Read on Twitter
Ok here we go round 2. I hope everyone has drinks at the ready while reading this because it is reality check time. Let’s get some basic facts out of the way about the franchise sector to put some context around all of what I have been posting.
It is estimated that franchises support 13.2 million jobs and are responsible for 1.6 trillion (6%)of US total GDP. In addition 1 in 7 US businesses are a franchise. Many don’t realize that these franchises are owned & operated by individuals and are NOT owned by the Franchisor
In most instances the franchisee only owns 1 or 2 units. In short the business is both their job AND source of income. It is likely the UE numbers and household income numbers could be EVEN WORSE than what is being reported because of this
Additionally jobs supported by the franchise sector are OVER 10% of the private sector non farm workforce in 33 states and at least 6% in EVERY state. The largest are CA, FL, TX, IL,OH. In short THIS SECTOR IS A BIG FUCKING DEAL !
When considering that many of these businesses are run by owner- operators it truly is likely their entire households financial well being is at stake and a whole sector of jobs and income reduction for owner operators that many may be missing entirely with impacts that follow
On to lending. The SBA budget for 2020 called for 42bln in new loans. The est. 2021 appropriation is even lower. This is NO WHERE near enough $ to support the sector. It also has to support mom & pop SME which are even more disproportionately cut off from conventional financing
Additionally from the SBA budget document regarding loan amounts and function they state the current budget “allows agency to finance...while ensuring IT DOES NOT SUPPLANT SERVICES BETTER PROVIDED SOLELY BY THE PRIVATE SECTOR...”
From my experience roughly 5-10% of franchise businesses will turn over in a given year. Often times it is even larger during periods such as this necessitating an even greater need for additional capital into the space.
Let’s also say for argument that the gross sales of all franchises is about 1 trillion in 2020 and that they run at 15% EBITDA. These are likely underestimates but it will further drive the point home. That means EBITDA is roughly 150bln and the average sales multiple is 4x.
This means that there is roughly 600bln of collective EBITDA that could potentially be bought and sold in an average year. If 7% of units flip annually that necessitates 42bln in funding. SBA only has funds 42bln for ALL SME thus there is a LARGE gap the private sector MUST fill
Additionally this says nothing of the needs for new locations, remodels, pure refinances et al that are also part of the equation. The above refers only to the need for pure M&A or partner buyout financing. In sum — GIANT shortfall
Now where are we presently? As I stated last week upwards of 50% of the lenders have left the space entirely and the rest are not lending to new clients and/or are only lending to new clients of A+ brands and A+ operators....so the question is how will this gap be filled?
From some large banks in the sector still lending these are their current budgets for the rest of 2020 — 20 million. 100 million. 50 million. 30 million. We aren’t even at ONE BILLION from FOUR banks. Where exactly is this shortfall coming from? The answer is it isn’t.
I have one client in one brand who could literally tie up the remaining budgetary capitals of 4 banks for 2020. DISASTER of epic proportions unfolding.
This leaves in the alternative PE and Hedgefunds where borrowers will either need to give up ownership or pay higher rates or both. Bank rates are roughly 4.5% over 2mm+. Private $ is 7-9%. These businesses trying to hang on are doubling their borrowing costs bc banks say no
And if you find yourself in an undesirable brand or market segment or have flatlined or declining sales during Covid all banks will say no at all levels and you will be forced into a fire sale to PE just to get out. The vulture effect.
And what about the guy with 4 units and no growth plans or ability to grow that is also shut out of the debt market. He is TOO SMALL for PE to invest in so his choices will be to SELL his livelihood likely at a discount or hold on and pray. Not exactly a great position to be in
And if you need working capital money just to survive — your options are to outright close OR take a predatory short term account receivable loan that exacerbates the problems and leads to further issues and a likely firesale or bankruptcy down the road.
In sum if the private banking sector doesn’t open their wallets to SME we are going to have a lot more failures and otherwise good operators forced into discount sales and out of the workforce and into situations that they shouldn’t be forced into. Sad situation indeed. And now
If you like these threads PLEASE retweet and share and try to get this out into the general public not just fintwit. The public is wholly unaware of these issues. And they should know. I don’t want glory. Fame or money. I’m anonymous here. I just want to educate and help.
