Re-imaging Re-visited
Re-imaging has long been an intimidating word for franchisees of top tier franchise companies. The cost to re-image a single restaurant ranges from $50,000 to $800,000 or more in the case of a scrape and rebuild requirement. The franchisor would like the franchisees to believe that the “investment” in reimaging will result in a positive return on investment (ROI) going forward. Recently, franchisees and lenders have been questioning that “truism.” Below are several potential scenarios for franchisees faced with imminent re-imaging issues and possibly some solutions. Scenario 1 – Strong franchisee, ample cash flow at the unit level Re-imaging expense is not a major issue because the primary lender is usually happy to finance the cost in anticipation of improved sales and cash flows after the re-image is completed.The only gauge the lender will normally examine is the fixed cost coverage ratio (FCCR), which uses the restaurant’s projected EBITDA, after re-imaging and divides it by its anticipated fixed costs (including lease expense and note payment). As long as the FCCR is above the minimum acceptable level of the primary lender, financing should be approved Scenario 2 – Franchisee in good standing, minimal cash flow at the unit level Franchisee has to make a determination whether the continued good standing with the franchisor is more important than possibly going into a negative cash flow after debt position at the unit level (if the re-imaging is not completed by the franchisor mandated deadline, the franchisee is technically in default on the franchise agreement). The risk is that the additional financing costs may not be offset by improved cash flow as a result of the re-imaging. If the decision is made to go forward with the re-imaging, the lender may require additional collateral or a personal guarantee on the new loan. This could potentially lead to further problems if the cash flows go substantially negative. The positive side is that the re-imaging creates adequate cash flow to offset the additional note payment. Scenario 3 – Franchisee hanging on with franchisor, negative cash flow at the unit level Franchisee needs to assess the potential improvement in cash flow from the re-imaging to determine whether there is a reasonable probability to emerge with a positive cash flowing restaurant after debt payment. If not, the cost of selling or closing the unit should be explored. If it is decided to go forward with the re-imaging, financing can most easily be obtained from the primary lender because they will likely want to protect it investment. A loan from a new lender would be contingent upon the franchisee’s ability to present a positive pro-forma analysis of the unit after the re-imaging is completed. A track record of sales and cash flow improvements after re-imaging by other franchisees will present the best argument to the lender. These results should, hopefully, be available from the franchisor. If the decision is made not to go forward with the re-imaging, the risk is that the franchisee goes into default with the franchisor. At that point, the franchisee is at the franchisor’s mercy in terms of monetary penalties, being disenfranchised, and the ability to sell the unit. Scenario 4 – Franchisee is examining the possible sale of unit(s) requiring re-imaging Franchised units are sold in today’s market based mainly on a multiple of rolling 12-month EBITDA. At the time of sale, if the re-imaging is currently due and has not been completed, the buyer and seller need to come to agreement on who is responsible for those costs. The argument for the current franchisee (seller) is that the reimaging will “pay for...
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The SBA and SBA Loans The U.S. Small Business Administration (SBA) was created in 1953 as an independent agency of the federal government. Their mission is to: “…assist and protect the interests of small business concerns, to preserve free competitive enterprise and to maintain and strengthen the overall economy of our nation”sba.gov. The SBA currently offers a wide variety of services to small businesses in addition to their loan guarantee and disaster relief programs including help on almost any aspect of starting or running your small business. Some of the programs include: SCORE Veteran’s Business Outreach Centers Women’s Business Centers U.S. Export Assistance Center Check with your local SBA office to find out what is offered in your area. ...
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