ANN ARBOR MICH. —Franchisees seeking growth capital from lenders may see new faces across the negotiation table: their franchisors.
As banks, lending institutions and credit companies continue their vice grip on growth capital amid the current financial turmoil, franchisors are confronting the possibility that they may have to step in to keep growth on track. —Franchisees seeking growth capital from lenders may see new faces across the negotiation table: their franchisors.
(To view financial charts featured in this week's print pages, click here.) —Franchisees seeking growth capital from lenders may see new faces across the negotiation table: their franchisors.
So far, Domino’s Pizza Inc. is the only franchisor to commit to offering up its own cash. Officials said this month it would offer “short-term financial support and solutions,” such as small loans or payment deferrals, for strong operators who are looking to purchase additional locations. Others, including Burger King Corp., Tim Hortons Inc. and Sonic Corp., have drawn speculation from industry observers that they also may step in where other lenders have left off. —Franchisees seeking growth capital from lenders may see new faces across the negotiation table: their franchisors.
“It will never be my preference to provide financing to our franchisees,” David Brandon, Domino’s chairman and chief executive, said this month during an investor conference call. “We would rather keep our relationship with them focused on being the franchisor rather than their bank. However, we are wading through uncharted waters.” —Franchisees seeking growth capital from lenders may see new faces across the negotiation table: their franchisors.
Franchisees typically are the engine of growth at many restaurant chains. By developing markets, breaking into new territories and opening new units, franchisees accounted for 62 percent of the total unit growth among Nation’s Restaurant News Top 100 chains during their latest fiscal years ended closest to December 2007. —Franchisees seeking growth capital from lenders may see new faces across the negotiation table: their franchisors.
Franchisors also rely on franchisees to purchase underperforming stores earmarked for improvement or to buy corporate locations the franchisor wants to shed. —Franchisees seeking growth capital from lenders may see new faces across the negotiation table: their franchisors.
Securities analyst Steven Kron at Goldman Sachs & Co. said Burger King management said they would be “willing to explore, if necessary, creative ways to keep funds flowing to franchisees,” and that Tim Hortons most likely has increased the amount of financial support it typically offers franchisees. —Franchisees seeking growth capital from lenders may see new faces across the negotiation table: their franchisors.
Burger King spokeswoman Deborah Martin said the company has not yet needed “to commit [its] balance sheet to help franchisees fund new restaurants or remodel existing ones.” She added that Burger King had not experienced “any broad-based lending pull-back in [its] system.” —Franchisees seeking growth capital from lenders may see new faces across the negotiation table: their franchisors.
Tim Hortons officials could not be reached for comment at press time. —Franchisees seeking growth capital from lenders may see new faces across the negotiation table: their franchisors.
At Ann Arbor-based Domino’s, its successful franchisees—what the parent company labels “A” and “B” operators—could get transactional help when looking to purchase underperforming stores, or those units run by the “F” operators the company is trying to force out of the system. This shuffling of operators is part of Domino’s strategy to turn around domestic results, which have battled stalled sales. That plan is now at risk. —Franchisees seeking growth capital from lenders may see new faces across the negotiation table: their franchisors.
“There just doesn’t seem to be any capital availability to finance those transactions,” Brandon said. “The bank credit market has been very tough, and it’s gotten exceedingly worse.… I think their credit committees have gotten very conservative as the overall banking industry has gone through its own form of hell.” —Franchisees seeking growth capital from lenders may see new faces across the negotiation table: their franchisors.
Domino’s has 8,726 locations worldwide, including 5,086 U.S. units. In the U.S. market, franchisees operate 4,574 locations, or nearly 90 percent of the total market. Many of those franchisees are small businesses that own and operate a handful of locations. —Franchisees seeking growth capital from lenders may see new faces across the negotiation table: their franchisors.
Any franchisor-led lending case will be approached on an individual basis, the company said. Options for financing would include small amounts of bridge financing or deferrals of royalties or other costs, and any lending would include relatively small increments. —Franchisees seeking growth capital from lenders may see new faces across the negotiation table: their franchisors.
“I don’t want to be a bank,” Brandon said. “It’s never been our plan or our interest. So whatever we do…will be done at a very low level and will not be material to our financials.” —Franchisees seeking growth capital from lenders may see new faces across the negotiation table: their franchisors.
For the third quarter ended Sept. 7, Domino’s reported an 8-percent drop in profit, to $10.1 million. Its revenues fell 4 percent to $323.6 million. —Franchisees seeking growth capital from lenders may see new faces across the negotiation table: their franchisors.
While agreeing to support certain franchisees, Domino’s also said it would need to explore additional sources of corporate liquidity, as the now-bankrupt Lehman Brothers was a primary lender. The failed investment bank was responsible for commitments of up to $90 million under Domino’s $150 million variable funding notes. Domino’s said it held sufficient operating funds “for the foreseeable future” and that other lenders may be able to fill any gaps. —Franchisees seeking growth capital from lenders may see new faces across the negotiation table: their franchisors.
At Sonic Corp., the franchisor or operator of 3,400 restaurants, an aggressive growth plan coupled with a refranchising program could be difficult to execute with the current credit freeze, analysts said. In a conference call, however, the company said most of the franchisees looking to purchase corporate units and most of the operators that have agreed to expand are either self-financed through operating cash or already well-financed. —Franchisees seeking growth capital from lenders may see new faces across the negotiation table: their franchisors.
No development projects have been lost, the company said, but operators are reporting that deals require more equity and take longer to close. Sonic officials said required equity now averages between 20 percent and 30 percent, compared with 10 percent to 15 percent last year. —Franchisees seeking growth capital from lenders may see new faces across the negotiation table: their franchisors.
One analyst asked if Sonic would consider backing loans to franchisees. The company said it did not have to yet. —Franchisees seeking growth capital from lenders may see new faces across the negotiation table: their franchisors.
“Our focus is to consummate [financed] transactions as quickly as possible,” said Clifford Hudson, Sonic’s chairman and chief executive. “We will deal with the eventualities of the tightened credit markets as those situations arise.” —Franchisees seeking growth capital from lenders may see new faces across the negotiation table: their franchisors.