Risk Mitigation for SBA & Franchise Lenders

Risk Mitigation for SBA & Franchise Lenders


YOU’RE APPROVED! These are two of the most exciting words for a new franchisee to hear and for a lender to say. After painstakingly digging into the details, weighing the risks, crunching the numbers, and figuring out ratios, this milestone is the jumping off point that sets new wheels in motion. The Happy Dance begins!


Unfortunately, sometimes those wheels can drive naïve franchisees right off a cliff!


The money that was borrowed to get their business open is often eaten up (even gobbled up) by costly mistakes they had no way of knowing even existed:


  • The set-up of their company was done according to advice from well-intentioned friends or family members who may not have realized the tax ramifications. If the intended corporate structure does not match the actual registration, the Tax Man will cometh! Regardless of what the money was originally borrowed for, Uncle Sam will take his cut off the top (and seldom is that ‘just a little off the top’). What remains may not be enough to actually get the doors open. As the lender, how will you get paid back?


  • The Franchise Agreement has been signed – and now, so has a lease. Without realizing the role that local zoning plays in areas such as permitted uses and utility requirements, this poor franchisee unknowingly gifted $75,000 of your money to its landlord because they didn’t know what they didn’t know. With a signed lease comes the ties that bind. “I’m sorry” or “I didn’t know” won’t grant this franchisee a do-over. With a $75K haircut, will this franchisee make it? As the lender, how will you get paid back?


  • A different franchisee to whom you loaned money decided that boiler-plate legal jargon in the landlord’s standard lease was standard practice and proceeded to sign the lease without proper legal representation. As luck would have it, a critical ‘out’ clause (like the inability to secure a liquor license) was conveniently missing from the landlord-friendly lease. This franchisee will still open its doors and operate the business, but with significantly lower sales because they are prohibited from serving alcohol. Will the lower sales still cover overhead costs and the monthly note on the loan you have with them? As the lender, how will you get paid back?


The list of possible ‘what ifs’ can stretch a mile long. The dollars associated with those ‘what ifs’ can easily stretch into the tens of thousands. The dance is not so happy now and if I were the lender, I would be shaking in my shoes!


“When there is a $5,000 mistake on a franchise project, the

franchisee has a problem. When there is a $100,000 worth of mistakes

on a franchise project, the lender has a problem.”


A significant portion of lenders’ due diligence comes from the very important question of ‘How will I get paid back?’  This is such an important question that it is often asked several times while running through various scenarios.


Despite all of the number crunching and due diligence that goes into approving smart loans, few lenders take the time to qualify borrowers about their knowledge and ability to actually get the doors open. This is super scary because the build-out of their location is likely the biggest reason the franchisee needs your money in the first place.


Yes, it is true that established, national brands often play more of a hands-on role with their franchisees in these key areas. With new concepts hitting the scene almost daily, there is a critical gap in the assistance that new and emerging franchisors are able to offer to their franchisees. It is not a matter of wanting to, the fact of the matter is that they have not grown large enough to be able to bring these resources in-house. This leaves franchisees to figure much of this out on their own. All the while, everyone’s fingers are crossed:

  • The franchisor’s fingers are crossed because if the franchisee fails, it is not only a very public failure with consumers, it also gets reported to the FTC and becomes a disclosure to future prospective franchisees;
  • The franchisee’s fingers are crossed because their life savings, their future income potential, and their livelihood are on the line – not to mention their family’s safety and security;
  • As the lender, your fingers are crossed because you are really hoping that the intelligent person who brought a business plan, financial statements, and past business experience to the table is wise enough to know their construction limitations and will seek the help they need.


The Risk Mitigation Tool That Lenders Are Adding to their Toolbox


Lenders ToolboxIn two days and for a fraction of the cost of one mistake, the National Franchise Institute’s ESSENTIAL COMPETENCIES program is an insurance policy that helps to mitigate a lender’s risk on loans that fund the building of new locations.

Borrowers include the cost of this program into their loan;

As an incentive, some lenders are rewarding borrowers with a more favorable interest rate for participating in this program and significantly increasing the likelihood of success


Click Here for a pdf About This Vital Program


Franchising is the fastest-growing method of conducting business in the world. Lenders love franchising! Lenders really love successful franchise loans.


