What can franchise brands do to offset a borrower’s weakness?

Jessica SarterSmall Business Lending

Video Transcript:

Mike Rozman:
You know, we’ve heard from the lenders that – you know, where they are on equity, collateral, level of experience. Talk to us about when a – and we’re going start to shift towards the brand question here, moving away from the individual borrower’s perspective for a second and more shifting towards and understanding the brand. Before we get there, if someone’s light on one of these elements or a few of these elements and it causes you to be a little concerned, I want to understand what the brand can do, what the franchisor can do to mitigate some of these elements. Doug, you know, what are your thoughts on that? Is there anything that you’re seeing in the market as a whole where the brand is helping bridge a gap?

Doug Bagnasco:
Yeah, I think there’s a number of things that can happen if the relationship with the brand is a strong relationship. In some cases the franchise company may offer up a partial guarantee on the loan or specific loans where they believe in the franchisee and maybe some of the credit conditions are a little tight for us, to help us get over the hump. We never go into a relationship with a franchisor expecting those sorts of credit enhancements, but when they are there it certainly helps. Also on the back end if there’s help from the franchisor in terms of their assistance if we’re in a default situation with the borrower, that also gives us some comfort to take a little bit more risk on the front end if we know we’re going get some assistance on the back end.

Mike Rozman:
Right, and I think that’s one of the themes that came out of certainly one of our pre-calls, which is as much as possible you’re looking for that – to understand how the franchise brand will behave in the ______ of that franchisee getting into a challenging situation. So obviously if they’re specifically guaranteeing a portion you know you have a committed partner. What are some other ways that you’re seeing out there in the market that a brand – and I’ll stay with you here, Doug – that a brand is helping to give you this confidence?

Doug Bagnasco:
Well, again it’s more so on – on the front end it would include things like helping us understand the degree of due diligence that the franchisor is involved in in site selection, which as everyone knows is just so critical in the success of the business. And I would say again on the back end it’s what can they do to assist us in the event that we have a problem franchisee that’s struggling, whether it’s for personal reasons or just not a good fit for them, in terms of trying to remarket it or possibly even reacquiring the store. Those sorts of things will go a long, long way.

Mike Rozman:
Okay, great, thanks.