Franchisors financing restaurant expansion was practically unheard of until recently. But as the nation’s economy starts to recover, franchiors are the new food business bankers.
Even in the ravaged economy of Northern California, we are starting to see signs of recovery. Although in my home city of Sacramento, California state workers, who comprise a signficant part of the work force, still have tenuous employment contracts, tenant sales in our shopping centers have nearly all shown at least a slight increase in 2010 over 2009.
As shopping center vacancies continue to shrink and no new supply is being added, owners and merchants share a ray of optimism for the coming 12-24 months. The weaker players in all categories are largely gone. The remaining merchants have for the most part weathered the storm and are preparing for a renewed and hopefully more dependable stream of sales.
However, regardless of the opportunities that may be re-opening for many categories, the growth of new businesses has become highly problematic. During the extreme growth years of 2003-2007, many new retail operations were financed with HELOCs, or home-equity loans. There was a euphoria that acted to obfuscate the risk element, as too many homeowners believed their rapidly rising home values would replace any equity removed to start a small business. We now know how that worked out for most of the high leverage borrowers.
Absent HELOC availablity, the primary funding source for small retail businesses were commercial banks, often partnering with the SBA. Commercial bank lenders are now reluctant to even participate with the still active SBA, and the result is a dearth of expansion capital.
In early 2010, Quizno’s introduced a revolutionary program to encourage the re-opening of closed stores. For as little as $5,000 down, a new franchisee could become part of an operating team for a re-opened store. The balance due was carried by Quiznos. In February 2010 we profiled this program in a Quick Food Examiner article and attracted some very negative comments from Quizno franchisees. The comments spread to our Quick Food Facebook page as well. We have not formally tracked the local success of this program, but have observed that several closed Quizno units remain shuttered.
This month at the IFA show, significant emphasis was focused on the newly available franchisor financing both domestically and abroad, as detailed in this article from Nation’s Restaurant News. We do not expect this model to be more than a bridge policy used to jump start and fuel expansion, however it presents a window of opportunity that may not be seen for long and again for some time.