Article

Fast casual finance

Economic turmoil leaves operators scrambling for ways to raise startup money.

January 19, 2009

Tight credit markets and a weak economy have made financing a new restaurant a tough sell.

It's still possible to close a deal, though. Just be prepared to put up more of your own money.

"Before the lending crisis began, you had people able to secure loans on the order of 90 percent of their development needs," said Don Fox, chief operating officer for the 352-unit Firehouse Subs. "In this environment, people are working in the range of certainly no more than 70 percent and some have tightened up where they will loan no more than 40 or 50 percent of the project cost."

Startups aren't the only ones taking the hit. Because many fast casual chains grow by franchising, the credit crunch means operators are scaling back expansion plans. According to Fox, Firehouse fell short of its growth goal in 2008 and plans to open 50-60 in 2009, nearly half of the restaurants it could have opened in 2007.

"The good news, at least for Firehouse, is that even through 2008, when things had tightened up, we still had our second-best development year ever," he said. "We opened 57 new stores, which was a bit short of our plan. The reason we came up short is almost entirely due to where financing had tightened up in some areas and for some operators."

Finding alternatives

A typical restaurant can cost $250,000 or more to open. And because few operators have that kind of cash lying around, a new restaurant almost always involves some form of financing.

Although there's a perception in the market that financing for franchisees has been completely cut off, that's not necessarily the case, said Jim Grien, president of Boston-based TM Capital. Grien's company assisted Arby's franchisee RTM in structuring and negotiating its sale to Triarc in a transaction valued at $725 million.

"I think it is harder than it was six months ago, but I don't think the market has completely shut down," Grien said. "It is tougher and more expensive."

Franchisees are turning to community banks in many cases to obtain the financing they need, instead of working with national lenders, he said.

"I would say that the financing picture in the community bank world is challenged, but there are community banks that are viewing these times as an opportunity to gather market share," he said.

Two key opportunities are available in the current economic climate for an operator who is having difficulty arranging financing, Fox said.

"On the equipment front, one option is to look at leasing arrangements," he said. "A lot of those leasing companies are still pretty well capitalized."

In conjunction with that is negotiating more intensely with landlords and developers on the buildout, he said. The best case scenario is to persuade the developer to pay for 100 percent of the buildout of the store, leaving the franchisee to worry only about furniture, fixtures and the equipment package, plus their working capital.

"If they take the lease option on the equipment and a 100 percent buildout, they are getting in basically without a loan," he said. "Those opportunities are there now where two years ago that was impossible to negotiate."

Another option is the angel investor. If an operator isn't able to arrange financing through one of these methods, they may choose to take the friends and family approach. Bryce Rademan, who co-owns and operates the fast casual restaurant Spitz in Los Angeles, was able to secure financing from friends and family.The partners opened their second location in November.

Both restaurants feature Doner kebobs, a type of sandwich popular in Europe. Doner kebobs were first introduced in Germany by Turkish immigrants following World War II.

"The real success of the restaurant is based on the fact that I saw a niche that wasn't being filled," Rademan said. "It was not done here in the United States in the capacity I saw it in Europe. That was the basis of my business plan, so bringing on people wasn't all that tough."

It helped that Rademan had been working in the restaurant industry since high school, he said, in everything from fast food to fine dining.

Jason Scott, an entrepreneur preparing to open the first location of his fast-casual concept, The Taco Truck, in Hoboken, N.J., hasn't been as lucky.

While he had counted on angel investments from friends and family, he realized that wasn't going to meet his needs.

"We currently are speaking with a number of private equity firms and venture capitalists who specialize in our industry," he said. "Fewer deals are going to be done, but if you have a solid concept, plan and management team then you are going to find the money somewhere."

Some restaurant concepts are providing financing directly to franchisees who aren't able to secure financing elsewhere.

"We have our own lending company, which is an alternative for franchisees as well," Fox said. "We have a finite number of loans we can do, but it has helped us as a last recourse for people who are very good operators in our system who have just run into a brick wall."

And when might the financing landscape improve?

"Unfortunately the true answer is somewhere between tomorrow and never," Grien said.