Franchise Update Magazine Issue II, 2012 | Page 49

By Darrell Johnson

New Franchise Registry
a Game Changer?
One-stop website aims to speed lending

T

he 2008 financial meltdown
has had a lot of bad implications for franchising, mostly
by making access to capital
much harder. However, it did have one
good implication for the franchise business model. It strengthened it. Capitalism
is all about survival of the fittest. Most
would agree that many franchise brands
in the first half of the past decade were
focusing more on growth than quality,
assuming (correctly for a while) that the
economy would continue to rise and in
doing so cover up weaker franchisees
and even weaker brands.
All that changed after 2008. Although
painful, the down economy demanded
better performance, forcing weaker
brands and units out. That wasn’t good
for underperformers, but it is very good
for the business model of franchising.
Performance now matters, is getting
judged by prospective franchisees and
lenders, and is defining winners and losers. I’m not suggesting we thank lenders for creating the economic crisis, but
we should thank them for starting to
require better performance in brands.
Today they are saying, “If you want my
money, prove that you deserve it.” That
statement applies equally to franchise
brands as well as prospective franchisees.
Lenders and franchisors knew how to
prove a prospective franchisee deserved
access to credit: they had to meet certain standards regarding credit history,
financial position, performance history,
background, etc. Those criteria have
been unchanged for many years. The bar
a prospective franchisee needs to meet
has moved higher since the financial
crisis and moves at times unexpectedly
(bedeviling franchise development officers), but the criteria (things like FICO
score and liquidity) have been the same
throughout.

The problem in this recovery period
is that no one, neither lenders nor franchisors, knew exactly how to prove that a
franchise brand deserved access to credit.
We all had to learn. Intuitively, lenders
knew that a franchise brand’s history of
unit, system, and franchisor performance
should be a good indicator of whether
future loans would get repaid. After all,
that is why lenders relied on SBA loan
performance data. They knew SBA data
were not very accurate and therefore a
poor indicator of the future. They just
didn’t have a better means of assessing
franchise brand risk until Bank Credit
Reports (BCRs) were developed for that
specific purpose.
BCRs, developed with years of input from lenders and franchisors, are
addressing whether a franchise brand
deserves access to credit. For now, that’s
the essential answer to a lender’s underwriting concern. As we get further into
the recovery, lenders will begin to widen
their credit box and standards for betterperforming brands. Then BCRs will be
used to address both absolute access and
the relative credit risk a particular brand
represents, and therefore how loans to
a particular franchise brand should be
structured and priced.
That brings me to the main topic:
how a website will change lender/franchise brand interaction. Most franchise
lending today is done by smaller banks.
They don’t underwrite brands before they
have an active loan application. When
lenders receive a small-business loan
application, they have a limited amount
of time and resources to complete the
underwriting. For non-franchise borrowers, that means they have very little
with which to build a case for expected
performance. The best they can do is
look at some general small-business performance outcomes by NAICS code or

other broad industry categories.
BCRs were a game changer because
they provide information about very
similar borrowers through unit and
system analysis. Now think how timely
and efficient the underwriting process
would be if lenders had a place to go to
obtain not only BCRs but all relevant
information about a brand: 1) summary
information relevant to lenders about every active franchise brand; 2) FDDs; 3)
BCRs; 4) SBA Registry approval status,
addendums required, and certificates of
no change; 5) industry reports; and 6)
other pertinent information.
If all of this information were controlled by an objective third party and
made available to lenders, it would become a standard underwriting step in the
lending process. It would do something
that no other small business lending tools
(franchise and non-franchise alike) could
hope to do: provide performance history
for borrowers and units that look and
function almost identically—in other
words, the performance history of specific brands.
That’s how the new Franchise Registry website, launching in May, will
transform franchise lending and help
make franchise lending more attractive than non-franchise small business
lending—with better risk information.
But wait, there’s even more. The new
Franchise Registry website will provide
lenders with prospecting tools to find
brands that meet their desired underwriting characteristics. It also will give
lenders the ability to contact prospective franchise borrowers from those
brands—and it will put the power of
making those c