US Restaurants Turn To Big Franchise Partners In Tough Economy
30 July 2011 - 6:18AM
Dow Jones News
When it comes to franchising in today's economy with its
new-normal lending constraints, restaurant chains are opting for
larger, more experienced partners while eschewing mom-and-pop
bids.
Even McDonald's Corp. (MCD), which several decades ago regularly
took chances on the new single-location entrepreneurs, is now only
interviewing people with $500,000 in their own cash and other
assets.
DineEquity Inc. (DIN), which has been refranchising its
Applebee's chain for the past few years, recently sold another 66
company-owned locations to its largest franchisee, Apple American
Group, in part because the franchisee group agreed to accelerate
the remodeling plan of those New England locations to be completed
by the end of 2012. Apple American Group received a "strategic
growth investment" from Goldman Sachs Capital Partners for the
deal.
With banks tight on lending in this economy, smaller franchisees
not only struggle to secure the opening costs, but are also more
likely to have trouble keeping up with remodeling and technology
innovation. Professional franchising companies that operate
multiple restaurant brands already are less likely to leave a black
mark on the brand by failing.
"By working with larger, professional franchisees, the companies
can reduce training and support costs," said Dan Prechtel,
consultant and president of Franchise Alliance. "It's easier to
manage fewer people and ones who already know the industry."
Will Powell, a commercial banker in Bank of America's Credit
Products group, said he has seen a lot of consolidation of
franchisees recently.
"There are not a lot of net new locations, so the ones that are
opening are by multi-unit operators and [private equity] companies
because they have the capital to deploy," Powell said.
While the smaller franchisee space, owning two to five units, is
still active, he said, the headwinds on the financing side are
stronger. When deciding whether to issue loans, "the banks want to
see a track record, a history of growing same-store sales,
sustainability, transportability, and they want to understand the
concept."
The current economic situation is making it next to impossible
for new franchisees to show strength by such measures. But if the
franchisee successfully operates several other locations and has a
relationship with the bank for some time, the bank is more willing
to go out on a limb, Powell said.
Dunkin' Brands Group Inc. (DNKN), which operates the heavily
franchised Dunkin' Donuts and Baskin-Robbins chains, is willing to
work with smaller franchisees. But it, too, is being extra
stringent with its screening process to ensure that it is bringing
in people with the ability to secure loans and develop their
locations on schedule, said Grant Benson, vice president of
franchising and market planning.
While the average Dunkin' Donuts franchisee owns only six
locations, the company is still looking for candidates with
experience operating other restaurant concepts.
"It's certainly more challenging to find franchisees with enough
capital to qualify than it's been the past," Benson said. The
company requires a minimum of $250,000 in liquid assets to open a
Dunkin' Donuts locations and $125,000 for its Baskin-Robbins ice
cream shops.
Even though banks are more conservative with lending these days,
"the power of the brand and well-known success of our franchisees
helps with getting loans," Benson said.
Dunkin' Brands, while it doesn't provide financing itself for
franchisees, helps entrepreneurs with their business plans and
presentations to the lenders.
"Capital is a challenge," Benson admitted. "It's just not one
that we can't overcome."
-By Annie Gasparro, Dow Jones Newswires; 212-416-2244;
annie.gasparro@dowjones.com