IFA Financial Summit: Part 1 - Sunday, February 11 th, Strategies for Emerging Brands (0-100 units)

Transcription

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2 IFA Financial Summit: Part 1 - Sunday, February 11 th, 2018 Strategies for Emerging Brands (0-100 units)

3 Ron Feldman David Jackson Mara Fortin Dan Israel ApplePie Capital Chief Development Officer Fifth Third Bank National Director of SBA Lending Nothing Bundt Cakes Multi-Unit Franchisee Goldfish Swim School Director of Franchising & General Counsel

4 Agenda 3 Perspectives: Franchisee Franchisor - Lender Franchisor: What your FDD says about your brand Lender: Key metrics Lenders focus on, Common errors that end up in declined loans Franchisee: Case Study How to prepare for Multi-Unit growth Strategies for emerging brands

5 Moderator Moderator 25 years in franchising IFA Board Member Previous companies: CEO at Franchise America Finance (FAF) Ron Feldman Chief of Business Development ApplePie Capital Principal & Chief Brand Strategist at Siegel Financial Group Chief Development Officer at FranDATA Early franchisee in The Goddard School

6 Panelist Experience with 5/3 Bank spanning 30 years Overseen SBA program at Fifth Third for almost 7 years Responsible for directing all activities in the government guarantee loan program areas: SBA, USDA, and State Small Business Credit Initiative. David Jackson National Director of SBA Lending Fifth Third Bank

7 Panelist 1 st Nothing Bundt Cakes franchisee Owns 7 Nothing Bundt Cakes in San Diego IFA Board member Mara Fortin Multi-Unit Franchisee Nothing Bundt Cakes Franchise Action Network "FAN of the Year" award in 2015 Previously served as Chair of the Franchise Advisory Counsel Before becoming a NBC franchisee, Mara was an attorney for 7 years

8 Panelist Oversees all legal matters, franchise award process, and site selection for GSS Dan Israel Director of Franchising & General Counsel Goldfish Swim School GSS was recently ranked #1 in their category by Entrepreneur GSS teaches over 70,000 students/week in 62 locations and an expected ~20 locations to be opened in 2018

9 Objectives 2-3 strategies for franchisors to put into action immediately An understanding of what a lender is looking for in order to finance franchisees in emerging brands Pitfalls franchisees face financing initial unit(s)

10 Lenders ask yourself What is the first thing you look at in an FDD? What are the most important financial considerations when making a decision to approve a loan? What do borrowers usually not think to address but always enters the minds of a lender? What is an acceptable discontinue percentage for emerging brands?

11 Getting Unit 1 Done Private Money Security Line-of- Credit Other Cash 401k Rollover SBA Loans.But they signed a 3 unit dev agreement, what is right?

12 Franchisees ask yourself What is the first thing you look for when considering a brand in the FDD? If you were considering a brand without an item 19, what steps would you take to determine the financial viability of the brand?

13 Franchisors ask yourself What considerations did you make when completing item 19/20? (if you had a 19) What could you have done more of to help the first timers with financing? How has your approach to your FDD changed over the years?

14 Item 19 the good, the bad, and the ugly

15 Is my FDD my friend? The Great

16 Item 19: The Great Is my FDD my friend? The Great

17 Is my FDD my friend? The Great 1. Excellent Unit economics 2. Breakdown by maturity 3. Full EBITDA disclosure 4. SSS type analysis for all to use

18 Is my FDD my friend? Item 19: The Bad The Bad Why bother doing one at all? High range - $1.8MM Low range - $316k No profitability, food cost, occupancy, food cost etc.

19 Item 19: The Ugly (from a lender s perspective) Is my FDD my friend? The Ugly

20 SBA Lending do s and don'ts 401k Strategies SBA Lending limits Protecting Liquidity Cross corporate guarantee limitations How has the SBA changed the ways lenders look at franchising?

