Financial Summit - Part I - franchise.org · your 401(k). • This is wise advice and we agree. •...
58
Transcript of Financial Summit - Part I - franchise.org · your 401(k). • This is wise advice and we agree. •...
Financial Summit• Part I: Challenges In Getting Franchisees Financed
• Overview of the credit market place• How to improve the success rate of funding• Multiple financing options or combinations
• Moderator: Brad Fishman, CFE, CEO, Fishman Public Relations
Presenters• Geoff Seiber, CEO, FranFund, Inc.
• Nigel Mayne, CFE, President, MatchPoint
• Ian Moses, Chairman, Aussie Pet Mobile
Geoff SeiberFranFund, Inc.
Agenda
• Welcome
• Market Conditions and How to Handle Them
• Current Lending Marketplace
• Franchisee Options
• Franchisor Options
• Questions
What the Heck Is Going On?
Liquidity
“Stuff” in the News
• Fannie & Freddie, Lehman & Merrill, AIG, Goldman & Morgan, Wachovia & WAMU
• TARP
• TARL
• SBA
What Is the “Bailout”
And why is it important to me?
Troubled Assets Relief Program
What Was It Planned To Do?
• Turn Illiquid Assets into cash equivalents
• As importantly remove additional loss reserve provisions from the financial institutions
• Provide additional oversight and regulation
• Stimulate Lending and Credit Markets
g g ( )Rationale
• Estimated that 24% of all Sub Prime Mortgages fail in the current environment
• Currently Sub Prime Mortgages are Valued by Holders as if 60% of them fail
• Trading at up to a 50% Discount to Value
• Typical Foreclosure Recovery Above 80%
Liquidity
What Has Happened?
• Purchased Bank Stocks rather than Troubled Assets
• Funded Auto Industry “Bailout”
• Formed and Partially Funded the Term-Asset Backed Loan facility (TALF).
• Many Banks have used Funds to “Shore Up” Balance Sheets and Financial Positions to either acquire or rebuff any acquisition attempts.
Treasury Secretary Henry Paulson16 Jan 2009
• “I believe that the program has been well managed during this tumultuous, fast-paced period. I think history will look and say, maybe around the edges we might have done things differently, but the big decisions we've made have been the right ones and I think they'll stand the test of time.”
• “When you go through a period like this, lending naturally decreases. So really the key question, the big question, is how much greater is the lending as a result of the program than it would've been without the program.”
Liquidity
TERM-ASSET BACKED LOAN FACILITY
TALF & SBA
What Is TALF?
• The Federal Reserve Board announced the creation of the Term Asset-Backed Securities Loan Facility (TALF), a facility that will help market participants meet the credit needs of households and small businesses by supporting the issuance of asset-backed securities (ABS) collateralized by student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration (SBA).
• These securities are
Why Do This?
• Continued disruption of these markets could significantly limit the availability of credit to households and small businesses and thereby contribute to further weakening of U.S. economic activity. The TALF is designed to increase credit availability and support economic activity by facilitating renewed issuance of consumer and small business ABS at more normal interest rate spreads.
What Does This Mean For Us?
Liquidity
Common Future Themes
• Further Consolidation
• Financial Institutions back to more traditional ways of raising and lending capital
• More regulation
What About Now?
Current Concerns
• Due to Sub Prime Crisis many National Lenders are in a very illiquid position that affects all Loan Products
• Home Equity Lines are no longer a simple process; valuations arediscounted and employment is likely required. Refinancing boom does not include “cash out” in most cases.
• Credit Requirements will likely increase
• Market liquidity is volatile; approvals for limited time
Credit Score Analysis
Current Concerns
• “According to Federal Reserve data, in the last quarter, 75 percent of banks reported that they have tightened their lending standards for small firms.
• At the same time, lending in the SBA’s 7(a) and 504 programs have declined dramatically. Over the last year, lending in the 7(a) program has decreased by 55 percent, and loan volume in the 504 program is down 36 percent.”
Source: Business Week Interview with Senator Olympia Snowe (R-Maine), Ranking Minority Member of the U.S. Senate Committee on Small Business & Entrepreneurship
Current Concerns
• SBA‘s 7(a) flagship loan program is down significantly in the quarter, which ended Dec. 31, 2008.
• The program backed 8,996 loans in the Fourth Quarter of 2008. That's a 57% drop from the 20,859 loans the SBA backed in the same Quarter a year ago, and a 62% drop from the same Quarter two years ago.
• Ten of 13 big TARP beneficiaries saw outstanding loan balances decline by a total of $46 billion from Third to Fourth Quarter 2008.
Common themes for 2009Credit Box in 2006
• Credit Score of 640• 1:1 Cash Flow coverage ratio• Management experience
recommended but not required• Unsecured loans approved• 20% Cash Injection Norm• 3 months of personal resources
needed• Seller notes on standby for 1 year
Credit Box in 2009
• Credit Score of 720• 1: 1.5 Cash flow coverage ratio• Direct experience or applicable
crossover experience required• Fully secured• 30% Cash injection Norm• 6-12 months personal resources
needed• Seller notes fully subordinated
The Good News…YES there is some!!
• The franchise industry continues to grow!
