Cheek says he began researching financing options that went outside the scope of major national banks. He says the Breugger’s team learned about new financing sources, then set out to educate them about the brand.
Slavin says that brand familiarity is going to be critical with bankers. As the big banks have dried up as funding sources, more franchisees will need local banks and Small Business Administration lenders to fund their plans. Those local and regional banks might not be as familiar with some franchises, so any materials will be helpful.
Local banks have taken advantage of the ill fortune of the national organizations. In Alabama, local banks have advertised for months that they’ve been relatively isolated from the credit crunch and can finance projects. Those banks can fund million-dollar loans, and they might look favorably on expansion plans of a locally owned business adding a franchise.
“Smaller banks are in a better situation, and they are still lending,” says Jay Malik, a Pennsylvania financial adviser long familiar with the restaurant industry. “They are underutilized. Many franchisees don’t think they can go to a local bank and get what they need.”
Local banks may be the only outlet for newcomers to franchising, or for franchisees who want an emerging concept. Because so many of the established franchises have saturated many markets, emerging brands were seen as a way to get more people into franchised restaurants. However, those new brands aren’t a deal that many national banks will take a chance on nowadays. If a brand isn’t a decades-old veteran, national lenders likely won’t touch it.
Large, established multi-unit operators won’t have a problem, experts say. Many of them have a history of operations, as well as their credit history, to bank on. Individual franchisees—or people looking to get into franchising for the first time—will be out of luck.
“A lot of lenders who, back in the good old days, were lending to start-up concepts have retreated from that,” Cheek says. “They are looking to mature, proven brands and experienced operators.”
Real estate is the third factor to the equation of franchising in 2009. It plays a role because home equity was once the most reliable way to establish credit and gain financing. It also affects restaurants because stores that were put in overheated real estate markets are still paying those overheated prices, despite a downturn in the industry.
“In many ways, what drives the restaurant break-even point is the real estate cost,” Malik says. “That’s fixed.”
So the burden of real estate for some operators, especially mom-and-pop independents, may put them out of business, which then opens up an opportunity for more sound operators, says Marty Kotis of Kotis Properties, a Carolinas-based developer with a focus on restaurant sites. In that, there is opportunity for established restaurant operators to take over buildings, remodel them, and open up again under new management and a new concept.
Many restaurant operators who take over existing buildings can—and are—asking for tenant allowances on improvements. The owner of a closed restaurant figures that any money is better than no money, and chances are they’ll be receptive to helping fund a remodel.
Kotis says financing and construction costs mean a lot of new products aren’t being built. He says there are few markets in this climate that are vibrant enough to handle large scale restaurant expansion. Like Slavin, he says 2009 will continue to be a weeding-out year of marginal operators. “It’s a vulture trend. Everybody is looking to see who is going out.”
The current financial crisis in real estate can also be an asset to operators who have capital and want to build new stores, Kotis says. Real estate in hip areas was out of reach for many franchisees 12 or 18 months ago. It might be more reasonable now, especially if a franchisee gets in with a local or regional bank.
Kotis says it may be 2010 until things begin to recover. The overall effect of the economy’s plunge combined with a credit crunch is a double-whammy that won’t go away soon, Mangieri adds.
A big casualty could be the diversification programs franchisors had been pushing to increase the variety of people owning franchises. The programs aimed at minorities, women, and other under-represented groups will have a hard time thriving in an environment that’s unfriendly to newcomers. It’s going to put the brakes on entrepreneurs, both at the franchisor and franchisee level, Mangieri says. More market share will go more and more to the big guys, both franchisees and franchisors.
“It’s not a matter of competing,” Mangieri says of newcomers. “They’re not even going to get in the game.”