Franchises That Offer Creative Financing Programs designed to make buying a franchise easy

Ray Depouli, vice president of franchise marketing formanagement training franchisor Priority Management Systems Inc. inBellevue, Washington, has seen a lot of franchise deals cometogether. And he has seen a lot of investors struggle mightily withthe financial aspects of their purchases. "Most people arethinking about the exciting and familiar and manageable aspects oftheir new business venture, and the last thing they think about isfinancing it," says DePouli. "Financing should be thefirst thing they think about, but for some reason financingthe purchase is always relegated to the back end of the thoughtprocess."

The truth is, even if financing is put at the front of thethought process, it can pose a formidable challenge for the mostenterprising franchise buyer. The good news is that manyfranchisors are providing innovative financing programs to easeyour way. Consider the approaches of a few companies that haveapplied ingenuity, drive and business savvy to the financialchallenge of financing a franchise.

Churchs/Popeyes Gets Its Minority Investment Program in Gear

America's Favorite Chicken ("AFC"), the franchisorof Popeye's Chicken & Biscuits and Church's Chickenrestaurants, is actively promoting minority franchise ownership inits ranks through a new program called "PLUS" (ProgramsLaunched Universally for Success). "At our company, we havetaken a straightforward approach to encouraging minority investmentin our businesses. We have recognized that a significant part ofour company's heritage is rooted in minority communities in ourcountry. We have many locations in minority communities and a highpercentage of our customers are African-American andHispanic," says Joe Genovese, chief development officer."We celebrate that heritage, and we want to encourage growththrough franchising with minority ownership. The AFC PLUS programis a concerted effort to encourage minority ownership ofrestaurants in the AFC system and expand the chain's presencein underserved urban areas. We started AFC PLUS with an abidingpassion for those two objectives, an open door, and a welcominghandshake for minority owners willing to be our partners indeveloping new and innovative Church's and Popeye'srestaurant locations.

"In a few months, our program has jumped to 50 commitments,and it could easily quadruple in the next year. The largest singleobstacle in quick-service restaurants, of course, is the cost ofstarting up," continues Genovese. "It can cost as much as$600,000 to $750,000 to build a free-standing restaurant in ahigh-traffic location. But there has been a dramatic change in themarketplace, and the PLUS program has taken advantage of the changein a unique way."

The AFC PLUS program achieves its goals--and overcomes thefinancial challenge of new restaurant development--through the useof a single new concept in the franchise marketplace:nontraditional franchise locations. "It is known as `InterceptMarketing,' putting product in the path of the consumer. Newfranchise locations are now being placed in supermarkets,convenience stores, colleges, travel centers like airports--youname it," explains Genovese. "These locations are not asexpensive to build as free-standing locations--they are mostlyleased--but a good location can carry a high volume of business.One of our owners who came in with the PLUS program, GeorgeShanklin, placed his Columbus, Ohio, restaurant in a Kroger'sgrocery store and built his restaurant for about $80,000. His salesvolumes are about as high as a full-service, free-standingrestaurant for about one-tenth the cost of establishing thelocation. He now plans to open as many as 10 additional locationsin Kroger's stores and is on his way to remarkablesuccess."

The new nontraditional restaurant location is then financedthrough a variety of traditional sources. "We have very goodconstruction financing with the top names in the financialcommunity, and they have all expressed interest in the PLUSprogram," claims Genovese. "It comes down to this:Creative financing is always necessary, but without a flexible,open, welcoming franchisor, it won't help where it is trulyneeded."

Microtel Create Financing Subsidiary

Financing creates a formidable barrier to buying a hotelfranchise. "Finding sources of financing for franchisees hasbeen the most difficult area of franchise development at everyhotel company I have been involved with," says Michael Leven,president and CEO of US Franchise Systems in Atlanta, franchisor ofMicrotel Inn and Hawthorn Suites hotels, and a veteran of thefranchised-hotel business. Leven and his company have tackled theproblem with a solution that is novel in the hotel industry:forming a wholly owned subsidiary, US Funding Corp., which makesavailable to its franchisees $200 million in construction andpermanent first-mortgage financing.

"By establishing a financing subsidiary to help with thisproblem, we have taken a major hurdle out of the way of ourpotential customers and smoothed the way for further growth of ourhotel brands," says Leven. "This program will beespecially interesting to the multi-unit developer because therates will be competitive and the funds immediatelyavailable."

