Underwriting the Franchise Borrower: Management Experience

Jessica SarterSmall Business Lending

Video Transcript:

Mike Rozman:
I want to leave collateral and shift more towards experience of the principle. So certainly we all know that the experience level is important to an owner’s success. In some cases brands are seeking out franchisees with a meaningful amount of experience, and in other cases brands are seeking out those franchisees that don’t have any experience, to work with someone with a clean slate. And so I want to view that – I want to discuss that for a moment. Ron, within the programs that you’ve worked on, tell us how you see, from the underwriting perspective of the borrower, the role of experience.

Ron Feldman:
Well, we’re program lenders. We will not just do one-up transactions. So we do a very, very deep dive on the brands that we work with, understand their franchisee selection process and their requirements. So once we approve a brand we’ll approve their handicapping of that perspective franchisee.

Mike Rozman:
Gotcha, and so kind of a good enough for the brand, good enough for us concept because you’ve already vetted their acceptance process.

Ron Feldman:
Correct.

Mike Rozman:
Gotcha. Okay, thanks, Ron. Eric at US Bank, how do you guys view this?

Eric Daniels:
We prefer experience but we listen. We want to understand the background of our operators. We do use the Patriot Express programs veterans, up to $500,000.00 for startups, and that’s something that we’re going be focused on in this coming up year. So I would say, you know, the preference is experience; however, you know, we’re listening.

Mike Rozman:
So I want to stay with that, Eric, for a moment. I have a question that came in from Jerry Chautin. Jerry’s an experienced SCORE counselor and a journalist that covers this and the feedback he’s getting from his score clients is that they’re not getting a lot of feedback. I like the way you use the words that “you’re listening”. Talk to me about how that happens at your bank, whether it be on a policy basis ________ your loan officers are focused on giving feedback as opposed to just a raw rejection letter. How does that work?

Eric Daniels:
Yeah, we have our field representatives, our business development officers who work with the prospects, and once deals go into our center there is a borrower interview, so our borrowers do have an opportunity to speak to our loan officers directly to best understand and get as much color as they can possibly get so that they can be, you know, looking at the deal holistically. So we think that having the interface with the sales rep plus the conversation with the loan officer in credit combined gives us really good insight in terms of the background of our prospects.

Mike Rozman:
Great. That’s real helpful. And I want to stay on the experience for one more moment. You know, Doug, we heard from you that you’re looking for those experienced operators _____ multi-unit by definition that you’re having that experience. Kevin, from a community bank perspective at Atlantic Coast, how do you guys view this?

Kevin Ellis:
I mean, of course we prefer direct industry experience, without question. There are a number of franchise concepts, however, that don’t necessarily require that an operator have the direct experience, and in some cases any. You know, we’re often approached by potential borrowers that lack direct experience but their resume and background is very translatable. And just like Eric said, you know, we vet those borrowers and, you know, we know them intimately, and you know, we get to a certain comfort level. And, you know, we might be able to make deals happen where they might not necessarily have the – you know, the direct industry experience. I would say on something like a restaurant it would be much more important.

Mike Rozman:
Okay. And on that experience level, does that mean that the person previously was a general manager and you’re looking for ten years’ experience? Could it have been earlier in their career? What’s your view on that?

Kevin Ellis:
I’ve got a great example of a deal that we closed today. It was a startup pizza franchise restaurant where it was partners, you know, a father and his two sons. And one of the sons had previously, you know, within the last – I don’t know – ten years or so been an assistant manager at one of the more high – I believe it was the highest volume store in the country. And that was – you know, that worked for us because we had a very competent principle, you know, in dad as well as his sons, but we did have the direct experience. So it was an easy approval for us.