Easy way to get loans for franchisees?

The International Franchise Association didn’t over-promise in pitching its Small Business Lending Summit as an opportunity to hammer out solutions to restaurant franchisees’ capital crunch. A packed room of attendees heard repeatedly today that lenders would extend loans more readily if applicants’ franchisors provided detailed data about the brand’s overall performance.

Bank representatives said the rusted machinery would be greased significantly if brand headquarters shared such nitty-gritty info as long-term sales plans, what failed stores are fetching when they’re sold, and what HR support is available to franchisees.

Several noted that medical-related small businesses are having an easier time than restaurants and other franchised businesses in securing growth capital. “The reason is there’s a tremendous amount of data available in that sector,” said Joe DiNicola of Bank of America.

“Today’s underwriting is different than yesterday’s underwriting. When the story can be supported with the franchisor’s data, that story becomes stronger,” he asserted.

The discussion prompted one member of the audience to grab a microphone and suggest that franchisors put systems into place and standardize the information they pass along to potential sources of licensee loans.

The give-and-take grew out of what panel moderator and celebrity business journalist Geoff Colvin called a “giant disconnect between lender and borrower.”

He noted that the conference was convened because franchisees are starved for financing. Yet lenders on the program attested that they not only are willing to lend more money to franchisees, but are aggressively prowling for those sorts of deals.

Ironically, they asserted that a major part of the problem is insufficient demand.

“We’re seeing a lot of hesitancy,” said Mary Navarro, a senior EVP for the Midwest’s Huntington Bank. “A low sales volume might be part of that hesitancy, and [franchisees] have learned to do more with less.”

The discrepancy between franchisees’ complaints and lenders assertions had Colvin scratching his head. He asked Navarro, “What explains the perception that franchisees can’t get credit?”

After some give-and-take, lenders acknowledged that they’re using different criteria post-Great Recession to decide who gets money. They’re looking for a convincing track record and far more detailed information about the ventures they back.

“Document, document, document,” advised Tony Wilkinson, CEO of the National Association of Government Guaranteed Lenders.

Banks are also looking for an on-going relationship, not a one-off transaction. Her company is loath to make one-shot loans because it wants to lend money on an ongoing basis with businesses in the neighborhood.

A representative of Regions Financial Corp. suggested that franchisors choose a dozen banks nationally, educate those institutions about their concept, and then work exclusively with then.

Pens were scribbling furiously as she spoke. I bet the notation was starred and underlined a few times.

Dueling growth strategies

Seldom have two restaurant philosophies been pitted so blatantly against one another. Contestants, start your cash registers.

In one camp are the experienced multi-concept operators who’ve decided to narrow their holdings to category titans—Taco Bell and Pizza Hut, but not the A&W burger chain, to cite the most pronounced example.

In the other group are the mini-conglomerates that figure they can maximize sales and profit growth by amassing a stable of next-tier concepts—The Office Beer Bar & Grill, not Red Robin or Max & Erma’s. They’re shopping for deals on brands that may not be tearing up the fast lane, but in the aggregate can still get you there financially.

The current test of strategies is shaping up in fast food, with Arby’s joining A&W and Long John Silver’s on the public auction block. Presumably there are plenty of other, smaller chains similarly available for the right price.

The situation echoes what happened in casual dining during most trying days of the Great Recession, when giants like Outback and Brinker pared down their portfolios—and counter-thinkers like Landry’s went on a shopping spree.

At the very least, the dynamic has changed the line-ups of who owns what. Among the new stables of restaurant brands are companies like Villa Enterprises Management, which just added The Office to such concepts as South Philly Fries, Banana Smoothies, and perhaps its best-known brand, Villa Fresh Italian Kitchen, still known to fans as Villa Pizza.

