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8 Com. Lending Rev. 10 (1992-1993)
Lending to Franchises

handle is hein.journals/cmlrv8 and id is 104 raw text is: When a bank makes a loan to a franchisee, it relies for repayment on the strength and success of the franchise. In this article, Dev Strischek tells how to evaluate a franchisor and its financial statements and suggests ways to reduce credit risk in loans to fran- chisees. Lending to Franchises DEV STRISCHEK FOR BANKERS MAKING LOANS to local businesses, the fran- chise factor cuts across industry lines. While the repayment ability of the local Chevy dealer and McDonald's restaurant depends on different business elements, each also relies on the caliber of its franchisor. A nationally recognized sign is reassuring to a lender, while a poorly run franchise may drag down the franchisee. This article will provide some practical tips on evaluating a franchise. Since the lender bets on the franchise name to improve the chances of the borrowers success, the lender should analyze the franchisor, too. Franchisees Can Avoid Some Problems of New Businesses A commercial franchise is a license from an owner of a trademark or trade name per- mitting another to sell a product or service under the name or mark. A franchisee agrees to pay a fee to the franchisor in exchange for permission to operate a business or sell a product or service according to the methods and procedures prescribed by the franchisor under the trade name or trademark of the franchisor. The franchisor usu- ally grants the franchisee an exclusive territory where the franchisee is the only dis- tributor of the particular goods or services. The franchisor is usually obligated by contract to assist the franchisee through advertising, promotion, research, develop- ment, quality purchasing, training, education, and other specialized management resources. Sales by franchise operations amounted to $758 billion for 1991, a 6.1% gain over the previous year, according to the International Franchise Association. Some 35% of all retail sales in the United States are generated by franchised businesses.1 Dev Strischek is executive vice president at Barnett Bank of Palm Beach County, West Palm Beach, Florida.

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