People are always looking for ways to finance the growth of their concept.  One primary way to grow a concept is through franchising.  However, franchising is not a universal tool that is effective with all concepts. 

Today’s franchise world has had a proliferation of outside investors teaming up with good operators to buy into franchise systems.  In particular, private equity has served as the funding for consolidation of franchisee units and the acquisition of franchisors.

There now seems to be a more robust market for acquisitions and mergers in the franchise world.  There has been pent up demand (particularly for franchisee units) and many franchisees have been waiting to sell their units. 

Last month’s column analyzed the P&Ls of a typical franchise business.  I made the comment the P&L is the window to a company’s success.  This month I will analyze the balance sheet which is more analogous to looking at the financial health of the franchise company. 

Sometimes it is said that the eyes are the window to the soul, and I would say the same is true about a company’s profit and loss statement (“P&L”).  Profit and loss statements are the window to a company’s success.

Private equity is back.  In the last year there has been significant funding by private equity for the multi-unit concept world (this has been particularly true with restaurants).  In fact, the pace of investment has accelerated.

As a franchise business owner, you either have existing debt financing, are currently working on debt financing and/or at some point in the future will be seeking debt financing.  It is simply the nature of the business, whether you are refinancing an existing loan, funding capital improvements to your business, seeking to fund an acquisition or for a host of other reasons. 

As covered in last month’s column, there were a number of positive developments in franchise finance in 2010.  In addition, the franchise trade press has been active with reports of many encouraging developments.  Still, not all the news is positive.  In a discussion with my partners, Randy Evans and Rick Gibson, we thought it would be interesting to further elaborate on last month’s column and look at the challenges and opportunities for 2011.

Each year I reflect back on the high points of the previous year and look at the ideas, transactions and developments I think had the greatest positive effects on financing for the franchise community.  In reverse order, here is my list of the ten best things that have happened in 2010 for franchise finance:

Old benchmarks are being exacerbated by the economic downtown and the change in consumer attitudes.  Here’s how to redefine the long-standing benchmarks for operating franchise businesses:

In today’s tight financing market for franchise businesses, it is key for us to share our success stories and help each other find financing.  This column discusses three actual situations where a franchise business was able to secure financing.

While the economics (particularly in the franchise world) have not substantially improved, there recently has been an increase in mergers and acquisitions (“M&A”) activity.  In large part, this is due to the fact that there has been little activity for so long that the pent up demand is beginning to be reflected in increased transactions.

For years my partner, Randy Evans, and I have been helping both franchisors and franchisees navigate the tricky waters of getting into the franchise world and then developing a franchise business.  Many of our franchisee clients have gone from one unit to hundreds of units, and many of our franchisor clients have grown from a core group of businesses to become multi-national concepts. 

Regular readers of my column know I am always searching for new financing ideas, and it has not been an easy process in 2008 and 2009.  However, I have come up with some new ideas for this month’s column that are worth considering.

There is an absolute truth - the public market has been almost non-existent for franchise businesses.  This tight market may continue to be tight for several more years; however, there does seem to be some encouragement in light of the recent Open Table Initial Public Offering (“IPO”). 

At the recent Franchise Finance and Development Conference in Las Vegas, John Hamburger and I discussed some of the unique ideas that have recently evolved in creating financing sources.  Financing is certainly a different game than it used to be.  This article highlights these unique ideas.

We need equity, and we need it now.  The whole franchise development world has come to a screeching halt.  No debt and little equity have made it difficult for franchise systems to plan for the future.  But do not lose hope.  Once again, I want to present some tools to assist you.

When I started writing for Franchise Times ten years ago, I had been practicing in the area of franchise finance for almost 20 years.  All along I had a dream.  I had a dream that each solid franchisee would be able to obtain financing for growth and acquisitions. 

I don’t have to tell you that franchise financing is tight.  All you have to do is open up the Wall Street Journal, local newspapers or trade magazines to understand the present credit crunch.  In my 30 years of working in the franchise space, I have seen many contractions and have been through many periods of time when franchise financing was virtually nonexistent. 

This column has recently been addressing economic issues and how they affect the franchise industry.  This month we’ll finalize the series by discussing how the franchisor can help its franchisee community.

In these tough economic times, the question I am asked most often is, “What is my franchise business worth?”  This month’s column will outline a few key points that may be helpful in determining what your franchise business is worth.  Also, you may want to look at the July 21st issue of Restaurant Research prepared by Wally Butkus at www.restaurantresearch.info.  In the newsletter, Wally addresses the valuation issues with information he has gathered for franchise restaurants.

In recent months we have seen many franchisors selling off their corporate units.  (This is commonly called “refranchising.”)  There are many reasons for refranchising.  For example, DineEquity (the franchisor for Applebee’s) feels their focus should be pure franchising and the capital investment necessary to own corporate stores is not part of their strategic plan.

There has been no small amount of discussion, and hand wringing, related to the current conditions in the credit markets.  Not as much has been said about equity markets in our industry.

This month’s column will give you some ideas of what you can expect in the 2008 financing market.  It is no secret that all financing has tightened and the amount of time it takes to get a financing deal closed has almost doubled. 

Last month’s column dealt with getting ready for a downturn.  Much of the column discussed appropriate steps to take to minimize issues if, for some reason, the franchise business has to go through a restructure. 

The franchise world is getting older.  Most of the major franchise systems were developed at least 20 to 30 years ago, and the average franchisee has aged along with the franchise.  The aging of the franchise systems and the franchisees have converged to create a significant need for franchisors to embrace the issue of exit planning for their franchise community. 

The franchise world (particularly franchisee expansion development) is driven by the availability of credit.  We have seen significant cycles over the years, from easy credit in the mid through late 1990s to the proliferation of lenders into the franchise market using securitized lending and then the withdrawal of those same lenders.

This article is truly a work in process about the technique of securitization.  As I write about this month’s topic, there are significant pending transactions utilizing the franchisor’s cash flow and royalty streams as a collateral source for low interest debt financing which may further define this topic. 

In the world of franchise finance, it is always wise to reflect on what has happened over the previous year and see how the past can create opportunities for the coming year.  2006 was a year filled with significant activity in the franchise community: (i) an unprecedented number of new franchise concepts were created; (ii) an impressive number of franchisors were sold; and (iii) a large number of franchisee to franchisee transactions were closed.

The selling price of franchise businesses has significantly increased.  Nearly every week someone asks us if it is time to sell.  Even though it may be an appropriate time to sell in terms of the market, it may not be the appropriate time to sell in terms of your business cycle or being prepared for selling.

Over the years this column has addressed the use of sale/leaseback as a franchise finance vehicle.  While interest rates have been moving up fairly quickly and the prime rate of interest is now above 8%, the cap rates or effective financing cost of using sale/leaseback have stayed pretty flat.

For many years franchise financing has been effectively illustrated as a continuum.  On the far right of the continuum is the most conservative type of financing - senior debt.  Senior debt is dominated by banks and large commercial finance companies (e.g., GE, Bank of America, Wells Fargo and other groups).

Many sectors of the real estate market continue to remain strong and attract significant attention in the financing markets.  Notwithstanding the recent slow down in the housing market, demand for and the valuation and financing of commercial real estate continues at a strong level.

“Can I raise money when I have only one location?” “Can I start franchising with one location?”  These are questions our firm is regularly asked.  In the past, our answer to both questions has always been “no”, but we are not as convinced today, especially as to the first question.  This article will address these two questions.

Two key words in the franchise finance world for 2006 will be “multiples” and “activity.”  It is apparent, through recent and pending transactions, that the valuation Multiples (the cash flow from the target business times a multiple) are at historic high levels.