Franchise Loan Rankings: For Their Eyes Only

Banks maintain lists which rank franchises based on the frequency that loans are repaid, which could be a good indicator of risk to potential franchisees. However, these lists are only …

Banks maintain lists which rank franchises based on the frequency that loans are repaid, which could be a good indicator of risk to potential franchisees. However, these lists are only reluctantly admitted to exist, let alone published. Read more on this topic in this article from Blue Maumau.

The lending industry has a closely guarded secret—they compile lists that guide them to a better return on their lending dollar for franchise systems. They try to understand which systems are risky and which are safer investments. If that sounds like a no-brainer, consider this: these lists are tightly held secrets among select inner circles. Although highly unlikely, if such lists were given to a prospective franchise buyer, the buyer would be able to determine if franchisees paid back their loans on a given concept or if they shuttered their shops in greater numbers than other franchise chains without even being able to sell their businesses.

One source who has been a franchise consultant for years agrees that such a ranking of franchise chains would be highly useful. He thinks they exist, remembering a lending acquaintance who once responded with a wink in the voice, “We don’t publish such information.” The consultant added, “They may not publish it, but I’m pretty sure an internal list is available to their lending officers.”

Richard Rosen, a New York franchise attorney, reasons, “How can you be in the lending business without doing risk analysis?”

On the other hand, Nick Bibby, principal of the franchise consulting firm Bibby Group, says that “Lending for franchises follows the same pattern of other traditional lending and if any type of ‘list’ is in play it would be the passing around of ‘experience’ among loan brokers and lenders on an informal basis.”

He continues, “The mere fact that most franchisors (75 to 80 percent) will not even publish an earnings claim (financial performance) should be a stark warning to lenders and borrowers alike.”

Mark J. Weiss, CEO of LeaseWise, LLC, a provider of small business funding solutions, talks frankly about his experience with lists from lenders and lending brokers that rate franchise brands by risk and loan worthiness: “In the past, a senior representative of CIT stated to me that CIT, and other large lenders, work from a list of ‘tier one’ franchisors for whom they will consider financing.” CIT is a Fortune 500 firm that provides lending, leasing and other financial services to franchise buyers. Weiss adds, “Included on that list would be names such as Dunkin’, IHOP, Kentucky Fried, Subway, McDonald’s, Burger King, etc.”

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Some of the larger lenders will engage in their own due diligence on franchisors, probing which chains’ franchisees earn enough to pay back their loans and which ones tend to go belly up. Franchisors directly contact such lenders to provide them with any necessary information they need to expedite loan approvals for prospective buyers. Franchisors are free to tell lenders things that aren’t on their own Franchise Disclosure Document, but that a banker needs to know—Bathings like average store profits and revenue. Lender lists would logically include comparison of business fundamentals among franchisor competitors.

Scott Burns, senior vice president of National City Bank, confirms that his bank cultivates such a top-tier list of franchisors for conventional and SBA loans.

Brian Butler, US Bank’s marketing director of the Small Business Administration division in San Diego, hints that US Bank uses a list of top-tier franchisors that analyzes their return on investment risk. When asked for details, he cautiously writes, “We do not publish lists of preferred franchises as we consider a variety of factors, not just the concept.” He elaborates, “This is mostly considered proprietary information.”

“This is as far we can go on this subject,” he concludes.

He’s not alone in wanting to guard such information. One banker in the Midwest, after confirming that his bank had such a list, told this journal, “I would rather you not quote me.”

It cannot be known if these banking lists are accurate or if they are simply tip sheets for bettors at a racetrack by which they think they have quantified the risks. These lender lists are proprietary and mysteries to the outside world.

When asked if the bank would share their wealth of information on their top-tier list with prospective franchisee borrowers, Butler states, “No, we would not do that. [It] Seems to me presumptuous for a lender to tell a potential franchisee that his concept is off base. [That’s] Entirely his business.”

Attorney Rosen states, “I’d be shocked if they made their franchise rankings and analyses available to their franchise buying customers.” He understands why franchise buyers might desire to see such a list. “When people invest or lend money, they don’t do it unless they know what kind of return there is going to be, so that they know if the investment is good or if the loan will be repaid. The question is, how do they as a franchise buyer get the information? Buyers should get it in an open and free informational fashion, as opposed to someone writing it on a table napkin.”

Although Rosen thinks that showing such lists wouldn’t expose banks to liability, he is concerned that a coziness could develop with franchisors through soft-selling and guiding franchise borrowers. “If a franchise projects a $150,000 profit and the bank says to the buyer that they know the franchisor, they are comfortable that he should be able to generate such profits, in effect, they are making an indirect earnings claim. Maybe the franchisor sends all their customers to that bank because they know the bank has been cultivated with the judicious use of selected information. The franchisor knows that all those pieces will fall into place when they send the buyer to their preferred bank.” Rosen thinks that with such a perfect storm of slanted information, the bank may become liable.

No lender that spoke with this publication expressed a willingness to discuss sharing such proprietary lists with a franchise buyer.

By this point some franchisees may be wishing they had a cousin working in a big bank who could slip the information their way.

SBA’s List of Franchise Loan Failure Rates

All is not lost. Franchise buyers can purchase certain analyses and reports that aren’t bank reports. Weiss elaborates, “There are services that you can pay for, like Restaurant Research, that give you their analysis like average sales and failure rates. The more you pay, the more disclosures they list. It’s fairly accurate.”

There is a also a banker’s list of failure rates that is available to franchise buyers and that is open to public scrutiny. It was made available through Blue MauMau over two years ago and has recently been updated. In the midst of the well-guarded lists that help bankers identify what to expect for a return on their lending investment on particular franchisors, the Small Business Administration has been providing its preferred lenders a list of loan failure rates by franchise brand.

This article has been reposted from Blue Maumau. View the article on Blue Maumau’s small business and franchise news website here.


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