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any things are important when you’re opening a club,
but first and foremost is your ability to finance it.
How you go about doing that largely depends on you
as a franchisee and where you are in your business. Nonetheless,
knowledge, experience and patience are key to making smart
financial decisions.
“It’s important to take counsel with other people who have
had experience so you understand the complexities if you aren’t as
experienced. Look to people who have experience in structuring
and negotiating deals,” said Sam Glassman, franchisee with Planet
Fitness Midwest. “Structure can get complex quickly, and many
of these obligations are long-term. You don’t want to rush into
something. You really want to be thoughtful about the type of
institutions and the type of people you are dealing with.”
“You don’t want to rush into
something. You really want to be
thoughtful about the type of
institutions and the type of
people you are dealing with.”
— Sam Glassman
Planet Fitness Midwest franchisee
Glassman is currently funding his business with a mixture of
traditional bank loans and mezzanine lenders, but notes there are
several alternative sources for capital that may be right for a certain
situation.
In addition to traditional bank loans, franchisees have the
option to explore financing companies, business development
corporations and private lending.
“Cash flow-based loans provide more leverage and can come
with development lines, which use your existing businesses and cash
flow to provide financing for future projects,” added Kevin Fagan,
franchisee with CCMO PF Management, LLC. “Locking in the
terms now can be very useful, particularly as we enter an increasing
interest rate environment. For very large groups, lines of credit
combined with syndicated term loans is a common solution.”
Glassman also notes that the various sources of capital are often
a concession between the flexibility of terms and competitive rates.
“You can get better pricing for less flexibility, and there is
a gradient. If you work with a nontraditional lender, you might
get more flexibility, but you’re going to pay for that flexibility,”
explained Glassman. “Maybe you can take money out of the busi-
ness sooner than you traditionally could with a bank. There could
be less stringent financial standards when going to a nontraditional
lender as opposed to a bank. Nontraditional lenders might be more
forgiving about certain things.”
Once you’ve decided which institution you would like to
pursue, there are still plenty of opportunities to negotiate a deal and
plenty of terms to review that could still affect your final decision.
• Asset and Liability Matching: The concept is that you
do not want to borrow or lend past the useful life of the assets
financed. For instance, it might not be a great
idea to finance your cardio over seven years
when your franchise agreement requires you
to replace it after five years. At the end of its
PF® useful life, the borrower would still owe
a substantial amount of principal for assets
no longer in use. The concept also applies to
strength and tenant improvements.
by Christina Cannon
• Interest Rates
• Term and Maturity: Longer terms will
have more deductible interest in early years.
• Fees and Administration Costs: Depending on the
lender, borrowers may be asked to fund various fees. Closing fees
are similar to points on a mortgage, and administrative fees may be
positioned as offsetting the costs of multiple draws in a buildout
process. Fees are typically negotiable, but often not to zero.
• Prepayment: Many lenders charge prepayment penalties,
which can be expensive if you refinance your debt or pay it off
early. These penalties are also negotiable, and it is encouraged that
you request a discounted penalty in case of a change of control or if
you think there is a chance you may exit.
• Guaranties: Personal guaranties are the norm until you
have a large organization that can provide a valuable corporate
guaranty. It is always worth asking what it would take to get out of
a personal guaranty. Some lenders will release the guaranty if your
total leverage falls below certain ratios.
• Closing Conditions and Timing: Make sure you
understand the lender’s complete process. Specialty lenders tend to
be quicker than banks, but that’s not always the case. Always ask
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