Franchise Finance: Pinnacle Commercial Capital

In 1962, car-rental company Avis debuted one of the most famous ad campaigns in the history of American marketing, leveraging their perennial second-place status behind Hertz as an edge over their competitor with the tagline, “When you’re only No. 2, you try harder. Or else.” Though Avis never took the number-one spot from Hertz, the campaign undoubtedly turned things around for the brand, which went from losing $3.2 million in a year to earning $1.2 million in the next.

Pinnacle Commercial Capital, a franchise financing company in Indianapolis, has not employed the same bold campaign, but Vice President Craig T. Weichmann says the “we try harder” mentality explicitly informs the brand’s lending strategy. Pinnacle works with investors to finance investments that larger banks might not. Which is not to say that the lender is any less risk-averse than a larger bank, “we just look closer,” Weichmann says.

Weichmann says Pinnacle Commercial Capital vets entrepreneurs on a personal level, looking past their existing portfolios to get a clear picture of their goals and skills.

How does Pinnacle Commercial Capital differentiate itself from other lenders?

Weichmann: Our niche is a little different. It’s like when Avis was battling Hertz years ago and said, “We’re number two, but we try harder.” That’s our thing. There are a lot of bigger banks, but the bigger you become the less personal you are. We work closely with our clients to get them to the next level of development, and we get a lot of repeat business as a result. It all comes down to trying harder.

How do you decide what projects to finance?

Weichmann: Generally speaking, there are three tiers of franchise brands, which depend largely on the size of the brand. From a lenders perspective, size is traditionally seen as very important. The biggest banks typically focus on the largest, tier-one brands. Right now, at the top of the heap is Taco Bell. That’s a premier loan that every brand clamors to get a shot at.

That’s the easy path. That’s no-brainer lending. Once you get into tier-two and tier-three, you find some projects that the biggest banks aren’t looking at, and that’s where we have an opportunity to try harder. There was a sort of earthquake in the industry this year when Nation’s Restaurant News’s annual Top 200 report ranked Dominoes above Pizza Hut for the first time — Dominoes was number nine and Pizza Hut slipped to 11. There have been some warning signs that Pizza Hut was slipping for a while, and now banks are wondering if they should be financing Pizza Hut deals. But those rankings can represent superficial slips, so if we have an investor who wants to purchase a block of Pizza Huts, we’re not going to rule it out. We want to learn more about who the franchisee is, what kind of game plan they have and if they are cutting the appropriate deal with the brand.

The test at the end of the day is our portfolio, and we’ve got an excellent portfolio of well-performing loans. And that’s because we go the extra mile.

Do you ever work directly with franchisors?

Weichmann: Everyone on our team specializes in something. Some of our people specialize in certain brands, so they will work with franchisors. We have a guy who specializes in Burger King, so he has deep contacts in that world. He goes to their annual convention. He can catch up with clients there, but it’s also an opportunity to get intelligence from the corporate team. We’ve got someone else who does the same thing with Pizza Hut, so it’s sort of a divide-and-conquer strategy.

We also go to emerging franchise conferences to look for brands that aren’t tier-one but may be worth learning more about — up-and-comers with positive things happening at the franchisor level and are attracting the right kind of franchisees.

What do you looking for when you vet a prospective client?

Weichmann: This is the question at the heart of proper lending. What we’re looking to see is if the client is just looking to add another unit to their portfolio or if they are invested in the opportunity on a personal level. If it’s just another unit for their empire, it may not make an enormous impact on them if it fails, and that’s not a deal we want to be a part of.

In the past 20 years, we’ve seen the emergence of large, multi-brand, multi-unit franchisees. These are people who have assembled their own organizations to tackle many brands. Some are good; some aren’t. So we’re trying to figure out which projects to finance.

I worked with a large Wendy’s franchisee who had more than 300 units in his portfolio. He tried to diversify by opening up a couple one-off stores for other brands, and that didn’t work for him. He knew he had hit the peak of how many Wendy’s he could open, so he came to us not only to help finance the next venture but also to help him figure out what brand would work for his portfolio. So we sat down and worked through what he was trying to accomplish. If he was just looking to buy a few units and get a decent transaction on the books, that wasn’t something we would be interested in. But he was looking to, over time, build up to another 100 or 200 units with a brand. That’s what we wanted to hear. If you buy a block of ten units, you have to develop a team to manage those units, and that requires a certain overhead. If you build 100, that same team can manage all of them and you have a far greater return on the same overhead.

The key is spending time with the client to understand where they are headed. And we don’t disappear after the financing. We stay in touch with our clients so that when they are ready for something else, we can be there. We also want to provide some guidance in terms of their growth, because if you grow too fast, that can bring all sorts of problems. So we try to help set them up for long-term growth.

Has that strategy resulted in a different portfolio of clients from what you might see at larger banks?

Weichmann: Yes. We have more repeat clients, people who think of us as a partner. When we were just starting out, we worked with a number of clients who had been turned down repeatedly by other banks. People remember that, and they come back to us. We’ve built a lot of very strong relationships, which you don’t often see at other banks.

What kinds of changes have you seen in franchise financing in recent years?

Weichmann: We’ve seen a lot of fluctuation. 2008 and 2009 was a very painful time for the whole industry, but since that low point, we’ve moved into an era of what some people see as easy money. For the last decade, rates have been extremely low and the growth of the industry has been strong, as has been the performance of operators. But with that kind of easy money, it’s easy to become careless and make loans that you shouldn’t be making, which we’re seeing from a lot of institutions right now.

Business goes through cycles. That’s an absolute truth. When you have loans on the books, a loan that was once good can turn bad when the cycle changes. They key is how you handle it. Last year’s massive hurricanes in Florida and Texas are good examples. A lot of businesses had to shut their doors, and it was completely out of their control. When the chaos was over, they all had a lot to deal with, and the ones that didn’t panic and came back with clear eyes and a plan to get back on track survived. A lot of our side of the business is about staying in communication with people when there is a bump in the road and helping them figure out what happens next