Franchisers are taking a more active role in franchisee finance by offering discounts on franchise fees and royalties by improving the profitability of their existing franchisees or -- in one franchise owner's case -- by going through the loan process himself.
This winter, Denny's, the 62-year old family dining restaurant chain headquartered in Spartanburg, S.C., is running a value-meal special -- all the pancakes you can eat for $4. Doug Wong, Denny's senior director of global recruitment, is promoting a second discount -- a $1 million package of incentives if you build six new restaurants, or a $280,000 savings if you build two.
Mr. Wong, who works out of Atlanta, says, "By reducing franchisees' upfront costs, we've made it easier for lenders to work with out new franchisees."
He adds that a significant number of new franchisees have joined Denny's as a result of its incentive program, including Donnell Thompson, of Snellville, Ga., a former defensive end for the Indianapolis Colts, who owns nine Denny's restaurants in the Atlanta area. Mr. Thompson and his partner Ron Wooten, also a former National Football League player with the New England Patriots, plan to build many more.
"Ron and I are bullish on Denny's because the incentives allow us to keep millions of dollars that we can combine with conventional loans to build more stores," Mr. Thompson says.
"The best way for franchise prospects to obtain conventional or Small Business Administration (SBA)-guaranteed loans is for their franchiser to prove to banks that their current franchisees are making money." says Chris Dull, chief executive officer and president of the Global Franchise Group in Norcross, Ga.,franchiser of Great American Cookies, Hot Dog on a Stick, Pretzelmaker, and two ice-cream brands.
FOCUS ON PROFITABILITY
Franchisee profitability was the focus of several crowded seminars at this year's convention of the International Franchise Association, a Washington-based trade group, held Feb. 15 to Feb. 18 (2015) in Las Vegas. Randy Jones, the founder of Funding Solutions, in Plymouth, Mich., a consulting firm that helps franchisees obtain financing, says: "There is a big divide in the lending community. Major banks and national nonbank lenders mostly work with franchisees from the top 50 franchise brands and leave the rest of the country's franchisees to local and regional banks. These institutions want to be sure their loans will be repaid and are asking franchisers for more and more data."
To prove their franchisees are profitable, franchisers told conventional attendees that they keep track of unit-level economics by collecting sales, expenses and key performance indicators from their franchisees on a weekly, or even daily basis.
In the exhibit hall, Kyle McEuen, co-president and chief operations officer of ProfitKeeper, of Mesa, Ariz., a subscription software program that aggregates such data, said: "Franchisers have a greater interest in benchmarking every franchisee's performance against all others in their systems."
The data collection enables franchisers to spot underperforming franchisees. Freddy Dupuy, vice president of unit economics for East Coast Wings and Grill in Winston-Salem, N.C., says he and his team analyze each franchisee's data against historically determined brand benchmarks.
"When we identify a franchisee-owned unit that is below our brand benchmarks, we have set procedures in place, which may include sending our field team out to assess the operations of the respective unit," Mr. Dupuy says. Other assistance may include a field and unit level economics consultation with the franchisee, he adds.
Franchisers also use the data to create item 19s, the optional Financial Performance Representations found in Franchise Disclosure Documents that provide annual average net income figures for their current franchisees. Item 19s provide prospective franchisees and their lenders with information on how much money they can make.
Steven Yeffa, executive vice president of Los Angeles-based Sky Zone Trampoline Park, says, "I would urge every franchiser to start collecting financial information from your franchisees from day one.
Even with a strong Item 19, financing can be a problem for smaller franchisers, Stephen Scholber, president and CEO of Metal Supermarkets in Mississauga, Ontario, Canada says, "We have 68 units throughout North America, where we are the only major distributor of small quantities of industrial metals for repair, maintenance and operational purposes. We attract a lot of executives and engineers who would like to become franchisees, but because we are so unique, they [have had] trouble securing financing." Mr. Schober says he eased that problem by paying FRANdata, a research company in Arlington , Va., to produce an independent financial analysis on his company.
HELP TO BUY
Paul Manglmanbe went even further. In February, he and his wife Gwen used an SBA-guaranteed loan from a regional Texas bank to help them buy Dallas-based Bennigan's, a family dining concept with 35 units in the U.S., from Fortress Investment Group, LLC., the New York investment management firm that hired him as CEO in 2011 to lead a turnaround. "We reduced the size of each restaurant and reinvented the food and beverage menu," Mr. Manglemanbe says, "but we realized new franchisees would have a hard time borrowing money unless banks were convinced we had also improved the chain's profitability. We decided the best way to do that was to go through the loan process ourselves."
Julie Bennett is a freelance writer specializing in franchising.
This article was posted in the special advertising feature in the Wall Street Journal. written by Julie Bennett.