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Funding franchisees: How small Z's are finding big money

When Myron Allen wanted to open a Toppers Pizza franchise in Rochester, Minnesota, he turned to an old friend: his local banker. His banker passed him to another bank, which left him hanging for a month. It was then that he gave computer dating a try.

He listed himself with Boefly.com, a year-old online exchange that introduces lenders to borrowers who meet their criteria. Within a week, he had eight interested parties. Four weeks later, he was approved for a Small Business Administration loan.

Allen is a beneficiary of a new breed of restaurant finance firms. Old-school lenders like GE Capital and Wells Fargo are opening their wallets, but not to little guys. “At conferences, they all say the same thing,” says Dallas investment banker Craig Weichmann. “They’re lending to the top 10 brands.”

The new breed focuses instead on small and midsized chains, particularly ones that have made money through the recession.

“There are some companies that figured out how to make money in down times,” says investment banker Rod Guinn, with FocalPoint in Albuquerque, New Mexico. “They can become the haves of the restaurant world.”

Here’s a sampling of financiers who are helping them get there:

Don’t skip the middleman
The SBA can guarantee loans up to $5 million, but the red tape of applying scares off many new franchisees. Enter the middleman.

“I refer to them as aggregators,” says Dennis Lombardi, executive vice president for consultants WD Partners in Columbus, Ohio. “They streamline the unknowns for franchisees of going through the hoops.”

One aggregator is Franchise American Finance of Conshohocken, Pennsylvania. It prescreens franchisors, 250 units and up. Once they’re approved, their franchisees can be underwritten in seven to 10 days. In just over a year, the firm has approved 21 brands—like Bojangles, Culver’s and Marco’s Pizza—with access to $400 million, primarily from The Bancorp Bank of Wilmington, Delaware.

“We’re not trying to compete with the big boys,” says principal Ronald Feldman. “We have a niche to fill within the brands we have. We’re closing loans in every brand we have in the portfolio every day.”

Small banks, big lending
While others aggregate franchisees, Bill Wildman aggregates banks. After his chief national funder pulled out, the CEO of Indianapolis-based Pinnacle Commercial Capital recruited 44 local and regional banks. He taught them the basics of franchising. They agreed to lend to 25 second- and third-tier franchisors he follows.

In 2010, his network committed $40 million for franchisees of Denny’s, to convert 140 restaurants into Flying J Travel Centers. The next year, they put up another $100 million, to convert another 150 properties.

Now Pinnacle is tapping a bigger pool. It’s partnering with John Delaney, chairman of CapitalSource Bank of Los Angeles. He heads a network of 41 banks with up to $10 billion in assets.

“These banks are heavy on deposits and light on loans,” says Wildman. “This is a great alternative for them to participate in high quality loans, with people who understand each asset class to guide them in credit decisions.”

A little ventured, a lot to gain
Think venture capital, and you think computers and smartphones. Ned Grace of Orlando raises venture capital for restaurants.

He’s started a few himself, chains like Bugaboo Creek Steakhouse and Capital Grille. He’s helped private equity funds buy concepts with a dozen or two units.

But Grace Restaurant Partners thinks smaller: early-stage fast-casual chains that will someday franchise. Grace looks for concepts that have run at least three units for at least a year, with strong unit economics and potential to go national. He’ll assemble a private placement, offering shares of $125,000 to a network that includes three billionaires. For a relatively small stake, they’re betting on the next Chipotle.

“There’s no other way for these kinds of people to play in this space,” says Grace. “In restaurants, there is a lot of money to be made if you’re betting on the right horse.”

To date, he’s invested an average of $3 million apiece in two chains. He’s helped grow Not Your Average Joe’s of Middleboro, Massachusetts from five to 16 units, and Larkburger of Vail, Colorado from two stores to six.

Matchmaking
Boefly.com of New York City is a Match.com for small businesses. Franchisors offer financial information through the site. Then, their franchisees post funding requests, and Boefly matches them to a network of 1,500 lenders. Currently 44 restaurant franchisors are in the system, from regional chains like Topper’s to national ones like Dunkin’ Donuts. 

“The way borrowers and banks were connecting was massively inefficient,” says co-president Michael Rozman. “Many of us were former bankers. We had to sift through piles of applications to find borrowers who worked for our specific criteria. From a borrower’s perspective, the alternative in the past has been to go from bank to bank to bank.”

For Allen, a single application brought him enquiries from Florida to Colorado. “For someone seeking financing,” he says, “it gives you lots of visibility you don’t have if you’re doing it on your own.”

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