Underwriting the Franchise Borrower – Equity Injection

Jessica SarterSmall Business Lending

Video Transcript:

Mike Rozman:
When a Borrower seeks a loan, they are typically required to inject their own equity into a transaction, and we’d like to hear from the lenders on our call today how much equity they expect a borrower to inject into a deal. Let’s start with Kevin Ellis from Atlantic Coast Bank. Kevin, on the transactions that you are getting done at your bank, tell us what you’re looking for borrower’s equity injection.

Kevin Ellis:
Thanks, Mike. We currently require a borrower contribution of 20 percent or startup and business acquisition franchise projects. If real estate is involved we’ll require ten percent on the real estate portion of the deal and 20 percent on the non-real estate portion. On business acquisitions, business acquisitions of an existing franchise, you know, we’ll get a minimum of ten percent from the borrower, you know, towards the project costs, and then the rest could come in the form of a seller note, so the remaining ten percent.

Mike Rozman:
Great. And so what we’re hearing is that, you know, depending upon the type of loan purpose that’s coming into play. Doug, United Capital, you know, what are you seeing on this?

Doug Bagnasco:
Sure. Well, first I’d like to clarify that we work predominantly with multi-unit operators with existing units, and we predominantly are a cash flow-based lender where we’re focusing on the cash flow of the existing units and not say strictly the new builds, or in a business acquisition scenario the store being acquired. With that in mind, if there’s adequate cash flow from those existing units we typically will do up to 100 percent financing for the business acquisition as well as up to 100 percent financing for new builds as well.

Mike Rozman:
Okay, great. So we have an array. Brian, can we go ahead and get a question out? We have a poll question for our lenders as well, as far as the equity levels that they are seeing. I’d like to push this out to the larger group to get some insights on that element. Maybe while that question goes up – and thanks, Bri – so for you lenders – and we – and I think Kevin brought this up, as he’s viewing type of transaction as being – impacting how much equity he’s looking for. We’re asking lenders, on a startup how much equity injections do you like to see or do you need to see? Please select the one that’s most appropriate for a startup franchise transaction for you today. So we’ll go ahead and get that.

While that’s being answered, Ron, on transactions that you’re seeing in the market as a whole, what are you seeing on this piece?

Ron Feldman:
We require a little higher equity injection on year one, and then on year two we’ll do as much as 90 percent, on years two and higher. We really look at the global cash flow of the franchisees – how much enterprise that they can support.

Mike Rozman:
Great. Good, good. So those questions are out there. It looks like we have a good response rate back. We’re going leave it open just for one more – oh, it looks like we’re all set. So – and I’m not terrible surprised. So the center of gravity here on the response is 21 to 25 percent was just edged out by 11 to 20 percent. And I’ll say we’re seeing that indication on BoeFly as far as equity injection on deals that we’re seeing get done in the 20 to 25 percent band, although it’s highly dependent on the type of transaction that’s being worked on.