• New franchisees are starting businesses on a daily basis adding jobs and therefore dollars to the economy
• Banks and lenders need to lend money to make money
• Potential franchisees have opportunities with the 401(k) rollover process and personal credit
More Good News
• Many Regional and Sub Regional Lenders are dramatically less affected by the liquidity issues and see this as a time for potential expansion
• New Traditional Lenders coming into the Marketplace
• Non-Traditional Lenders expanding presence in Franchise space
• New Administration seems focused on SBA as a recovery agent
How should the potential franchisee
optimize their options in this
situation?
Franchisee Options
• View home equity as a secondary rather than primary source of funds• Utilize retirement savings through rollover process as a primary equity
option if available• Leverage personal credit through signature credit lines• Realize that the “rates” are reflective of the current market conditions• Act on approvals quickly when obtained (here today, gone
tomorrow….literally)• Utilize consultants to assist with the lending process, especially with the
SBA
Suze OrmanIs She Right About 401(k)s ?
g ( )Rollovers?
• Suze Orman, among others are warning consumers not to “cash out”your 401(k).
• This is wise advice and we agree.
• You can have the full use and benefit of your 401(k) earnings by rolling your funds into your new company’s retirement plan with no tax or penalties, and then investing in your business
• Your Previous Company 401 (k)• Investments in:
• Motorola• Hewlett Packard• Apple• Microsoft• Mutual Funds• Etc.
• Your New Company 401 (k)• Investments in:
•• NEW COMPANY INC.NEW COMPANY INC.• Motorola• Hewlett Packard• Apple• Microsoft• Mutual Funds
How should franchisors
optimize their options in this
situation?
Franchisor Opportunities
• Be sure FDD is on the Franchise Registry• Take a through look at the FDD as if you were the lender. Be prepared to
explain in depth any earnings claims, have operational pro formas (for lender use only), be prepared to in detail explain any Item 20 concerns.
• Consider recourse programs with lenders• Consider internal finance options• Consider utilizing financing consultants and advisors• Be flexible and understand the marketplace, things can change quickly
Updates
Conclusions
• Expect more changes and more regulation• Expect Obama Administration to make some significant , aggressive
changes to the SBA• Look to alternatives with regard to lending options including use of
retirement funds• Look to “bundle” multiple financial products to capitalize projects• Stay current, utilize contacts and consultants while things are in
transition• Stay flexible, work with alternatives
Thank You
Nygel MayneMatchPoint
Part 1
• Overview of the credit market place• How to improve the success rate of funding• Multiple financing options or combinations
What we have found?• 46% of franchisors financially qualify their
applicants*• 54% DON’T!!!• 51% miss-report liquidity• 96% net worth accuracy!• *courtesy Franchise Update Media Group
What we have found? (cont’d)
• What are people buying?• Low cost franchises (2008 average $135k)• Home-based or small office (as low as
$40k)• Recession proof.
How are most clients funding their new franchise?
• 401K rollovers up significantly (42%)• Home Equity (18%)• Unsecured Loans – institution/family (14%)• Cash on hand / stocks/ bonds (23%)• SBA (3%)
Who is buying?
• Average Liquidity $48k• Average Net Worth $1.08M• Average Age 49• Homeowners 94%• Male 73% - Female 12% - Couples 15%
What are some of our franchisor partners doing?
• Candidate Profiling• Choosing the right franchisee• Potential in-house funding
What are some of our franchisor partners doing? (Cont’d)
• In-house funding• Set standards• 30-50% down• Training Fee/extra
territory fee
• Balance 3-5 years• 8% default rate• Compensation• Risks – debt service
The way forward…some suggestions• Leverage your
relationships• Funding• Brokers
• Funnel Management• All leads are not created
equally!• Leaks in your process.• Ask Probing Questions
The way forward…some suggestions (cont’d)
• Prepare your candidate• Early credit bureau• Be creative!• Manage expectations
Ian MosesAussie Pet Mobile
DEMANDING TIMES CALL FOR CREATIVETHINKING
Win-Win on Incremental Investment
1.1. CASE: CASE: Single Franchise Fee: $40,000 (cash)Territory: 50,000 (People)Possible Units: 1 to 2 (1 Required)
2.2. QUESTION:QUESTION:How can I improve my cash flow & the opportunity for Franchisee success?
Win-Win on Incremental Investment
1.1. ANSWER:ANSWER:
T.P.O: Territory Protection Option
T.P.O Fee: $40,000 (Promissory Note)
Territory: 50,000 (People)
Possible Units: 1 to 2 (0 Required)
Win-Win on Incremental Investment
4.4. FRANCHISEE INVESTMENT: FRANCHISEE INVESTMENT: $40,000 Franchise Fee – CASH$40,000 T.P.O. Fee – Promissory Note**
** T.P.O Promissory Note$40,000 @ 14% over 5 years = $931 / mos.
Win-Win on Incremental Investment
5.5. FRANCHISOR RECEIPTS: FRANCHISOR RECEIPTS: $40,000 CASH = $40,000$40,000 NOTE = $ 931 / mos.
ANDANDWhen Financial Market Improves, Bank Financing:(A) Discount note 10% to motivate(B) Lower payments to Franchisee – over more years(C) $36,000 Cash to Franchisor
Win-Win on Incremental Investment
6.6. END RESULTS:END RESULTS:Franchisee – Paid $40,000 + low mos. payment
– Doubled chance for success– Van expansion opportunity
Franchisor – $40,000 Free– $36,000 T.P.O. (Financed by Bank)_________
$76,000 $76,000 + Incremental Royalty Stream
