For franchisees and franchisors obtaining necessary capital is becoming an increasing challenge which is impeding growth. Unfortunately, finance experts think the ongoing cash crunch will continue to limit opportunities for some time.
Restrictions on available capital will reward those franchise systems that adopt intelligent management and systems which enable them to improve core operations so they are poised to rebound when the capital markets loosen up.
Here are four key trends that will continue to impede business finance for the foreseeable future:
1. Business credit will be scarce: Even as the banking system continues internal repairs in 2010, lenders will be reluctant to approve business loans, said Scott Shane, professor at Case Western Reserve University who follows corporate finance trends. The problem: Commercial real estate loans that have gone bad or are on the verge of doing so forced banks to divert money from capital accounts into loan loss reserves. Regulators are demanding banks improve their capital ratios, leaving them two options: Raise more capital from investors or reduce the book value, which means dropping loans.
2. Financing business start-ups will be nearly impossible: Start-up companies often seek bank loans to get going. When that fails, entrepreneurs use savings and personal credit lines for cash, or rely on friends and relatives for help. But Shane said going those routes is harder than ever. “People’s net worths have dropped, so they don’t have investment capital. Banks have cut home-equity and credit-card lines” to reduce their risk.
3. Selling businesses or taking them public will be difficult: Smart business developers think of an exit strategy from the day they launch a business. The possibility of big returns to investors via a sales helps to raise money. Typically, the strategy is either to sell the business or sell stock through an initial public offering. But opportunities will be limited this year. “Last year at this time, the IPO market was as bad as it has ever been,” said Shane. “I see only a handful of companies going public in 2010.” Jim Gilkeson, associate professor of finance at the UCF, predicts similar problems for those who want to sell businesses. The M&A market dropped over 21% last year, from 8,788 deals between January to November 2008 to 6,892 during the same period in 2009, said a Robert W. Braid & Co. report released in December.
4. The outlook for venture capital investment will remain poor: Venture capital fueled growth during the past decade, but investment plunged with the market crash of 2008 and has recovered only slightly since. According to the latest PricewaterhouseCoopers MoneyTree report, $4.8 billion in venture funds was invested nationwide in third-quarter 2009, up from $4.1 billion in second-quarter 2009. But that was down from $7.2 billion in third-quarter 2008. The Venture fund investments likely will be weak this year as funds remain cautious about the prospects for new businesses in a still-troubled economy, said Shane.
These sobering statistics only reinforce the need for franchise systems to focus on their core operations more intensely. The opportunity to re-engineer processes and improve operational and marketing systems is now. Those who use this time to get better at their core will be prepared to benefit from an uptick when financing becomes more available.