You might not know Beautiful Brands International, but you may already compete with one of its 12 concepts, including what may be the industry’s only crepe chain since the dissolution of Magic Pan, Le Beau Rouleau. Its other brands include Camille’s Sidewalk Café, Fresh Berry, Rex’s Bite Size Chicken, In the Raw Sushi, Dixie Cream Donut, Blazing Onion Burger Co., Greenz Salads, Caz’s Chowhouse, Top That! Pizza and SmallCakes, a “cupcakery.”

Then there’s Focus Brands, with Moe’s Southwest Grill, Schlotzsky’s, Carvel, Cinnabon and Auntie Anne’s.
One of the oft-mentioned other multi-concept franchisors is Kahala, the parent of Blimpie, Ranch 1, Cereality and nine other concepts.

Lesser known are Trufoods, parent of Wall St. Deli, Arthur Treacher’s and Pudgie’s Chicken; and Franchise Brands, the younger venture of Subway founders Fred Deluca and Peter S. Buck, with Mama DeLuca’s Pizza and Taco Del Mar.

All those clusters are tiny dots compared to the collection that Landry’s has pulled together: Some 33 brands, ranging from the Mongolian-themed Yak & Yetti to its namesake high-end fishhouse.

Will that more-is-better philosophy prevail? Or will Wendy’s prove that a focus on a single powerhouse brand delivers more of a return to franchisees, shareholders and employees?

We’re about to find out.

A game-changer named Abe Gustin

The restaurant industry lost one of its revolutionaries last week, though it’s strange to apply that label to an arch capitalist like Abe Gustin.

He’ll be remembered as the person who founded Applebee’s, even though the concept was actually the brainchild of Bill Palmer, now of Up The Creek Without a Paddle. What Gustin truly founded was a simpler, far more effective approach to franchising, with the principle of partnership elevated to an art form.

Plenty of franchisors pledged to make their relationship with franchisees a symbiotic one, but Gustin had learned how empty those words could be. As he would candidly recount in interviews, being a franchisee of Taco Bell in the mid-1980s had taught him how subordinate the licensee could be. He felt the home office was dictating the terms and controlling franchisees’ growth, instead of working in tandem.

Gustin said he tried to set up Applebee’s franchisee programs to be just the opposite. For one thing, he limited the number of franchisees to a few dozen, so the field-level operators wouldn’t be competing with one another for turf, sales or employees.

And they were given a firm say in what they served, and not only through the advisory council that virtually all chains set up to give franchisees a voice in shaping menus. Long before local specialties were given the spotlight they get today, Applebee’s franchisees were invited to fill out their menus with regional specialties. The home office set about 80% of the listing, and the field operators chose the rest.

More important, franchisees attested that the home office heard what they said—maybe not all the time, but enough to make them feel they had a strong influence on the brand’s direction.

When franchisees felt their territories were running out of room for more Applebee’s restaurants, the home office went out and bought a second franchise concept, Rio Bravo. Since it, too, was developed in part by Palmer, headquarters figured it was the right means for franchisees to keep opening outlets.

It was wrong, as franchisees and investors soon let management know. Rio Bravo didn’t work for the system, so the brand was divested. Everyone went back to expanding the Applebee’s chain again, using smaller prototypes and smarter siting strategies.

The proof of Gustin’s approach to franchising was Applebee’s phenomenal growth. Before he controlled the brand, it was owned by W.R. Grace, which treated it like a glorified lemonade stand. It grew to 42 stores, if memory serves me correctly, which made it a miniscule part of the chemical giant’s portfolio. Its other restaurant holdings, just to put it in perspective, were Del Taco and Houlihan’s.

When Grace decided to exit the restaurant business and sell those brands, no one seemed to even notice Applebee’s. Houlihan’s was the plum. With barely any notice taken, Gustin was able to secure what would become casual dining’s longest string of restaurants.

It would grow to far more than 1,000 restaurants, a size more befitting a fast-food chain than a group of full-service places. But Gustin and his lieutenants—some might say disciples—made it happen.

The fuel was franchisees’ capital. Gustin kept the fire stoked.

The industry shall miss him for sure.