During a November 13, 2009 presentation to the legal firm Nixon Peabody and their Franchise & Distribution Team, Fran-Data’s CEO Darrell Johnson shared that, “tight credit” was “the single biggest constraint on franchise growth.” According to Mr. Johnson, easy credit over the past several years allowed franchise systems to expand and prosper even though their systems and operations were not optimized. When the credit crisis hit in 2008, the ability of franchisors or franchisees to obtain credit froze. Now the banking industry is taking a very conservative approach to lending, which has resulted in a continuation of the credit crunch.
While Darrell was right about credit restricting growth, he missed a few important points – many of which he is likely aware of and might agree with.
It is highly unlikely franchisors are going to convince the banking community to change their ways anytime soon. Educating bankers about the “industry” isn’t the answer in the near term. In fact “educating bankers” might result in LESS lending to franchisees. Why ? The fact is that default rates on franchise loans are TERRIBLE, approaching 1 in 5 deals with some systems experiencing over 50% defaults. This fact reflects that many franchisors have not managed their systems in a manner that lends to REAL success. In many instances, franchise business models are unsustainable.
Instead of hoping for a miracle, like lowered underwriting standards, franchisors should focus on 4 fundamental things:
1. Improve REAL profitability and the balance sheet by cutting overhead;
2. Enhance the franchise business model and UNIT ECONOMICS;
3. Start identifying and recruiting QUALITY prospects to develop; and
4. Weed out poor franchisees who are draining the system’s resources.
The answer to the growth challenge is not easier lending standards. Hardly. It is the need for most franchisors to run their business better by doing some fundamental things. The industry for too long kept emphasizing unit growth as a measure of success and in the short term it isn’t. That is why quality and AFFORDABLE tools like Franchise Flywheel are quite relevant to achieving the fundamentals. You can’t really accomplish the 4 items above, getting back to basics, without the tools and a philosophy that really get you there.
The next time a consultant advises you that educating lenders is the answer to your core growth problems, think again.