Vetting for Success
Vetting for Success

What small business lenders look for when vetting franchisee candidates.

When a franchisor vets a prospective franchisee, the candidate’s access to capital doesn’t typically require much scrutiny. It’s a prerequisite. If the candidate can show that they have the financial wherewithal to open a franchise unit, then the franchisor will begin the more detailed analysis of the candidate’s goals, skills and experience to see if they will be a good fit for the system.

But to secure the capital required to invest in most franchise systems, the vast majority of franchisees will apply for financing from banks or lenders, who apply their own vetting protocols to determine which entrepreneurs to finance.

Those vetting protocols can be mysterious for new small-business owners, and different lenders are looking for different things. We talked to franchise financing experts from four lending institutions to learn what they are looking for vetting candidates for financing.

Erik Herrmann, Managing Director and Head of Restaurant Investment Group for CapitalSpring

There are a number of factors we look at. Most important is the caliber and experience of the team we’re partnering with. We want to be sure that, whatever their plan is, whether it’s new-unit development or acquiring a block of restaurants, they have the experience required so that they aren’t learning how to do it on our investment.

We are also very focused on unit economics. But in general, we’re not so much in the business of picking brands that we want to be in. Instead, we’re more interested in finding a great team that has found a unique opportunity. As long as the brand they’ve chosen has proven viable, we will create a financing package so they can execute on that plan.

What you often find with a lot of the more conventional lenders in the market is that most of them kind of live and die by brand lists. So bigger banks may only be able to lend into five or 10 brands depending on their screening protocols. If you are a franchisee operating in a system that’s not on that list, you may have challenges accessing the capital you need. We come at it differently. We are looking for the story behind the brand — it’s situational. We have invested heavily in McAlister’s Deli, for instance, which today is a big brand, but when we started working with them in 2011, it wasn’t on anyone’s list, and it was hard for franchisees in that system to find capital, but we saw a viable brand that knew what it was doing.

Brian Frank, Senior Vice President, Group Head Franchise Finance for Texas Capital Bank

We work with franchisees and franchisors and discuss with them what exactly they are trying to accomplish. We talk to each client about their needs and figure out what the right mix of debt and equity is for their particular situation. There is no cookie cutter solution; it’s more of an art than it is a science. We work with each individual operator and help them reach their end goal.

Mike Rozman, CEO and Co-Founder of BoeFly

A lot of franchisors will use BoeFly to help qualify franchise applicants. We do diligence on applicants on behalf of the brand. We do full criminal background checks, credit checks and every other piece of vetting. That includes a financial pre-qualification. So not only are we establishing the applicant’s financial wherewithal for the brand, we are also delivering a financing proposal right back to the franchisee.

For a franchise, we know the vetting process will require three components: credit report, criminal background check, including federal and down to county-level and verification of liquidity and net worth. Independent of that, we are always looking at tax returns, the business plan, financial projections and overall financial health.

Craig T. Weichmann, Vice President of Pinnacle Commercial Capital

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.

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