It’s no secret that running a restaurant is a risky business. The fact that many restaurants will ultimately fail early in their existence is not lost on most entrepreneurs, and yet they carry on anyway in hopes that their restaurant dreams can be made true.
The risk inherent to opening a restaurant—both mom and pop and franchise—has made the post-financial-crisis period especially hard for operators, as they find it exceedingly difficult to secure financing. Commercial banks have tightened their lending policies across the board, and their assessment of the restaurant industry as a particularly risky investment has thwarted the expansion ambitions of many brands in the quick-service sector.
In this climate, quick-serve franchises have been forced to get creative in order to push on with expansion. One brand in particular, Marco’s Pizza, epitomizes that reality.
Based in Toledo, Ohio, Marco’s operates more than 220 stores in 17 states. In the last 18 months, the company has pursued five alternative financing options in an effort to realize its growth goals. Most recently, it enrolled in a lending program created by Bancorp and Franchise America Finance that all three parties are heralding as the next great financing model for restaurants.
The program works like this: Franchise America Finance vets a franchisor based on its business model, franchisees, and real estate selection processes. The approval process requires more due diligence than banks tend to do when processing a loan application, but franchisors that make it into the program are able to get their operators reliable access to financing provided they meet certain predefined qualifications—a dream come true in today’s credit climate. “Financing has become that black hole that no one knows what’s going on with it,” says Ron Feldman, cofounder of Franchise America Finance. “We created this program to allow the approved brands to have a predictable finance model once again.”
Marco’s was the second franchisor enrolled in the program. The company first had to submit to analysis by FRANdata, the Small Business Association (sba) watchdog, per Franchise America Finance’s vetting process. After being approved, Bancorp agreed to lend Marco’s $9 million in SBA loans—$6 million for new stores and $3 million for resales or refinancing of existing stores. Marco’s franchisees that meet the predefined qualifications still have to go through an approval process with Bancorp, but the process is much quicker than through the traditional lending model.
“It’s like we’ve been preapproved for a loan,” says Ken Switzer, Marco’s Pizza’s vice president and chief financial officer. “There’s still a lot of paperwork, but Bancorp has found a way to take a lot of the time out. As long as somebody meets our criteria”—a 680 credit score, $100,000 of liquidity, and a certain level of business experience—“they know they are going to be approved.”
Bancorp and Franchise America Finance have so far approved eight brands, including Marco’s, in their lending program, Feldman says. Eight more brands are undergoing the underwriting process, and eight others are in pre-underwriting. Ultimately, the program will comprise 30 franchisors, with half of the financing going to restaurant brands.
Many franchisors have applied for the program since it was announced, Feldman says, but “we’ve turned a lot of brands away.”
Culver’s is one of the other brands that has already been approved for Bancorp financing. A burger brand based in Prairie du Sac, Wisconsin, the company plans to use the loan to open 10 of 20 new stores in 2011. Culver’s does not yet know how much financing it will receive, but it is hoping the program will make life easier for its franchisees after a couple of tough years.
“Applying for a [traditional] loan is lengthy and time consuming,” says Tom Goldsmith, Culver’s director of development. “We’re hoping this system will be a lot more painless.
“If so, it could end up being a new growth model for restaurants in the years ahead.”
The extent to which franchisors are involved in helping their franchisees secure financing is the “paradigm shift” in the program, Feldman says. It is a sign of the post-recession times, in which the relationship between banks and franchisees has fundamentally changed.
By that measure, Marco’s is “brilliant,” Feldman says, as the company has taken a very hands-on approach helping its franchisees secure financing after the near financial collapse at the end of 2008. Besides the Bancorp program, Marco’s also created several of its own alternative financing options, including Marco’s Assurance, a subsidiary that provides a $50,000 guaranteed bank loan to franchisees and pays to relocate stores to better locations.“Before the crash the banks were in the franchisors’ lobbies looking to lend money to their franchisees,” Feldman says. “Now all the franchisees are in the banks’ lobbies looking to get money from the bank, and the smart franchisors are getting involved. The ones that aren’t smart are taking a hands-off approach.”
In this system, Marco’s assumes a chunk of the risk of opening a new restaurant, but Switzer says the company’s “exhaustive” vetting process and training procedures decrease Marco’s risk while reassuring banks that Marco’s is a solid investment.
“What the bank then saw was that Marco’s was willing to stand behind the franchisee and help out by guaranteeing at least $50,000 of a loan,” Switzer says. “What it really communicated to them was that we weren’t a typical franchisor … that we were going to do whatever we could to help the store survive.”
Switzer says this is the new expectation of banks following the recession, while only a couple of years ago they were throwing money at restaurants. Now that this is the case, he says, brands that want to continue to expand must adapt. For Marco’s, the proof is in the pudding, as the company expects to open 60–65 new stores this year.
“I already have 60 letters of intent,” Switzer says.
News and information presented in this release has not been corroborated by FSR, Food News Media, or Journalistic, Inc.