Fast food outlets feel the heat

Date AddedMay 30, 2009 05:09:28 AM

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Article from:? The AustralianNOT surprisingly the franchise sector, like much of the small business sector, is suffering from the capital drought.Last year saw an increased number of new franchises on offer and high activity in resales of established franchises.In particular, in the fast food and general food outlet sector, this year the recession may bite into business activity. There is evidence that some of the business models will need to adapt to prevailing economic conditions, perhaps signalling a slowdown in new -- "greenfields" -- franchise activity.The challenge lies in raising the capital to buy an established or new store at a time when banks have signalled a new era of lending practices. The major banks, while publicly declaring that it's "business as usual" for business lending, in practice are adopting much tougher lending criteria.Indeed, banks for some time have been known to adopt an accreditation system for established systems and avoid lending to many other franchise systems. There is firm anecdotal evidence emerging that banks are requiring bricks and mortar security as well as strong financials for a business purchase. In the absence of financials, as in a greenfields site, loan funds are available only against private equity.The situation presents challenges -- perhaps not for the established major brands but for the relatively newer entrants.Dave Milne, co-founder of the 72-store Noodle Box chain, is seeing the impact of a tough lending environment. "Growth by franchise cannot be taken for granted," he says.The downturn has meant that prospective franchisees are more inclined to buy company-owned stores than greenfield sites. "Especially at the moment with finance, we find it a lot easier for people to raise capital for a business with a track record. We're at the $250-$300,000 plus GST level for a turnkey fit-out for our franchises."The GFC is affecting the whole restaurant and catering industry -- an industry employing hundreds of thousands of people and attracting more than 40,000 business owners, the vast bulk of whom employ fewer than 20 people.By its very nature, it's a highly competitive industry with few barriers to entry, and often low profit margins as a result. Many new entrants lack the business skills necessary to survive. Doubtless this would be a factor in the capacity of a borrower to secure bank funding -- regardless of the economic environment.Michael Fischer, former restaurateur and a past president of Restaurant & Catering Australia, now an industry consultant with Sydney-based restaurant broker Feszt & Feszt, says the current economic downturn might be good for the likes of KFC, McDonald's and Dominos."But it's also having a big impact on the industry, especially on the capacity of buyers to raise capital. It's very difficult to raise a loan today."Banks and finance companies want bricks and mortar security. This can have a dramatic impact on transaction prices of businesses and the ability to close on a sale."I've seen an experienced operator with a successful, profitable business try to raise capital for a solid $200,000 restaurant. He couldn't raise the capital."Previously banks would lend on strong financials. There's very little lending today. There are some great opportunities for buyers."Franchise Council of Australia executive director Steve Wright says it's a mixed bag at the moment. "We're seeing continued growth in revenues for many systems but there is anecdotal evidence of reluctance on the part of banks to lend or at least lift the hurdles in relation to new territories or greenfield sites."He does not, however, expect this to lead to any significant downturn in growth. "There are more potential franchisees today," he says. "We expect some systems will increase their company-owned store numbers and later sell them with a track record of profitability."Mark Bouris, founder of Wizard Home Loans and establishing one-stop financial services shop Yellow Brick Road, says the solution is simple: don't ask for money for the franchise."We (Wizard) didn't seek up-front capital. If you ask people for $200,000 to buy into a franchise, then they're working to pay it off and not focusing on growing the business. Find the right people and give them the keys." SOURCE