The bank of GE

In the world of restaurant finance GE Capital is an $11 billion giant with an appetite for helping small chains become big ones. Across the vast Serengeti landscape of restaurant financing, there is an 800-pound gorilla roaming. Its name is GE Capital, it’s very hungry—and it wants to be your friend.

Through a series of billion-dollar acquisitions over the past decade, the corporate giant has seized a unique position of strength in the lending market for small to mid-size restaurant chains—fueled as much by its size as its simple willingness to work with smaller operators. And with its most recent purchase of Trustreet Properties, it is now a giant in the restaurant real estate market as well.

If you’re an entrepreneur looking for cash or space to open restaurants, it’s becoming nearly impossible to ignore the oversized hands and heavy breathing over your shoulder.

“We play and work with the largest operators, but also with a lot of five- to 50-unit operators,” says Darren Kowalske, CEO of GE Capital’s franchise finance division, an $11 billion arm of the $544 billion General Electric Company, America’s sixth-largest corporation. “As you go through the years, you see examples of ones that started with five units and grew into major operators.”

GE Capital fills a unique niche, says Dallas-based investment banker Craig Weichmann. “Even though they’re extremely large, they still are very competitive for smaller operators,” he explains. “If you contrast GE to Bank of America or Wells Fargo or Wachovia or the bigger players in the industry, you find most all of them set a minimum hurdle. If it’s not a $10 million project, they don’t look at it. With GE, even though they’re a large company, they still look at their roots.”

To understand this company and its opportunities for food-service entrepreneurs, it helps to look at those roots. GE Capital wasn’t always a giant. Its original mission, in the depression days of 1932, was to help cash-strapped Americans buy refrigerators. Over time, money turned out to be even more profitable than manufacturing. In 2006, GE’s commercial lending produced a 21 percent return, versus 8 percent for its industrial operations. More important, the financial side gave the industrial side a means of recycling its earnings, by loaning them out.

“Those guys spin off tremendous amounts of cash,” explains one former employee. “One internal strategy is to take that cash and pump it back into the service component.”

GE Capital raises extra cash in the bond markets, to the tune of $90 billion in 2006. Because its parent company has a AAA credit rating, GE Capital can borrow money at low interest rates, loan it out at higher rates and pocket the difference.

Besides lending its cash, GE Capital has a second use. Like its parent, it has a big appetite for buying other companies. Two of those purchases plunged it into the restaurant business: Metlife Capital Corp., in 1998, a $2.2 billion portfolio that included loans to restaurant franchisees; and Franchise Finance Corp. of America, in 2001, which expanded GE’s real estate loans and loans to restaurant franchisors Foodservice turned out to be a good fit for GE. Like refrigerators, eating out is a basic commodity, one consumers will buy during good times and bad. Even in a recession, some chains will prosper. The key is to pick those winners. 

“We start by understanding how the industry works, knowing what are the proven concepts and operators and aligning ourselves to those operators,” says Kowalske. Half a dozen analysts sift out strong operators and set industry-wide benchmarks. They publish the results in an annual, widely reaChain Restaurant Industry Review. As a result, they comprehend the quirks of restaurant balance sheets, like low profit margins and few receivables.

“Generally, at your local banks, the lenders don’t want to lend to restaurants because they don’t understand the metricsof restaurant financial statements,” says Doug Sullivan, CEO of the 17-unit Stonewood Grill & Tavern in Ormond Beach, Florida, who’s borrowed from GE to build two of those units. “GE Capital was very familiar with restaurant metrics.”

What kind of metrics does it look for in a small chain? Kowalske, who’s spent the last 20 years working his way up through the GE ranks, says the most important thing is at least three years of strong sales growth and returns on investment. It helps to have an experienced management team and a concept that can expand to 50 stores and beyond.

Once a restaurant company has met GE’s underwriting standards, “It’s analogous to the Good Housekeeping Seal of Approval,” says finance broker Steve Himmelfarb, president of Himmelfarb Commercial Inc. in Washington, D.C. “When their deals go to market, people know it’s a quality deal. They make my life easier.”

Some chains take the GE seal and show it to other lenders. “You have that in your hip pocket, and then you shop other places,” says Weichmann. “GE knows that goes on. On the other hand, their first offer might not be their last offer. They will come back to the table with revised terms as they get better educated on how a deal meets their criteria.”

The first loan is the hardest to get, say borrowers. “It’s much easier the second time, because they’ve become more familiar with us,” says Tammy Boetsma, chief financial officer of 12-store Hacienda Mexican Restaurants in South Bend, Indiana. After GE helped fund a management-led buyout, in 2004, Hacienda came back two years later.  The $7.6 million deal retired its mezzanine debt and cut its interest rate from 12 percent to 9 percent.

Once an operator is in the system, it can nosh at an ever-swelling buffet of financial options. Just as GE expanded from home appliances to television networks and airplane engines, GE Capital has evolved from backing buildings to backing buyers of entire chains.

In 2006, David Blackburn got a private equity partner and went shopping. When he found a five-store Italian concept called Amerigo, GE ponied up $7.7 million to buy the restaurants and a $3 million line of credit to build more.

“Long term, we wanted to develop a relationship with a company that could continue to provide more financing,” says Blackburn, CEO of VIVID Restaurant Concepts in Nashville, Tennessee. “We’ll want to recapitalize in year five or six, and GE offers us another option, to replace equity with debt.” 

GE Capital’s latest big buy, a $3 billion deal for Trustreet Properties, makes it a landlord as well as a lender. Trustreet had specialized in sale-leasebacks, in which an operator sells a building and leases it back. The operator can use the sale proceeds to build more restaurants, while GE collects the rent or sells the building to someone else. If a real estate investor wants a restaurant property, GE Capital now offers hundreds to choose from, nationwide.

“GE had a small business in this before, but Trustreet was the best operator out there and their biggest competitor,” says Joseph French Jr., national director of retail for real estate investment advisors Sperry Van Ness in White Plains, New York. “What’s the best way to beat your biggest competitor? Buy them.”

The result, GE likes to say, is a one-stop shop for restaurant finance. That’s a fair slogan, says restaurant broker Patrick Silvia, of Advanced Restaurant Sales in Marietta, Georgia: “They have got it all, from soup to nuts.”

There are a few hurdles to dealing with GE. One is figuring out which of its many doors to knock on, says franchise attorney Dennis Monroe of Minneapolis. “With this huge company, the major issue is, ‘How do you get into the system effectively, to avoid the queues?’ In their defense, they’ve tried to more clearly define the entry points.”

A first-time borrower might need a financial advisor who’s worked with GE before.

A bigger hurdle is that not every concept is right for GE, like limited-growth chains or systems working out financial problems. “We’ve had declining concepts with strong intrinsic value, where the underlying real estate is good, but GE is not good with that stuff,” says Himmelfarb. “They’re looking for deals where the concept is strong and the growth is good.”

But for restaurant entrepreneurs who match its profile, it’s good to have a gorilla on your side. “They are what GM used to be to the car industry,” says Monroe. “They pretty much set the standards for commercial finance lenders in this space. Everybody else tries to find a niche outside of them. They are the dominant player.” 

GE Capital Corp., Franchise Finance

Parent company: General Electric Company
HQ: Scottsdale, Arizona
Loans & leases: $11 billion
Franchise concepts: 350
Borrowers: 6,000
Locations financed: 20,000
Types of loans: Real estate, facilities & equipment, acquisition, lines of credit, refinance, sale-leasebacks
Minimum loan: $50,000
Web site: www.gefranchise finance.com


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