21 Item 19 changes (NASAA) First, NASAA removed the prohibition against presenting gross profit/net profit FPRs of company-owned outlets if a franchisor does not have any operational franchise outlets. This puts new franchisors on a level playing field with developed franchisors, though it is important to note that any franchisor who wishes to disclose only the gross profits or net profits of company-owned outlets must still include a supplemental disclosure the reflect the material differences between company-owned and franchised locations. Second, NASAA clarified that, while franchisors with fewer than 10 outlets are prohibited from presenting a subset of those outlets, franchisors with more than 10 outlets may disclose a subset of less than 10 outlets in Item 19. This prevents a distorted reading of the NASAA commentary, and justifiably permits franchisors to highlight a smaller subset of outlets that may share a particular characteristic (e.g., outlets in a certain geographic area, or all drive-thru locations) that is material to prospective franchisees

22 What Lenders Need to see A+ quality package A+ quality package How many first time franchisees have ever applied for a business loan?

23 Multi Unit Agreements Are they real? How many of your MU agreements meet their development agreement timelines? What happens when unit 1 never gets to break even and they signed up for 5? What happens when they open stores too fast?

24 Case Study Mara Fortin, Nothing Bundt Cakes Unit Unit Date Opened Financing Leveraged Currently Self-funded through HELOC Self-funded + $75K traditional Unit First SBA 7a Loan Real estate market was good at the time No debt Unit SBA 7a Loan Debt remains Unit SBA 7a Loan Debt remains Unit 1 Relocation Absorbed traditional 75k debt from Unit 2 + debt remains 2014 Line of Credit Accelerated 4 year payoff - done in 201 Unit SBA 7a Loan Debt remains Unit SBA 7a Loan Debt remains

25 Case Study Mara Fortin Nothing Bundt Cakes - Takeaways 1. Try to get unit 1 financed 2. It will be longer/more expensive than you expect 3. Work with your franchisor to get data that banks will ask for (brand growth, anticipated AUVs, franchisor support plans to make you successful, etc.) 4. Performance on your first locations are crucial for future financing.

26 Emerging Franchisor Strategies Top Know your unit economics 9. Your first 10 franchisees should be ready to build out of cash 8. Get on the Franchise Registry It is where lenders look for information 7. Visit your local lenders - in the markets you are developing 6. Create a template Business Plan (categories only) for your franchisees 5. Create a template cash flow projection (categories only) for your franchisees 4. Get a bank credit report 3. Commit a person in your organization to lending (or outsource it) 2. Have a proper item Have a company-wide understanding that franchisee profitability is the primary driver to your overall success as a brand

27 Takeaways 2-3 strategies for franchisors: We gave you 10! What is a lender looking for: A+ franchisee package and stellar Item 19 Pitfalls franchisees face: Undercapitalized, long process, work with your brand, reasonable development timelines

28 Thank you!

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30 IFA Financial Summit: Part 2 - Sunday, February 11 th, 2018 Strategies for Growth Brands (101+ units)

31 Randy Jones ApplePie Capital Head of Originations Moderator Johnny Weber Lex Lane Greg Vojnovic Madison Jobe Sport Clips Area Developer Panelist Wingstop Franchisee Panelist Arby s Chief Dev. Officer Panelist Wingstop Chief Dev. Officer Panelist

32 Agenda Franchisee: Case Study Sport Clips Franchisor/Lender: Roles and Perspectives Challenges: Liquidity for growing franchisees Workshop: Understanding growth potential

33 Moderator 20 years experience in franchising Randy Jones Head of Originations ApplePie Capital Previously Funding Solutions, now part of ApplePie Capital Funded thousands of franchise business across the U.S. Developed diverse and reliable lending networks and increased access to capital for franchisors

34 Panelist Wingstop franchisee since 2007 with 4-units in Portland, Oregon area Lex Lane has 25 years of experience in providing more than $3 billion of conventional franchise loans to multi-unit franchisees nationwide, covering more than 30 franchise concepts Lex Lane Franchisee Wingstop

35 Panelist 30 years experience in franchising Previously: SVP of Int l Dev. at Dickey s Barbecue COO at Shakey s VP of Franchise Dev. at Ruby s Diner VP of Franchise Dev at Red Robin Madison Jobe Chief Development Officer Wingstop

36 Panelist Owner of 56 Sport Clips Opened his first location in 2008 in Nashville Johnny Weber Area Developer Sport Clips Built an empire of over 50 stores in seven states in less than 10 years Employs over 560 people He and his team support a total of over 1,500 Sport Clips team members

37 Objectives Provide clarity of 3 perspectives (Franchisors, Lenders, Franchisees) Today Define challenges for brands with 101+ units Align Franchisor and Lender financial analysis of franchisees

