With multi-unit operators controlling 55 percent of all franchised units according to Multi-Unit Franchisee
, it's clear that multi-unit growth continues to be a cornerstone of franchise development across the industry. However, with that kind of growth comes certain challenges - namely financing. We recently spoke with Mike Rozman, chief executive officer and co-founder of BoeFly
, the premiere online marketplace connecting small business borrowers with lenders, to get his take on the state of financing for multi-unit development and he indicated that the market is getting stronger.
“Over the past few years the level of capital in the franchise market has grown significantly as senior lenders fully engage back in the business of lending after the credit crisis. This comes at a time when the Fed has aggressively pumped capital into the system," Rozman said. "Interestingly, this has happened at a time when large multi-unit franchisees continue to grow in scale and sophistication. This combination is having a positive effect for those largest multi-unit owners. The result, I believe is, that the big and strong will get bigger and stronger.”
Rozman went on to say that while the larger multi-unit operators are seeing greater success, that does not mean smaller multi-unit growth is suffering. More often than not, emerging multi-unit owners are turning to Small Business Administration (SBA) loans to secure the capital needed to expedite growth. A common misconception however is that the SBA lends money to businesses. For the most part, that is not true because you actually get an SBA loan from a participating bank involved in SBA financing. The SBA guarantees a percentage of those loans to the banks, so financial institutions are incentivized to lend money to small businesses.
A less common option is mezzanine financing—a hybrid of debt and equity financing, where debt capital is given to a lender and the rights convert to equity interest and ownership if the loan is not paid back. But Rozman said this is usually designed for riskier, more complex transactions.
Lending sources such as a rollover 401K are also becoming increasingly popular. Since there can be such severe penalties and tax consequences for early withdrawal, programs were developed years ago that allow participants to access the funds in their retirement account tax deferred and penalty free.
"Alternative lending sources such as rollover 401K plans are a unique way to get a business operational without the debt and taxes that traditional methods of financing typically incur," said Rozman. "By reducing, or even eliminating traditional financing from the equation, some prospective multi-unit franchisees are able to use the capital in their retirement plans for development that they've been working to build their whole career."
In order to further break down the barrier to multi-unit franchise ownership, Rozman went on to say that BoeFly
, a tool designed to transform the development process for potential franchisees by making it easier to find a proper lender while better understanding their economic standing. bQual provides individuals with vital financial details, such as their business credit score (SBSS by FICO) required on most Small Business Administration loans, their FICO consumer credit score, a copy of their Equifax credit report, and an overall fundability assessment of their loan prospects. Ultimately, the impact is twofold— it helps franchisees by giving them the insight they need to move forward with confidence, which in turn delivers the franchisor a meaningfully higher lead-to-franchise sale conversion rate.
Whether you're looking at a single unit to purchase or considering expanding your existing franchisee network, Rozman insists that there is no substitute for good old fashioned research.
“Franchisees should be consulting their network to understand market terms. In the case of a single unit franchisee, this might come up during the validation process,” Rozman said. “The brands we work with at BoeFly use our knowledge base as a resource because we have unrivaled visibility into actual system results. Multi-unit franchisees should be trading notes with their fellow franchisees to access their market views as well.”