davis, a boutique investment bank partner who has completed hundreds of transactions in the multi-unit franchise and restaurant space.

He recently wrote about the importance of understanding the differences between the various types of lenders and capital providers and how to pinpoint the ones that might work best. Here’s what he says about one type of capital provider:

• Unitranche lenders can provide some attractive features such as limited amortization and a larger advance rate, but at a cost. From a leverage perspective, borrowers are generally measured on straight leverage basis (debt/EBITDA) rather than an LAL, and advance rates on EBITDA are between a half and one turn higher. As mentioned, pricing is significantly higher in comparison with senior lenders, but given the lower amortization total debt service in most cases approximates regulated senior debt. Unitranche lenders are typically most appropriate for franchisees in a rapid growth mode, are experiencing challenges in their business, or who are having trouble maintaining compliance with their existing senior lender. Unitranche debt is significantly less expensive than equity and can provide a great bridge for companies with a higher leverage profile.