When asked to write a piece about the franchise finance business, I began to reflect on what has been a personal journey for more than 30 years.

Back in the early ’80s, I was a Denver-based lender primarily engaged in the oil and gas industry. I was heading to lunch with a colleague and discussing the current plight of our lending platform. We were discussing how the oil business was drying up in our market area. With our portfolio delinquency rate approaching a dismal 30%, it was time to think about entering a new market that possessed the growth characteristics of a sustainable business. We realized at that moment that we needed to find the next big thing.

As we passed a Burger King, my associate remarked, “These places don’t seem to go out of business.” It was a revelation. We pulled into the parking lot in hopes of talking with the restaurant’s owner. The franchisee was receptive to our inquiry regarding financing and told us that there were very few lending options available outside of his local bank. He explained that the only national lender was FFCA, but they were strictly focusing on sale/leaseback transactions. We continued to meet with various other restaurant owners and started to formulate a national lending platform that specifically catered to meeting the needs within the restaurant industry.

And so the evolution of franchise financing began. I’ve had the distinct and fortunate advantage of seeing this industry grow from its infancy into the robust market it is today. I have witnessed its significant growth over the past several decades, which has spawned a sea of change in this dynamic and flourishing space.

The Evolution Revolution

In addition to what many view as staple brands, such as the nation’s leading fast food chains, the market is shifting to include many more restaurant concept types, most of which are in need of financing. The world of franchise finance is expanding rapidly, based on changing demographics, a more fast-paced society, the presence, importance and reliance upon technology, an increase in the number of dollars spent dining out and the rising consumer demand for a broader range of foods available more quickly and easily.

Gone are the days of just Burger King and McDonald’s. During the past several years, various sub-segments within the restaurant space have emerged, all presenting lending opportunities. This can be evidenced by 2013 food service sales, which reached $659.3 billion and are projected to grow 3.6% in 2014 to $683.4 billion.

Where the Action Is

Most of the finance activity occurring in the franchise space can be attributed to the following trends:

• An Aging Franchisee Population: Franchisees are retiring or exiting the industry, thereby creating new lending opportunities. In some cases, they are selling their stores to other franchisees that also need loans to buy those locations. This presents opportunity for establishing new loans and relationships.
• New Store Development for Existing Concepts: The Los Angeles area just welcomed its first Dunkin Donuts. Established chains like Dunkin Donuts are seeking to expand outside their typical or regional growth markets, and this will continue to present opportunity across the board.
• Remodeled Unit Financing: Aging locations that are in need of face lifts also represent lending opportunities. Chains such as Chili’s, Burger King, Wendy’s, Applebee’s, McDonalds and Jack in the Box are excellent examples of the opportunities that can be found in the remodeling arena.
• The Rise of New Concepts: More and more newly created concepts are sprouting up across the nation with different concepts taking root in various pockets of the country. These new ideas show the strength of the food service business. Since the restaurant industry accounts for 66.8% of all food service sales in the nation, we can safely anticipate that there will be much new growth in concept types throughout the years ahead.
• Mergers & Acquisitions: Much of the latest buzz is centered on mergers and acquisitions. While acquisition activity in 2014 has been steady, it has slowed somewhat and is not as strong as other industries. However, several concepts — mostly in the casual space along with some QSR and family concepts — are creating their own fast-casual spin-off concepts or service models by branching out from their parent QSRs. And of course, new concepts and new menu items are also driving change in the restaurant space. All this development is propelling lending activity across the board.

While all lending includes some level of risk, the failure rates of established chains are minimal, and therefore, present solid lending opportunities for banks and lenders as they easily recognize the staying power of nationally recognized chains.

Dynamic Drivers

There are many factors driving some of the current market dynamics.