When costly mistakes are prevented on the build-out side, franchisees significantly increase their chances of success and they are in a much better position to meet their loan obligations. The franchisor, the franchisee, and the lender all start toe tapping, gearing up for the Happy Dance.


Sessions are scheduled every six weeks in Denver and are limited to a maximum of 25 people!  The ideal timing for the Essential Competencies program is after a Franchise Agreement has been signed but before the search for real estate begins (and DEFINITELY before a lease is signed!).


Click Here for Program Dates, Details and to Register

A Tale of Two New Franchisees

A Tale of Two New Franchisees

PHOTO - two restaurateurs

Entrepreneurs who choose to become franchisees enter the industry with a double dose of excitement because statistics prove that ‘it’s only a matter of time’ until they begin to see success and start making money.


While the franchise model continues to prove itself across thousands of different concepts and brands, the success of individual franchisees lies largely in their own hands.  Before a new franchise concept can operate, it first needs to open. While the paths may be similar, each journey can be very different.



Take, for instance, two restaurant professionals who recently signed Franchise Agreements:

Operations Experience

Corporate Experience

This entrepreneur had been working in QSR and fast-casual restaurant concepts for years. The goal was to learn the ropes and eventually become a franchisee. This person knows operations inside and out and worked hard to make their dream a reality. Fast forward a number of years and this person achieved their goal: They signed a Franchise Agreement to own and operate their own restaurant franchise. This entrepreneur has a degree in marketing and been a business professional for the past 15 years.   For ten of the past fifteen years, this person worked on the corporate side of three different multi-unit restaurant franchise concepts, each time crafting marketing campaigns that were very successful. After much consideration, this person also signed a Franchise Agreement to own and operate their own restaurant franchise.


So which new franchisee is better prepared for the road ahead and more likely to open a successful restaurant? Toss a coin!  Most people are shocked to hear that the outcome of such a major career decision comes down to a simple coin toss.  Surely that can’t be possible – right?  To a surprising extent, it is.


Because of each one’s past business experience, both will likely be successful once their restaurants are open. The tipping point will come down to how much development experience each one has (or learns) once the Franchise Agreement has been signed but before real money starts flying out the door. Whoever is well versed in calculating development timelines and realistic costs, in understanding all of the intricacies and the ‘right’ resources that go into getting their restaurant built, and whoever effectively manages the timeline, resources, and on-site challenges once the clock starts ticking will definitely have a more successful restaurant opening.


The task of getting the doors open is an important component of franchise success and yet many newer franchise professionals don’t realize just how much is involved until the tally of costly mistakes becomes painfully obvious. Many are left weary, financially strapped, and scared.


This scenario plays out across the board for concepts that operate from brick and mortar locations: restaurants and breweries, fitness concepts, beauty and healthcare/wellness concepts, entertainment concepts, you name it.


Doctors, dentists and orthodontists are becoming franchisees of chiropractic, men’s health, and dental concepts.  Professional athletes are in the game too.  Each knows their craft very well but few are familiar with the build-out tasks of getting their locations open.


If you or someone you know is joining the franchise ranks, NOW might be a great time to look into the National Franchise Institute’s Brick & Mortar Franchise Success program.  A great concept, a proper plan, the right knowledge, and experienced resources will make all the difference so your success extends beyond simply getting the doors open but building your legacy (and your bank account) in the process!


To your success…

We’re In The News Again! Franchise Times’ Book of Brands

Franchise Times - BOOK of BRANDS (Spring.Summer, 2016) NFI on Pg. 11We’re In The News Again!                                       Franchise Times’ Book of Brands

The National Franchise Institute is honored to appear in the Spring/Summer 2016 edition of Franchise Times’ Book of Brands. 


Click the link below to view the article.



National Franchise Institute – Franchise Times BOOK of BRANDS – It’s What You Don’t Know That’s Key

Franchise Success by Asking THE Most Important Question

Franchise Success by Asking THE Most Important Question


Nfi april #2 post 2016When it comes to selecting vendors, making purchasing decisions, bringing on partners or investors, hiring staff, weighing lending options, or building new locations, what we don’t know is often what comes back to bite us – sometimes in a big way.

