Restaurant Franchise Lending as Market Emerges From the Thick of COVID-19

As we live through the partial postpandemic phase, we must realize that the “new normal” impacts on the franchising, restaurant and lending sectors are here the foreseeable future.

From operations to finance, marketing and human resources, those working in these industries have learned several lessons. The ‘normal’ modes of operation have changed for good, which has opened the door for transformative change, and the emergence of fresh opportunities for ambitious brands and savvy investors.

During the early days of the crisis, the pandemic posed many challenges impacting the market hard and fast. In response, banks had to respond to clients who were most effected swiftly and deftly. The priority was to secure PPP loans for struggling clients. Industry leaders encountered many roadblocks due to the ever-changing rules for PPP eligibility. They were forced to learn on the fly as standards fluctuated. The next step included securing principal and interest relief for three to six months for most clients, ensuring temporary stability. After this initial round of capital was distributed, the lending industry took a wait-and-see approach, putting a pause on financial support as they hoped for improving market.

Currently, a return to normalcy is within our grasp. Franchisees whose concepts have stayed resilient and strong throughout the past year will see a direct reward for their perseverance during the worst of the pandemic. Lending institutions are once again eager to support business needs and provide clients with ample access to financing. However, even though capital may be more freeflowing, franchisees must seek the right lending partner who is committed to their business concept.

Concept Survival – A Case Study from the Restaurant Industry

In the thick of the pandemic, several banks in the restaurant franchise space stopped lending altogether. However, institutions that chose to remain active in their lending were primarily funding quick service restaurant (QSR) concepts, as well as clients who had not been as hard-hit by the pandemic. Concepts with a drive-thru, advanced technological allowing for contact-less purchase and delivery that stayed resilient as take-out became necessary in the locked-down world were a sure-fire opportunity for lenders to support. The pandemic enabled those adaptable concepts to return to profitability quickly and, in many cases, even outperform their pre-pandemic operational levels. For full-service restaurant (FSR) concepts, the narrative varied.

FSR brands were forced to think on their feet and quickly adapt their operations to the brave new world of off-premise dining. Concepts that had already established sophisticated technology, delivery, and take-out services were able to stay afloat and thrive as the pandemic continued initially. However, unprepared operators unfortunately lagged, impacting their longterm


Throughout 2020, lenders ultimately continued to work with franchisees in the FSR sector on a case-by-case basis, ensuring that clients had access to enough capital to stay strong during the hardest days of the pandemic. In addition, by carefully coordinating the distribution of PPP and EIDL, these bank funds played an essential role in the survival of many FSR operators, saving many from bankruptcy.

Fast Tracking of Vaccine Provides Increased Market Stability

The increased availability, and use of, vaccines has resulted a positive ripple effect across the economy. With improving trends and performance in sectors like the restaurant industry, lenders have begun to fully support most franchise restaurant concepts due to the increased vaccine availability and easing restrictions. Today, ample funds are available for Top Tier Brands (QSR/concepts with efficient drive-thru and delivery models), and many franchisees have come through the pandemic even stronger than before. Due to their resilience, they are considered

desirable assets for teams looking to diversify their portfolios.

Banks are cautiously and selectively entertaining financial opportunities for these concepts for brands (FSR concepts, independents, and casual dining and family concepts) that COVID and governmentmandated shutdowns severely impacted. Many lenders are waiting to see how these businesses recover, judging to see whether they have long-term staying power. Across the banking industry, risk appetite has tightened, and decision makers will focus on how operators have adjusted to meet customer needs and their flexibility to industry changes. In the end, concept improvement and sustained revenue performance will ultimately determine who receives funding.

Changes in Relationships: Franchising and Lending

Even within the lending industry itself, drastic changes have occurred, impacting how daily business will be conducted moving forward. Like many franchise concepts, consolidation in the banking industry occurred at the start of the pandemic. As a result, many institutions refocused their lending power to support concepts that would thrive and outrun the pandemic slump. This uptick in financial institution consolidation created opportunities for new lenders to join the franchising industry with opportunities to acquire assets.

For these newly consolidated groups, their philosophy will also impact the relationship with franchise businesses. Conservative lending institutions remain cautious in providing capital to existing and new franchisees, especially those invested in lower-tier franchise restaurant concepts. They will conserve their resources to support their existing customers and nationwide chains. Organizations willing to take on riskier ventures may have more to gain and increase their portfolio size as we emerge. Institutions that fully supported their customers and treated them with care, dignity, and respect despite the challenging conditions will positively benefit by gaining market share. Institutions which lacked in support for their clients by restricting funds or faulting customers impacted by state shutdowns will lag in recovering. In the hopeful days ahead, if there is a need for capital, franchisees will once again be able to rely on the lending community for support.

Advice for Franchisees During Recovery

As we face the road ahead, there are many decisions yet to be made by franchisees. For franchisees whose concepts have stayed resilient and robust, lending institutions will be eager to support their business needs and provide ample access to financing. First, however, operators should do their homework to find the right lending partner who understands their select industry fully and can craft a plan that aligns with their business needs.

Franchisees whose concepts have faced challenges should consider delaying refinancing for the time being to maximize the benefits of recapitalizing fully. During this transition period, developing a plan and seeking the proper advice and guidance from industry experts will be invaluable. Once the market returns to its historical standard and business performance strengthens, this will be a sign to move ahead and execute the approved financial plan.

Pete DiFilippo, a partner with C Squared Advisors, contributes 25-plus years of expertise in acquisition finance, commercial and specialty lending, business development and client management to the team. A hallmark of his work has been successfully guiding portfolio growth and lending support to notable franchisees and franchisors such as Dunkin’, Wendy’s, Popeyes and

Burger King.

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