Franchise acquisition loan

burger, hamburger, bbq-3962996.jpg

loan to purchase an existing franchise
Posted by: mark Jun 16 2004, 02:42 PM
Hello, What are my alternatives to purchase an existing franchise. Franchise, a restaurant is very profitable. Would need financing to purchase the store outright and of course follow franchise regulations concerning day to day acitivity.
Franchise is up for sale due to family issues. P&L statement reflects
profits. Franchise is presently leasing the building. Equipment is only asset
that can be held as collataral. Equipment is new and no notes are attached to the equipment.
I have four existing investment properties that are rental properties.
Can i use these properties as collateral? What are all my options.
I am looking for financing to purchase the store outright .
I need financial ideas.
Posted by: loanuniverse Jun 16 2004, 09:51 PM

You can approach this several ways. Some of them might involve a bank, and some other ones might not. I also think that you should visit other resources regarding buying franchises. You can find very good information about it in the following link:

Now you asked me about financing, so let me give you some feedback off the top of my head.

1- You mentioned equipment as the only asset. When someone mentions restaurant equipment as collateral, the first thing that comes to mind is
 “10 cents on the dollar”. Sorry, but there is little value on that from a lender’s perspective.

2- You did not mention the purchase amount or how much equity you have in the buildings. Could you borrow on them so that you can use that money to buy the restaurant? Specifics help a lot.

3- Restaurant loans even for recognized franchises might be problematic. I guess that if the chain is one of the top five a bank could overlook policy and make an exception, but honestly I have only been involved in a couple of restaurant loans in my eight-year career.

4- I am of the opinion that when you need money you need to look for your cheapest source of money. The ideal scenario would be for you to obtain at least partial financing from the seller, but you mentioned that you want to purchase the store outright so that is not an option. The second best option would be for you to obtain financing for the purchase, but you are probably going to go to a specialty finance company for that and pay a premium for the money.

The way I see it, if there is enough equity on the properties and the rental income can afford the debt, then access that cheaper money. Anyway, the money will end up coming out from the same pocket.

Good luck
Posted by: The Fox Jun 17 2004, 09:30 AM
Nice pub from the FTC!

A couple of my thoughts:

Experience – Do you have any experience in the food service industry? To put it from the bank’s perspective, why do you feel qualified to run a restaraunt?
Financials: You mentioned the “P&Ls” showing a profit. Are these company-prepared (be cautious), compiled or tax (more credible) or audited statements (most credible). Have you run numbers to see if the business will cash flow for the debt it will take to acquire it?
Available equity: Like mentioned above, if you have lots of equity in your RE investments this will be easier. If your rentals are already quite leveraged, you may need to get creative with your financing.
When I hear “family problems” I think you should be able to buy this for a discount. Clearly neither you nor I are business valuation experts, but this business (most businesses) is an illiquid investment.
You mentioned buying the business outright. Does this mean trying to purchase the RE for the business? Is the property owned by the franchisor or the current franchisees?

Also I’d just like to expand upon the experience question, and this goes hand-in-hand with your expectations. Make sure you know what you are getting into. If you have plently of food service experience, then I’m preaching to the choir, but this is unlikely to be a passive investment.

That said, due plenty of research – talking to other franchisees, make inquiries into similar franchises, understand the market and the direction of the market, etc.

Good luck!
Author: Commercial Loan Underwriter