Franchises Battle Credit Crunch

NJBIZ:

The credit crunch that has been squeezing the economy has now caught the franchise industry in a vise. “I’m sitting on mounds of loan applications, but banks are holding back,” says Nirav Mehta, a franchise broker in Warren who helped clients get about $150 million in bank loans last year. This year, he says he will be lucky if the total breaks $100 million.

“First-time franchisees are having the biggest problem,” says Mehta, who also operates a Dunkin’ Donuts franchise. “Banks are more comfortable with people who have experience and a track record. But even then they’re taking a closer look. To get a loan, franchisees have to be prepared to document their claims of anticipated revenue and income.”

Mehta says things have gotten so tough that even Small Business Administration lenders -banks whose loans carry SBA repayment guarantees of 75% or more - are seeking greater collateral from borrowers.

Banks have also reduced the values they assign to the underlying businesses, he says. “Previously, banks would value a Dunkin’ Donuts franchise at five times earnings before interest, taxes, depreciation and amortization, and then they would loan up to 90 percent of the valuation,” he says. “Now they only value the operations at four times EBITDA, and generally limit the loan to 80% of the valuation.”

Mike Ghadia, a veteran franchisee who owns Papa John’s pizza outlets and Bojangles’ Famous Chicken ‘n’ Biscuits restaurants in northern New Jersey, found himself among those feeling the credit squeeze when he secured a $330,000 loan last month.