Capital Options - Real Estate Alternatives

Established franchisees have seen financing and capitalization alternatives blossom during the past few years. Traditional capital using straight senior financing and embedded equity or external equity capital has evolved to become only one of many alternatives for companies looking to grow.

But it's important for franchisees to have a firm understanding of their business's goals and growth strategies, including generic growth plans, remodeling projects (required and elective), and opportunities to expand through acquisitions, says Carty Davis, a boutique investment bank partner who has completed hundreds of transactions in the multi-unit franchise and restaurant space.

He recently wrote about the importance of understanding the differences between the various types of lenders and capital providers and how to pinpoint the ones that might work best. Here's what he says about one type of capital provider:

• Real estate alternatives. The sale/leaseback market is another financing alternative for franchisees in need of short-term liquidity. In the long run, most franchisees would be better off owning their real estate to hedge against changing business conditions, but the sale/leaseback market can be an effective tool if needed. Companies should, however, be cautious about selling all their real estate on the sale/leaseback market. It is generally best to look at this as part of a capitalization strategy, not a sole solution. Over time, burdening the operating business with escalated rents can put pressure on covenants like LAL with regulated senior lenders, especially with a brand downturn. Also, lenders will also provide better credit terms when real estate is included in the collateral package.