Changing Lending Practices In Franchise Transactions

Carty Davis is an area developer for Sport Clips in North Carolina with more than 70 units. He’s also a partner with a boutique investment bank and has experience with hundreds of transactions in the multi-unit franchise space.

Carty has observed changes and developments, including an extension of timelines for industry-related transactions, over the past few years. Everything from multi-unit franchisee approval, franchisee-to-franchisee transfers, and private equity/family office investments, to refranchising and recapitalizations with both regulated and non-regulated capital providers.

He says time kills deals and longer cycles can expose transactions to franchisor approval sentiment, changes in lending conditions, and macro or geopolitical events. But he says the deal process can be handled with the right focus, time, and effort up front.

Here he talks about the lending process and its evolution over the past few years.

• Lenders and investors. The lending process has been evolving over the past several years and has become increasingly complicated. Unpredictable franchisor capital demands, new growth requirements, and the inability to have consistent accretive revenue growth as costs escalate has given lenders pause. Lenders are demanding more data on a borrower’s ability to manage labor and food costs, the amounts, timing, and return on capital expenditures, marketing plans, brand initiatives, etc. If a transaction is above a size threshold for investment, expect a quality of earnings (QE) report. QE reports are now standard on most transactions involving family offices, PE firms, mezzanine or unitranche lenders, and larger senior credit facilities. QE reports take time, cost money, and almost always question some aspect of the business’s financial performance or reporting, which may leave the buyer vulnerable to deal renegotiation. Make sure your capital provider is experienced in your brand or similar concepts. Vet the lender and their outside support team (QE, legal, etc.). If your firm is not well-versed in raising capital and how to properly arrange the capital stack, retain a professional firm to assist. Again, experience matters. While there is significant capital available, the process simply takes longer to complete.