There is a great deal written on how to attract franchisees to a franchise system.  When Googling the topic, one gets such article titles as “marketing to attract franchisees,” “8 seldom asked questions before you buy a franchise,” “secret weapons for attracting franchisees,” “creative ways for franchisors to attract franchisees,” and “five things franchise buyers want.”  

The good news is that the opportunity for tax-free transfers of wealth to future generations has never been better during our lifetimes.  The bad news is that the window on this opportunity is closing in four months.

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. 

Many lawyers and franchise professionals seem to be stuck in a rut as to how franchise businesses should operate, particularly with regard to the franchise fees and royalty matrix.  The old adage, “same old, same old,” seems to hold true.  In light of the kind of return on investment franchisees are getting in this tight economy, tight commodity prices and escalating labor costs, the proactive franchisor needs to take a new look at the economics of its franchise system and how the franchisor charges for their intellectual property rights, services, and overall partnership with the franchisee community.

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.

For the last several years, growth in the franchise world (in terms of new units opening) has been slow.  The reasons are very obvious: the economy has not grown at the pace we would all like, capital has been short, and there has been uncertainty.

Royalty fees are at the heart of the financial relationship between a franchisor and a franchisee, so it’s no surprise that they’re often the source of disagreement. The concept is simple enough: a franchisee agrees to pay a franchisor periodically during the term of a franchise agreement in exchange for using the franchisor’s brand and operating methods and benefiting from the franchisor’s established goodwill.

Franchise agreements are frequently criticized as being over-reaching in protecting the franchisor.  While criticism is justified in many cases, more and more franchisors are realizing that a balancing of the parties’ interests is necessary for long term success of both franchisor and franchisees. 

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.

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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. 

Sale/leasebacks have been around for a long time.  At times, the franchise industry has used sale/leasebacks as a primary source of financing, particularly for real estate intensive concepts. There have been many groups that have been involved in the sale/leaseback market - major players, like GE, to niche players (who have basically served as real estate developers and then end up entering the sale/leaseback transaction as a culmination of the development work).

I would like to devote this month’s article to a topic that two of my partners, John Berg and Scott Husaby, have spent a great deal of time on the past few years.  John and Scott are panelists on the Franchise Times Exit Strategies Seminar Series and have been traveling around the country speaking to franchisors and franchisees on the topic of exit planning.

In these volatile economic times, the challenge every franchisor faces is effectively monitoring the financial health of a franchise system.  Monitoring the health of the system is not just a luxury but a necessity.

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:

Is your delivery business adequately reimbursing your delivery drivers for the travel expenses they incur in making deliveries?  Domino’s Pizza (“Domino’s”) has been sued by a group of its current and former delivery drivers (“Drivers”) in Minnesota federal district court.

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.