Part II: Understanding the Lender s Perspective Evaluation of the franchise Variables in decision making How to enhance the funding package

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2 Financial Summit Part II: Understanding the Lender s Perspective Evaluation of the franchise Variables in decision making How to enhance the funding package Moderator: Brad Fishman, CFE, CEO, Fishman Public Relations

3 Presenters Robert Rodi, President, Mt. Pleasant Capital Corp. Matthew Christie, Regional Account Manager, CIT Small Business Lending

4 Bob Rodi Mount Pleasant Capital Corp

5 Franchise Lending The New Challenge

6 The Past Plenty of Capital to Go Around Lots of Qualified Applicants New Space for Expansion Easy Credit-Easy Growth Volume Driven Credit Philosophy Very Few Obstacles to Growth

7 The Present The Window on Capital is Shut Tight Shrinking Pool of Qualified Applicants Credit Philosophy is Operationally Focused Obstacles to Growth Everywhere Less Construction May Cause a Shortage of Good Locations in the Future

8 Rest In Peace Wall Street Here Lies Securitization

9 No More 800lb Gorilla The Future

10 The Future Lenders Will Be Extremely Cautious. Risk Profile of the Industry Has Changed. The Death of the Secondary Market (Securitization) Means that Lenders Will Have to Focus on Risk as Opposed to Origination. Franchisors Will Need to Modify Their Qualification Process. Franchisors Should Consider Creative Finance and Risk Sharing Programs to Achieve Goals.

11 Where s the SBA? Negatives SBA Lending is Down 57% from last year Secondary Market for the Unguaranteed Portion of SBA Loans has Disappeared Pre-funding is an Issue Exposure Will be Limited to 70% Higher Collateral Requirements Related Experience is Required Positives Rate and Term Rumors Government May Increase Guarantee Amount

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13 Matthew Christie CIT Small Business Lending

14 Current Conditions with SBA....1 Business Ownership Options Available Factors to Consider Pros and Cons of each Types of Financing Features How to Prepare Where to Go For Help Loan Application Loan Flowchart Loan Approval Timing Who is CIT. 18

15 Current Market Conditions with SBA The secondary market that packages the SBA loans and sells them has frozen. Costs make SBA loans have too little profit to interest lenders. Demand by entrepreneurs has substantially declined.

16 Start up a new location Purchase an existing operation Buy into an existing operation

17 Factors to consider Start-up Importance of a Business Plan Accurately project the total project costs Equipment Leasehold Improvements Deposits Working Capital Franchise Fees Misc. municipal requirements Choosing a location Participate with Insurance Demographics Local Competition Break-Even analysis Projection 2 years

18 Pros and Cons Start-up Franchise Pros Can design location your way within the franchise framework No surprises left by sellers Disgruntled employees, customers, vendors No unpaid creditors Cons Must build a customer base from scratch start-up risk Lender s Opinion Follow the Franchisors game plan, use all the resources they provide and always consult your legal and accounting experts

19 Pros and Cons Existing Franchise Pros Cons The ramp up time is minimal Immediate Cash Flow Trained Employees Loyal customer base Lender s Opinion Acquisitions are no less a risk then start ups; do your homework and consult your legal and accounting experts Are the numbers what they appear to be? Why are they selling? Look for skeletons Disgruntled employees, customers, vendors, unpaid vendors

20 Types of Financing Available Banks - Conventional Leasing Companies Home Equity & Invest. Portfolio Loans Small Business Administration (SBA)

21 Types of Financing Available Banks - Conventional Most don t lend to start-ups If they do expect: 100% real estate collateral coverage 65%-80% financing of the hard assets only Typically will require deposit and merchant services as well as personal accounts to be maintained at the bank Most will not finance goodwill (business value) Leasing companies Terms vary widely (3 7 years on long term hard assets) Term typically matches useful life of the asset Matches a business loan for a business purpose (equipment purchase) Many have steep pre-payment penalties Financing is limited to the equipment being purchased

22 Types of Financing Available Home Equity & Investment Portfolio Loans Very simple process No flexibility on repayment terms if business hits a rough patch Business and personal financing should be separated Issues of tax deductibility may be an issue Loss of ability to sell the underlying assets SBA Lenders Many are active in Franchise Financing & understand the nuances Up to 75% - 85% total project financing available Longer loan terms than conventional loans Personal Guarantees required Outside collateral may be taken when available Matches a business loan for a business purpose

