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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:

  • If the intangible amount is under $500,000, lenders may finance 100 percent of goodwill without restriction.
  • If the intangible amount is greater than $500,000, lenders may finance 100 percent of goodwill, provided that the purchaser injects 25 percent or more into the transaction as equity. This may include standby seller financing (2-year minimum) as a portion of the equity injection.
  • Additionally, language forcing lenders to explore seller financing on all transactions was stricken from the document. Lenders now have the flexibility to determine if seller financing is appropriate on a transaction-by-transaction basis.

"This change in the SBA goodwill financing guidance is good news for the franchise industry," said IFA Vice President of Government Relations David French. "The previous guidance would have eliminated the ability of many franchised small business owners to transfer or sell their company."

To satisfy your inner wonk (or your franchise attorney), the entire 388-page revised SBA document is available for your reading pleasure at: (see page 142; the changes are highlighted).

Need a Rescue Loan?

Last month, Lynn Tilton, CEO of Patriarch Partners, a $6 billion private equity fund, launched, a program to create a public-private partnership to provide rescue loans to small and mid-sized enterprises (SMEs) - and preserve U.S. jobs at a time lack of capital is slowing expansion and unemployment continues to run about 10 percent nationwide.

Says Tilton: "Without access to basic loans, many companies that might otherwise survive and flourish are forced to lay off workers or liquidate, driving unemployment and deepening the recession. The most direct and rapid solution to stem job losses is to motivate private enterprise to originate and monetize rescue financing loans for struggling smaller and middle-market companies."

According to the announcement, the plan would work as follows: "Using excess TARP funds previously set aside for the Treasury's Public Private Investment Partnership (PPIP), the Rescue Loans Program would co-invest with pre-approved private investment managers in senior-secured, first-lien loans to SME companies that have been denied or have lost routine working capital loans necessary to operate a business in the ordinary course. The plan would share profits with the taxpayer but would protect taxpayer funds by requiring the private sector to take the first loss layer, thus bearing the bulk of risk."

The website (see above) provides details on the plan and information about ways for people to get involved, tell their stories, and apply for rescue loans.

Creative Tutors Reduces Franchise Fee

Announcements of discounted franchise fees, deferred royalties, and other startup incentives during the first half of the year have abated, but not ceased. Last month, Creative Tutors International announced it is discounting its franchise fee 25 to 40 percent. Regular start-up costs range between $20,000 and $45,000, depending on the size of a school district. With the discount (good until December 31, 2009) the cost is $15,000.
The company, which began as Creative Learning in 1999, has 12 franchised locations in Texas, Utah, and Colorado serving more than 25 school districts.

Incentives Redux?

Has the flurry of franchisors offering economic incentives to franchisees peaked? In its recent quarterly earnings call, Papa John's announced plans to reduce the level of financial support it will provide to its franchisees going forward. During the past year, Papa John's has deferred or waived royalty payments, reduced fees for online ordering, and boosted its national ad campaigns, in an effort to keep stores open. According to the company, "Franchise support initiatives primarily consist of discretionary contributions to the national marketing fund and other local advertising cooperatives." That figure rose from $150,000 in the first six months of 2008 to $4.4 million in the first six months of 2009. In the call, CEO and founder John Schnatter was quoted as saying that in the future, "It would be fair to assume that it would be quite a bit less."

Faith in Franchising

Is Roark Capital Group's spending on franchise brands simply a case of taking advantage of bargains available in the current recession, or a vote of confidence that the economy has bottomed out? Some of both, it appears.

"We have been concerned and bearish about the economy and the debt markets for about 18 months now," said Neal Aronson, Roark founder and managing partner, in an article in the Atlanta Journal-Constitution last month ( "We have been cautious and haven't invested our capital. Now, we feel like we're ready to start investing again."

In late August, the Atlanta-based private equity firm completed its acquisition of Pet Valu, a Canadian franchise brand, adding a 15th franchise to its stable. Founded in 1976 and based in Markham, Ont., Pet Valu sold $230 million of pet food and supplies through 295 corporate and franchised stores in Ontario and Manitoba, and 61 U.S. stores in Pennsylvania, New Jersey, Maryland, and Delaware.

Said Ezra Field, a managing director of Roark, "Pet Valu is consistent with our strategy of investing in value-added franchises that have strong brands and market positions, experienced management, and a loyal customer base."

Roark's 14 previous holdings include Focus Brands (Carvel, Cinnabon, Schlotzsky's, Moe's Southwest Grill, and Seattle's Best Coffee), McAlister's Deli, Cinnabon, FastSigns, Primrose Schools, and Batteries Plus. In total, Roark has investments in 15 franchise companies with more than $3.7 billion in system sales through 14,000 points of distribution in all 50 U.S. states and 33 countries.

Roark also is training its investment sights on franchisees as well, according to the article. Steve Romaniello, the former CEO of Focus Brands who signed on as a managing director at Roark late last year, was reported as saying the timing is right not only for investing in more franchised businesses, but also in franchisee groups.

"We're in active discussions right now with a number of companies like that where we could work on the other side of the equation," said Romaniello. "I think more than anything it demonstrates our belief in the model of franchising."

Jack in the Buy-Back Box

Jack in the Box Inc. sold 23 company restaurants to new and veteran franchisees in its third fiscal quarter. The sales are part of the company's strategic initiative to expand franchise ownership from the current 42 percent to 70 to 80 percent by the end of FY13. Jack in the Box has about 2,200 restaurants in 18 states, in addition to those of its wholly owned subsidiary, Qdoba Mexican Grill, which has approximately 500 restaurants in 42 states and the District of Columbia.

Published: September 10th, 2009

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