Requirements for financing are a franchisee equity position thatis 30 percent of the total development costs, a 0.5 percentapplication fee, and a 2 percent commitment/funding fee. Rates forthe loans are well tailored to the hotel industry: The constructionportion of the loan (as long as 30 months) will be set at primerate plus 1.5 percent. The construction loans are then converted topermanent 10- or 11-year loans with 20- or 22-year amortizationschedules. The rates for the permanent loans will depend on theperformance of the property and are tied to current treasury rates.When the program was introduced in the Spring of 1996, the fixedinterest rates ranged from 9.15 percent to 10.55 percent perannum.

"Our financing subsidiary will substantially cut down thetime it takes a new property to open by reducing the time itusually takes to line up financing with sources unfamiliar with theprogram," states Leven. "Anything that accelerates thedevelopment process will greatly assist our franchiseowners."

Logan Farms Equipment Leases Through a National Specialist

Pink Logan is building a fast-growing franchise empire on thestrength of his honey-glazed ham products. The Houston-based chainhas licensed 25 Logan Farms Honey Glazed Hams and Turkey BreastsInc.&tm; shops and is expecting even more rapid growth in thenext two years. "Developing a new ham-shop location requires asurprisingly sophisticated approach to financing," says Logan,the company's president and founder, "because our shopsfeature the highest quality display cases, ham slicers, and otherexpensive equipment. We have found success in our business workingwith AT&T Capital Corp. because they specialize in financingpackages for the equipment we specify, and then leasing it to ourfranchise owners. They have also provided construction financingand have tailored interest-only payments with principal payments inJanuary, after the ham-selling holiday season puts us in the bestposition to pay down the loan."

Equipment leasing is one of the most common financing devices inretail business development, but it is an especially good fit infranchising because the equipment packages in a given program arecarefully specified and familiar to the leasing company.

"AT&T Capital Corp. handles a broad range of financingproducts for franchise systems, such as SBA funding, straightlending, and equipment leasing" says Jean Brooks, vicepresident of marketing, business finance of AT&T Capital Corp.in Morristown, New Jersey, "but it is equipment leasing thatoffers so much flexibility for companies like Logan Farms. Afranchisee can tailor the financing to the type of equipment beingfinanced. The terms of the lease can be coordinated with the lifeexpectancy of the equipment, and when a franchisor introduces a newproduct or service, the new equipment can be handled on terms thatare attractive to the store owner. Under our lease, we can easilyhandle equipment upgrades and exchanges. For the franchise ownerthe equipment lease has several advantages. It works so much betterfor the franchisee than folding equipment purchases into moregeneral bank financing."

AT&T Capital Corp. makes the process simple for thefranchisee. There are no stacks of paperwork to complete; mosttransactions are handled over the phone and fax. For transactionsup to $50,000, they don't even require financial statements,merely that the program have three years of operational experience,and that the applicant submit a credit application, a personalguarantee, and an equipment list or quote from a vendor. Once theapplicant signs the lease documents and returns them, the companywill contact the vendor of the equipment and arrange for payment.It's that simple.

Logan concludes, "The combination of equipment leasingthrough a sophisticated financing company and the flexibility totailor financing to our seasonal business has been great for thesteady growth of the Logan Farms franchise program."

Follow the Money

While franchising is designed to ease the entrepreneur'sentry into business in so many ways, financing remains a monumentalchallenge in most systems. "Financing is especially difficultto find for homebased service businesses like ours," saysDePouli. "The fact that we offer to finance up to 50 percentof our initial fees is a measure of our experience and confidencein our franchise program."

The challenge is being met by a number of aggressive andcreative franchisors who have been there. Knowing the lay of thelending landscape and being willing to put financing at the frontof your thought process may be the key to franchising success.

Contact Sources

AT&T Capital Corp., 44 Whippany Rd., Morristown, NJ07962-1983, (201) 397-4059.

America's Favorite Chicken Co., 6 Concourse Pkwy.,#1700, Atlanta, GA 30328, (800) 848-8248, ext 25.

Logan Farms Honey Glazed Hams and Turkey Breasts Inc.,10001 Westheimer Rd., #1040, Houston, TX 77042, (800) 833-4267.

Priority Management Systems Inc., 500 108th Ave. NE,#1740, Bellevue, WA 98004, (800) 221-9031.

U.S. Franchise Systems Inc., 13 Corporate Sq., #250,Atlanta, GA 30329, (404) 235-7400.