38 Current Status of the Market Trends over the last few years compared to 5 years ago? Franchisor Development Franchisee Development Methodical Perspective Fast moving Perspective Lending Environment

39 Case Study Pt.1 Johnny Weber SportClips Date Opened Financing Leveraged Lender 3 units purchase April 2008 SBA 7A Spirit of Texas Bank Single unit purchase October 2008 Conventional Bank Loan Spirit of Texas Bank Single unit purchase July 2009 Paid Cash N/A Store Takeover November 2009 No financing N/A Single unit purchase January 2010 No financing Paid $1 Single unit purchase June 2011 SBA 7a Spirit of Texas Bank Development rights June 2011 Conventional Bank Loan + Private Loan Spirit of Texas Bank + Personal 3 units purchase September 2012 SBA 7a Spirit of Texas Bank Single unit purchase December 2012 Paid Cash N/A 18 units purchased June 2013 Part SBA 7A loan, Seller, private loan Cornerstone Bank Atlanta/others 3 units purchase December 2013 SBA 7A + Seller carry back Paragon Bank Atlanta

40 Case Study Pt.2 Johnny Weber SportClips Date Opened Financing Leveraged Lender Store Takeover June 2014 No financing N/A Development rights October 2014 Conventional + Seller carry back loan + private loan Pinnacle Bank New unit opened November 2014 SBA 7A Legence Bank 2 units purchase February 2015 SBA 7A + Store takeover Legence Bank New unit opened June 2015 SBA 7A Legence Bank Single unit purchase September 2015 SBA 7A loan and carry back note Spirit of Texas Bank New unit opened December 2015 SBA 7A Legence Bank New unit opened January 2016 SBA 7A Legence Bank 2 units purchase April 2016 Conventional Pinnacle Bank 2 units purchase April 2016 SBA 7A Legence Bank

41 Case Study Pt.3 Johnny Weber SportClips Date Opened Financing Leveraged Lender 3 units purchase July 2016 Conventional Legence Bank Store takeover September 2016 No financing N/A 2 New unit opened December 2016 SBA 7A for both units Legence Bank New unit opened April 2017 Conventional City National 2 New unit opened May 2017 Conventional for both units City National New unit opened June 2017 Conventional City National New unit opened August 2017 Conventional City National New unit opened October 2017 Conventional City National Sold 10 units December 2017 No financing N/A

42 Franchisee Mature, Multi-Unit, Growth Focused Franchisee strategies for financing sources Market Stability Franchisor Support

43 Franchisors Role in Financing Mature Brand Define good lender characteristics Role of the CDO in Financing Lender that understands your brand

44 Franchisor Review Bank s Perspective Number of Units Open Closure and Transfer Rates Financial Statements Balance Sheet + Income statement

45 Franchisee Review What is a bank looking for? DSC DTI Global Cash Flow Formulaic Subjective Credit History Distance Fast Growth Trends review lender issues Remodel What did Lender to Lender Consideration costs we miss? Lenders in Audience input

46 Remodels/Re-images/Refresh Don t forget to account for remodels when you re determining your financing strategy for growth Financing strategy Stand alone vs. include in global refinance/recap Working Capital Considerations Stores can be closed for days consider a loan product that injects working capital and accounts for the loss

47 Franchisee - Getting from Unit 10 to 50 YOU don t have to worry anymore The banks are calling them! The dirt is in the details: Loan Covenants Fine print Get a CFO s advice

48 Acquisition Strategies Liquidity issues have bigger impact with larger transaction sizes Down Payment Seller Financing SBA Loan (only 10% down) Recap existing debt Acquiring poor performing stores is tough for smaller franchisees Contiguous territories can get efficiency of scale for operations

49 Challenges in Development Mature Brand Common challenge in growing a mature brand Franchisee characteristics Changes in leadership Impact on Growth and Strategy

50 Workshop How can they grow? Take out your handouts! Example: Consolidated P&L and Consolidated BS 1. What is value of the combined businesses? 2. What is the net value (-debt) in the businesses? 3. What is the lendable equity?

51 Takeaways Determine value and net value of a Multi-Unit Franchisee Understand how this is determined by Franchisors vs. Lenders How these strategies ultimately impact your brand s growth

52 Thank you!