23 Comparison: Conventional Loan vs. SBA Loan Typical Conventional Loan Equipment Package $100,000 Working Capital $ 50,000 Building Improvements $100,000 Franchise Fee $ 25,000 Furniture & Fixtures $ 50,000 Misc. Pre-opening $ 25,000 Fees: $ 5,000 Total Project Costs: $355,000 Borrower Injection*: ($170,000) Loan Amount $180,000 **Down payment based on asset value with advances at 50%-80% Typical SBA Loan Structure Equipment Package $100,000 Working Capital $ 50,000 Building Improvements $100,000 Franchise Fee $ 25,000 Furniture & Fixtures $ 50,000 Misc. Pre-opening $ 25,000 All Fees: $ 10,000 Total Project Costs: $360,000 Borrower Injection*: ($ 54,000) Loan Amount $306,000 **15% Down Payment

24 Types of financing available : SBA Features Longer terms than conventional financing Financing based on the Total Project not just the assets No balloons, calls, renewals No pre-payment penalties (on loan less than 15 years) One loan on multiple uses of proceeds with a blended term Loan Rates are based on Prime or LIBOR + Spread (adjustable) Loans are fully amortized Up to 25 years for real estate financing 10 to 15 years for machinery and equipment Up to 7 years for working capital

25 Types of financing available - SBA Qualifying criteria Owner equity or initial investment as little as 15% of Project Cost Owner actively involved in daily operations Satisfactory credit history on all principals Projected cash flow must satisfactorily cover the proposed debt, inclusive of a salary for reasonable salary for borrower Leased locations lease term must equal loan term Additional Collateral may be taken Loans up to $2.0 million (may be greater with a CRE component)

26 Types of financing available : SBA Rates, Fees and Costs Loan Rates are based on Prime or LIBOR + a Spread (adjustable) What are the Fees Associated with an SBA Loan? Packaging Fee typically $1,000 charged by lender SBA Guarantee Fee % % of loan amount charged by and paid to the SBA by the borrower. This fee is typically included in loan. What are the costs Associated with an SBA Loan? Typically the same costs that would be associated with any conventional loan Construction Loan Fees average 2% of actual build out Closing Costs (average $3,500; higher if CRE is involved) Include: UCC Searches, Attorney s Fees, Title Work, Name Searches, Flood Searches.

27 How To Prepare Get your financial house in order Gather your last 3 years of Personal Tax returns Know where your cash injection is coming from and have it available at the time of application Update your resume - focus on your business experience and how it will relate to running this franchise concept Create a Personal Financial Statement Assets and liabilities Obtain a recent copy of your credit report Equifax, Experience, Transition Prepare written explanation of any derogatory accounts Do your homework on your project Know your project inside and out Don t let lender ask you a question you can t answer

28 Where to go for help Hire an Accountant & Attorney Assist with Business Plan Advise on financing sources Set up company properly Negotiate Leases Visit Small Business Administration Website (sba.gov) Service Core of Retired Executives (SCORE) Free services Assist with Business Plan On-line tools to assist

29 Loan Application and Submission Package Loan Application Package Lenders Application Package (6-10 easy to complete forms) Three Year Personal Tax Returns from each buyer (20% +) Detailed Business Plan with Financial Projections (2-3 years) Copy of lease agreement for the new business location Copy of the executed Franchise Agreement Evidence of Injection (borrower cash into the deal) Copies of the proposed equipment list Contractor Qualifications Copies of the proposed scope of the leasehold improvements Copies of contractor bids with time-lines Contractor qualification statement

30 LOAN FLOWCHART Deal Enters Operations Center (Sales Support) Is Package Complete? (Sales Assistant) No YES Review of Credit & Assignment to Credit Underwriter (Credit Manager) 48 hr Borrower Contact Decision within 10 Business Days (Credit Underwriter) Is Deal Approved? Follow-Up (pkg returned to RAM?) (Sales Assistant) YES No Decline Letter Final Customer Statement (Credit Underwriter) Refund Deposit days (if applicable) (Operations Assistant) Loan is Packaged for SBA Submission (Operations Assistant) Invoices processed for 3rd Party Reports Create Document Checklist Contact Borrower (Closer) Collect Due Diligence Items (Closer) Order 3rd Party Reports after receipt of $$ (Credit Underwriter) Reports reviewed and amendments processed (as needed) Loan may be withdrawn during this process: Underwriter or Closer prepares Final Customer Statement, withdraws SBA number (if applicable) and Operations Assistant refunds deposit or bills customer Create Documents (Legal) Coordinate Closing (Closer)

31 Loan Approval - Timing In Credit Loan approval within 10 Business Days Underwriter Calls within 48 hours of receipt of loan application package Commitment Letters sent out within 2-4 days of approval In Closing Times frames vary: days Closing checklist items to be gathered Contractors qualifications completed

32 Who is CIT Started in Employees Worldwide Operations in 50 Countries NYSE Symbol CIT