• Regional Landscape: Certain regions of the country boast diverse growth rates and demographics while emphasizing different concepts. Lending is impacted by region and geographic areas, and is based on local landscape trends. The chains popping up across the country span various types of operators and present different lending opportunities. This mix results in various options.
• Accessible & Plentiful Capital: According to recent data from the Federal Reserve Bank, banks have $2.6 trillion in excess reserves that must be used for lending. While they are already loaning to the construction industry where there is significant growth in multi-unit family housing, the franchise finance arena presents a whole new opportunity for many lenders.
• Hungry for Technology: Everyone is using technology, and its applicability to the restaurant industry is dramatically escalating. In 2013, an NRA Technology Innovations Consumer Survey showed that nearly two-thirds of consumers indicated they recently used restaurant-related technology. Whether they view a website or follow a restaurant on Twitter or Facebook, the volume and type of consumer technology utilization in the restaurant business is enormous and continues to increase.

According to the GE Capital 2014 Chain Restaurant Industry Review report, more and more restaurants are using technology to stay connected to their patrons and consumers. Digital marketing and social media will become the true differentiators in the fight for market share among restaurant chains of varying types. Nielsen found that U.S. consumers now own an average of four digital devices and spend 60 hours per week accessing content from those devices. Moreover, since smartphones are on the rise, an increasing number of the population is using these devices on-the-go to glean information relevant to restaurant choices.

In fact, 59% of all adults have visited a restaurant’s website via the Internet, 58% have viewed menus online and 55% have used the Internet to research new restaurants. It’s no longer just younger people — accessing restaurant-related information online is prevalent among the elderly population now, too.

Touch-screen ordering is also on the rise as restaurants experiment with a myriad of technologies aimed at enhancing and increasing business functions.

Although success across social media and deployment of technology has mixed reviews among brands, these trends will likely continue over the next few years as more than two-thirds of restaurant operators come to rely upon social media applications in 2014.

Today’s lifestyles will prompt additional restaurant sales through an increasing number of technological applications designed to find a restaurant nearby, make reservations, order takeout or delivery, view menus, share opinions or pay for meals.

Why Franchise Finance?

In July 2014, Signature Financial, the specialty finance subsidiary of Signature Bank, appointed me to lead its charge into franchise lending. Signature Financial’s franchise business is focused on providing financing to franchise operators across a variety of national and regional restaurant concepts and chains, such as those engaged in fast-casual and family-oriented restaurant businesses. Reported one of the fastest-growing bank-owned specialty finance companies in the country, Signature Financial caters to a variety of national business ‎channels, such as equipment finance, taxi medallion finance, vehicle funding and commercial marine lending. Franchise finance is its newest service line.

There couldn’t be a more exciting time to participate in this evolving space. Whether we’re lending to nationally established chains, regional and experienced franchisees that own multiple stores and have successfully operated within the same concept or in the same space, or supporting reputable owners on a quest to launch new concepts, there is considerable movement in the restaurant industry as demographics change and the resulting shift supports the food service business.

At Signature Financial, lending is based on solid relationships. Signature Financial’s parent company, Signature Bank, built its distinctive enterprise by creating teams of private client bankers that serve as a single point of contact for meeting all client needs. Signature Financial emulates and employs the same concept. When we work with and lend to an owner/operator, we have a history with that operator, which provides us a certain comfort level. We can gauge activities, not just financial performance. And more importantly, we have in-depth knowledge into our clients’ strategies as franchise owners, based on our long-standing client relationships. This is what sets Signature Financial apart in a crowded lending arena.

The franchise finance business lines are a complementary market for Signature Financial, and forecasted to become a strong growth market for our company.

An Appetite for More in 2015

Financing activity in 2014 has continued to thrive. From where we sit, the outlook for 2015 will be just as promising. Given the current market conditions in this specialty segment, a population spending more money eating outside the home, and technology emerging faster than we can type, this financing boon should not end anytime soon. It is an exciting time in finance history for all lenders engaged in the food service marketplace.

Note: Some statistics cited herein were part of the GE Capital 2014 Chain Restaurant Industry Review

John R. Black is a franchise financing expert with 33 years of industry-related experience. As national franchise finance manager for Signature Financial LLC, a wholly owned subsidiary of Signature Bank, Black handles loan origination, strategy and direction of Signature Financial’s franchise finance business. He can be reached at [email protected].