Webinar Discussed Tools to Evaluate Franchising Risk

Jessica SarterSmall Business Lending

“Credit access is the number one issue for franchising” Beth Solomon said. She is the vice president of strategic initiatives and industry relations of the International Franchise Association, a trade association that represents most of the franchise brands in America and overseas. Solomon set the stage for the “Bank Credit Report” webinar last week by saying that IFA will focus on products that make capital access easier.

The Bank Credit Report, commonly called, “BCR,” makes capital access easier by analyzing the economic health of franchise brands that order its report. The BCR details the franchisor’s financial strength, its historical successes and failures, and how well they are positioned in the marketplace. “We license the BCR to franchisors and it is entirely under their control,” Darrell Johnson told me. He is the president and chief executive of FRANdata, the company that developed the BCR. “If a franchisor decides to release one to someone else, that is their option.”

The “someone else” is a lender financing the purchaser for one or more franchised units. Prospective franchisees, of course, should perform the type of due diligence as lenders do to assure themselves that they are making a wise investment.

According to Rick Bisio, a southwest Florida-based franchise consultant and broker with FranChoice, due diligence “occurs by putting in the hard work that is required to separate fact from fiction.” In his newsletter, Bisio advises would-be franchise buyers to ferret the pertinent data they need before investing in a franchise. That includes slogging through the Franchise Disclosure Document, calling present and past franchisees and trying to make sense out of the limited disclosure information required by the Federal Trade Commission.

FRANData’s Johnson says, “BCRs are not under FTC rules so they can contain much more information than the limitations of FDDs.” Moreover, instead of using legal jargon, the BCR is “in the language of lenders, not the language of regulatory attorneys who designed FDDs.” That makes is easier for lenders to evaluate their risk.

The webinar was heavily attended by franchisors and lenders. It was hosted by BoeFly.com, an online marketplace that connects borrowers with the lenders most apt to finance their proposal. “We repeatedly hear banks say they want to understand the franchise brand and not just the franchisee borrower, and the Bank Credit Report provides a useful tool to do just that,” said Mike Rozman, co-president of BoeFly. “BoeFly is hosting this webinar to further explore how this report can benefit both lenders and franchisors with regard to credit access within the franchise community.”

Over 2,000 lenders participate on BoeFly’s web site in order to view applications from entrepreneurs seeking financing. Three lenders, JPMorgan Chase Bank, First Niagara Bank and Spirit of Texas bank, made presentations at the webinar.

Brian Myers, credit manager for Chase Bank, said that he maintains a library of BCRs. Even so, he and the other two lenders acknowledged that they underwrite each borrower in addition to reviewing the franchisors’ BCR.

Spirit of Texas Bank also uses the BCR to track the ongoing quality of the loans within their portfolio, according to its vice president, Tip Spata. Additionally, he uses it as a marketing tool to seek out low risk brands.

Meanwhile, Janell Anderson, vice president at First Niagara Bank said that the BCR “takes a lot of the guessing out of doing a start-up.” That’s because she has to rely on projected income and operating statements for a new franchise unit, and would rather have unbiased input from the BCR than the franchisor’s FDD.

A multibillion dollar international bank, became the poster child for relying too heavily on the FDD, and not doing independent research. The prolific participant in the U.S. Small Business Administration’s lending programs accepted the FDD’s projections to make 12 start-up loans. Ten of them failed within the first 18 months resulting in an audit by SBA’s Inspector General. Based upon the audit, SBA voided its guarantees and demanded repayment of the money it previously paid out.

Presenters from CiCi’s Pizza, Kiddie Academy and Tasti D-Lite, rounded out the webinar with their favorable experience in using the BCR to help their franchisees obtain financing. Other franchisors receiving unfavorable BCR’s, of course, would unlikely talk about it publicly.

The takeaway from the webinar is that lenders must meticulously underwrite each franchisor in addition to their loan applicants. Furthermore, entrepreneurs seeking to buy a franchise, should understand if the brand supports franchisees in seeking financing, through active investment in the BCR and BoeFly.

Jerry Chautin is a former entrepreneur, commercial mortgage banker and business lender. He writes and blogs about business and real estate for several publications and is SBA’s 2006 national “Journalist of the Year.” Jerry is a volunteer business mentor with SCORE, “Mentors to America’s Small Business,” offering free business advice. Post your comments and ask questions on this Blog or send Jerry an e-mail.

Copyright © 2012 Jerry Chautin — All rights reserved.