IFA s 45 th Annual LEGAL SYMPOSIUM

Transcription

1 LEGAL SYMPOSIUM

2 FINDING THE RIGHT CREDIT PARTNER AND CREATING YOUR OWN FINANCING Lane Fisher, Esquire FisherZucker, LLC Ron Feldman Franchise America Finance Kenneth Switzer Marco s Franchising, LLC Daniel Waddell Papa John s International, Inc.

3 FINDING THE RIGHT CREDIT PARTNER AND CREATING YOUR OWN FINANCING Direct Financing Facilitation Equity Investments Public Funding

4 The Franchise Lending Opportunity If franchising was an industry it would be BIG Over 3,300 franchise brands Over 200,000 small businesses Over 500,000 units REQUIRING ALMOST $12 BILLION OF LOANS IN 2012

5 Loan Availability

6 4-10 YR: Farewell To Cheap Capital? Challenges for the dollar as the world s currency S&P warning to downgrade U.S. government debt Developing countries are hungry for capital Some countries that bought our debt will need more of that capital for growth at home

7 Elements of Brand Credit Risk Analysis TODAY S SOPHISTICATED FRANCHISE CREDIT ANALYSIS BUILT ON Franchisor System Unit

8 Franchise Brand Credit Risk BCRs DELIVER PREDICTABILITY BCRs analyze a brand s unit, system and franchisor performance; then compare to peers THE RESULT -- PREDICTABILITY Category Measure UNIT Same store sales growth 2.5% Average Op profit before owner comp $69,398 Break-even # months since start of operations 11.3 mos 80% variance around break-even # months 3.5 mos SYSTEM Average 3 year unit expansion 27 units Continuity rate 94.5% Adverse closed unit rate 2.1% FRANCHISOR Management team franchise experience 8 years Under-performing unit program Yes Lender support in work-out Remkg agt

9 3-5 YR: Increasing Info/Data Transparency You re showing brands how to benchmark Franchisors have important system performance info/data BCRs analyze unit operational info/data across systems The Franchise Registry allows information/data flow to lenders Better info more $ Unit Operational Info Across Systems System Wide Unit Operational Info Franchisee Unit Operational Info Unit Operational Data Across Systems System Wide Unit Operational Data Franchisee Unit Operational Data Unit Operational Info Unit Operational Data

10 4-10 YR: Demographics Age Older age groups increased their numbers the fastest Retirees not just getting older; also healthy longer working longer buying longer Over 82 million (27%) are under 20 and leaders of mass customization

11 Know What League You Are In Investment Size: System Size: Under $150K $150K - $1MM Over $1MM 1-50 Units Units Over 100 Units

12 Transactional Lenders vs. Program Lenders Transactional Lenders Community, Credit Unions & Local Banks Regional and National Banks at the Branch Level Consultants Boefly, FAF ROBS Providers Program & Franchise Lenders Bank Non-Bank Borrower Initiated Franchisor Initiated

13 Franchisor Loan Enhancements First Loss Guarantees On Balance Sheet Off Balance Sheet Limited Guarantees % of Loan Step Down Provisions Remarketing Agreements Franchisor keeps debt current/not

14 Franchisor Loan Enhancements Equipment Repurchases Guaranteed Values Lien Purchase Positions Operating Agreements Works when Franchisor Operates Stores Franchisor Operates Units while remarketing Pays current debt service during remarketing period

15 Being the Bank Franchisor direct lending Franchise Fees/ Soft Costs Captive Finance Programs Vehicles/Equipment (remarket able assets) Usually in lower investment size concepts Rates/Terms tend to be higher than the market

16 Franchise Financing Vehicles Captive Lender Equity Investment Loan Loss Guarantee Program

17 Franchise Financing Vehicles Captive Lender Pros Flexibility Knowledge of business Capture revenue stream Cons Risk not diversified Two Hats Non-core business/overhead

18 Franchise Financing Vehicles Equity Investment Pros Strategic synergies/opportunities Knowledge of business Cons Control/ROI Two Hats

19 Franchise Financing Vehicles Loan Loss Guarantee Program Lender agrees to make p to $5 million in financing available to Papa John s franchisees. Approved franchisees may borrow up to 80% of new unit build-out costs, up to a maximum loan of $200,000 per unit. Franchisee and loan must be approved by both lender and Papa John s. Papa John s guarantees the first $250,000 in losses in the loan pool, and 20% of losses in excess of $250,000, up to a maximum of $1 million. Loan rates are indexed, but generally comparable or favorable to market.

20 Franchise Financing Vehicles Loan Loss Guarantee Program Pros Frees up capital by reducing lender s risk Favorable terms Cash free Cons Risk without direct return

21 Marco s Pizza 33 Year old Pizza Carry Out/Delivery concept 21 states plus Bahamas Branded as Authentic Italian Phenomenal focus on product quality 30% of new stores opened by customers

22 Marco s Pizza $250,000 to $300,000 to build a store Same Store Sales up 8.5% in stores. 61 new stores in 2011, 33 in 2010 Expect to open stores in 2012

23 IFA s 45th Annual

24 Captive Insurance Models Domestic true insurance captives Foreign true insurance captives Pseudo insurance captives

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26 Domestic Captives File 1120-PC (c-corp) return Accrual basis accounting Potential significant tax benefits Max. $1.2MM premium annual limit 80% of S&P 500 companies utilize

27 Foreign Captives Typically Off-shore (Bermuda, etc.) Considered domestic for tax benefits Generally well accepted by IRS High degree of expertise needed to start

28 Pseudo Captives NOT a true insurance company Simple to start (relatively) No special tax benefits Marco s Assurance is example

29 Marco s Assurance, LLC Key element in Risk Mitigation Strategy Reduces lenders risk Reduces franchisor risk Reduces perceived risk of business model to franchisees

30 Marco s Assurance, LLC Guarantees $50,000 new store financing Guarantees must be requested/approved Audited entity Funding also made available to relocate weak locations

31 MA Guarantees Unconditional First dollar loss after collateral liquidation Guarantee resembles an insurance policy

32 MA Funding Portion of franchise fee and royalties Escrow (not yet income or expense) Actuarially sound No funding from franchisees (state law issues in most states)

33 MA performance 2 years old No losses to date Resulted in unknown number of additional franchise sales Resulted in 20% plus more loans granted

34 MA benefits More loans Reduced risk profile $50,000 not a game changer to banks What this means is that you stand behind your franchisees. (loan officer quote)

35 MA future Potential conversion to domestic captive Potential increase in guarantee amount Potential tie into Personal Guarantee Insurance

36 PGI as Alternative (PGI) Personal Guaranty Insurance Guarantees 70% of net loss after collateral liquidation Premiums: 1.5-3% of loan, paid annually Potentially a replacement to SBA Brand and applicant must be approved Huntington Insurance

37 Captive loan loss entities Reduces Risk to Franchisor/Franchisee Improves perception by lenders May help in growth strategy PGI is alternative Analyze needs and numbers carefully

38 Other Methods Operating Leases Matching Flexibility in Structure of Franchise Ownership Discounts/Financing Initial Fees Crowd Funding