Hindsight is 20/20 – This sentiment has been echoed for decades because it is as applicable and relevant today as it ever was.  When things are going well, Hindsight is nowhere to be found – and no one is looking for it!  When things go awry, Hindsight and Murphy (of the Murphy’s Law persuasion) are often found hanging out together, wreaking havoc in seemingly every area of your life.  If only we could have known how to prevent Hindsight and Murphy from ever beckoning our doorsteps in the first place!

In the future, maybe we can.  What if there was one question that, when asked, might thwart Hindsight and Murphy?  It can’t be just any question – it has to be THE most important question.

Few people would argue that ‘How much will this cost?’ or ‘How long will this take?’ are important questions to ask.  But is either one of them THE most important question?  ‘Will I be covered for this?’ is also a good question, and so is ‘What are the additional costs I will incur down the road’ but by themselves, neither of these would likely be considered THE most important question either.  Is there even such a thing as THE most important question — one that gets to the truth, begs transparency, creates trusted advisor opportunities, and is applicable in practically every purchasing decision, partnership/investor decision, new hire decision, borrowing decision or build-out situation?

It seems to me that there is…and here it is:

“What questions am I not asking that I need to know the answers to?”

Before you roll your eyes and stop reading, hear me out.  I recently wrote an article titled ‘Sounding the Alarm on Development Timelines for Franchise Locations’.  We’ll use this article as the litmus test.

To give you a quick summary, a prospective franchisee asked a franchise concept how long it would take before they would be open for business.  The concept’s representative painted an appealing answer by prefacing their response to include only a small portion of the overall development timeline (in this case, specifying “90 to 120 days from the date a lease is signed” vs. the more realistic timeframe of “9 to 12 months from today”).  In this example, the sizeable due diligence portion that usually accompanies the building of new locations was omitted because the truth would likely have elicited fear and brought an abrupt end to the conversation.

Had the prospective franchisee asked THE most important question, they would immediately be better equipped to make an informed decision.

‘What questions am I not asking that I need to know the answers to?’ could then have been answered more thoroughly:  “The question you’re not asking that is important for you to know is that it will likely take six to nine months from today before you are able to find a location, negotiate the lease, sign the lease, and actually take possession of the space.  Once you get to that milestone, it will be another 90 to 120 days until you will officially be open for business.  This means that you will need enough money on hand (or included as part of your lending application) to keep yourself afloat for up to a year, possibly longer.”

What questions am I not asking that I need to know the answers to?’ is a great tool that pulls back the curtain and gives more of a behind-the-scenes look at areas where knowledge is often hard earned though costly trial-and-error mistakes.

THE most important question doesn’t require you to have extensive knowledge about a particular subject in order to receive its benefits.  In fact, asking THE most important question opens a door that allows for a trusted advisor to shine their light and help you succeed.

Of course there are other ways to ask THE most important question which also get at the heart of looking under the proverbial hood of the car:

  • What do I not see that I should be looking for?
  • What will come back to haunt me?
  • How could this turn out to be a bad deal for me?
  • What additional information (or parts, or components, etc.) will I need?
  • What hidden fees will no longer be hidden once I sign on the dotted line?

The point here is to craft questions that will reveal important details that you may not even know to ask about.  We’ve all seen or heard stories that go something like this:  “Why didn’t you tell me about that?” “Because you didn’t ask.”

Is this a foolproof way to avoid every Hindsight or Murphy sighting?  Probably not – but you have to admit it will definitely lead to better dialogue and more informed decisions.  Give it a whirl and let me know what you find out.

To your success…

Franchise Times’® Visit to the National Franchise Institute’s Essential Competencies Program

Franchise Times (March, 2016 Cover)Franchise Times’ Visit to the National Franchise Institute’s Essential Competencies Program

In late 2015, the National Franchise Institute spoke with Nancy Weingartner, editor at Franchise Times magazine.  As the premier publication dedicated to franchise-related content and resources, we were only too excited to share details about our Essential Competencies program and how it helps franchisees to successfully open new brick and mortar locations.  Imagine our surprise and excitement when Nancy asked if she could fly to Denver to attend our January Essential Competencies program!

                                                                                                         View the Franchise Times Article Here