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National Franchise Sales

Volume 2000-2

Franchise Connection

Alan Gallup

A Newsletter for Franchisees, Prospective Franchisees, and Small Chain Owners

In this issue

Is your Lender Competitive? Proverbs for the Millennium Groom Your Inventory Franchisee Profile You need to know what you need to know 1 1

Is your Lender Competitive?

Rate your lenders on the Lender Evaluation Scale When assessing the competitiveness of a possible business loan, we often find that 2 the borrower looks at only the interest, am2 ortization and points. While these issues are very important, there are many other 5 elements involved in assessing the competitiveness of a particular loan. Listed below, first in graph form, are nineteen elements that a borrower should assess relative to each loan (and lender) that is being considered. While every borrower may place a different value on each factor, all elements have some weight, positive or negative towards the borrower's individual requirements. How to use the Lender Evaluation Scale: First, familiarize yourself with the lender's loan policies and the specifics of the loan you are considering. Then read the Lender Evaluation Scale (see page 2) and consider which elements are important to you. Look over the loan elements and determine their relative importance to you, the borrower. Identify those elements deemed most important. Then assess various point values to each loan element, placing zero points on lending conditions more favorable to the lender, and higher points on lending conditions more favorable to the borrower. Place higher maximum points on those elements deemed most important to the borrower, thus giving them more "weight". Add up the scores for each loan and lender you are considering. This will provide you with an objective method of evaluating the competitiveness of any loans you are considering. If some lenders are close, you should be able to show them your assessment and negotiate. You may find that some things that aren't that important to you can be "given up" for something else that is important to you. The lenders may not necessarily have the same "weight" on each element. This way you can create the best loan for you, and a win-win for the lender.

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Special points of Interest · · On the Web Pg. 1

Lender Evaluation Scale Pg. 2

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Did you know? Pg. 6

On the Web

Wienerschnitzel: www.wienerschnitzel.com Applebee's www.applebees.com Wendy's www.wendys.com/index0. html Denny's Franchisee Association www.dennys.org International Franchise Association www.franchise.org Restaurants and Institutions Top 400 Restaurant Concepts: http://64.204.175.200/rimag/ riarchives/9823.htm

Proverbs for the Millennium

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Home is where you hang your @ The e-mail of the species is more deadly than the mail. A journey of a thousand sites begins with a single click. Speak softly and carry a cellular phone. C:\ is the root of all directories. Too many clicks spoil the browse. The geek shall inherit the earth. Don't byte off more than you can view. What boots up must come down. Give a man a fish and you feed him for a day; Teach him to use the Net and he won't bother you for two weeks.

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Lender Evaluation Scale

Low Competitiveness

Higher than competition Three 1.5 to 1, or more Seller's tax returns 70% or less on their valuation Lender's home state 2-5 year lockout and Rule of 78 Personal guarantee Lots, notarized, "blue ink signatures", etc. You never see him again. They play "Who's got the acorn?" Variable Home, other real estate, other businesses In the full loan amount naming the lender Requires an attorney to understand Required Yes Audited Financials with default provision 2% -3% of loan balance in first few years Five Seven Ten 1.3 to 1 Buyer's average on existing units Thousands in loan points, attorney's review fees, escrow, recording, etc.

Element

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 Interest Rate Length of Amortization (years) Loan Fees Cash flow Coverage Ratio Basis for Cash flow Coverage Ratio Loan to Value State of Jurisdiction Prepayment Penalties Recourse Amount of Paperwork BDO Accountability Loan Process Continuity Type of Interest Additional Security Required Life insurance requirement Loan Documents Attorney's Opinion Statement Loan Pool Annual Reporting

High Competitiveness

Lower than competition Twelve Fifteen None 1.2 to 1 Brand Normalization 100% of project cost Where you do business None Limited to the secured assets Simple and not redundant Calls you with updates! A clear and concise written process Fixed Limited to the business being financed None Clear and concise Not required No Operating Statements Continued on Page 4

Groom Your Inventory

By: Alan Gallup

In the Movie, "Pretty Woman", Richard Gere plays the part of a corporate raider who becomes enormously wealthy by buying companies, breaking them apart, and selling the parts for more than the whole. This idea is not foreign to the real world of franchising. While most franchisees do not buy franchise groups with the intention of breaking up their inventory of stores and selling them, many multiunit operators have found that certain units that consistently perform below expectation or operate at a loss, are more valuable if sold. When one examines a group of franchises, there is always one unit that is "the worst performing". It may be because of a series of poor management, or that the location is remote and not well supervised. No matter what the reason, valuable resources are tied up in these units, including management and capital. Like Richard Gere's character in "Pretty Woman", a good franchise owner sees these units as opportunities, not as problems. They know that multiunit under-performing franchises may be sold to owner-operators, who can more efficiently operate low volume or remote locations. The albatross around a multi unit operator's neck can be someone else's opportunity. In an October 17, 2000 article of Restaurant Finance Monitor, Ellen Welsher of Standard & Poors said, "..., often times replacing the operator can turn around the store's performance and generate a good recovery." At a time when loan defaults by large multi unit operators are on the rise, it seems that no time has been better to get rid of under-performing units and "Groom Your Inventory"

fi * nan' * cial in * de * pen' * dence ; noun: The state of deriving enough income from personal resources so as not to be reliant on a job or other source for survival.

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Franchisee Profile: Javid Mansouri

Javid Mansouri has been a Denny's franchisee for 35 years and it doesn't look like he's going anywhere any time soon. Mansouri arrived in the United States in 1957 at the age of 20 with $700 in his pocket and no sense of budgeting. Since his arrival, Mansouri has worked hard to establish himself as a successful multi-unit franchisee, now worth well over $700. He has become a force within the Denny's establishment as well as the restaurant community as a whole and plans to continue his climb to the top. Mansouri left his homeland of Iran simply because he wanted to be someplace else. He wanted a better education for himself, and so enrolled at the California State University of Fullerton with the hopes of becoming a Psychotherapist. Javid's $700 ran out quickly during his first few months in the States and to gain income he secured a job at the college cafeteria. In time he moved from the college cafeteria to a restaurant that, at the time, was known as Danny's Donuts. As Mansouri relates, his first job was as a bus boy like so many other immigrants who first arrive to America with nowhere else to begin but at the bottom. Mansouri went on to explain that he came from a "well-to-do" family in Iran and there he was occupied with things such as poetry and literature. When he arrived in the States, Mansouri had no skills to speak of, not even able to hammer a nail into a wall, he explains. While Mansouri worked his way up from bus boy at Danny's Donuts, he continued studying psychotherapy. Unfortunately, the field held no interest for him once he was introduced to the details of the position. Mansouri found the work boring and depressing which led him to a decision that would determine his life's path. Upon discovering his own disinterest in psychotherapy, Mansouri decided to stay at Danny's Donuts, which by 1959 had become Denny's Restaurants. In no time, Mansouri had worked his way up from bus boy to Manager and in 1965 he took the plunge into becoming a Denny's franchisee. He has remained ever since. According to Mansouri, a few years after becoming a franchisee, Denny's informed him that they would no longer franchise. This was a disappointment to Javid but did not put a pause on his business endeavors. Mansouri dabbled in a few other restaurant concepts but says he always remained loyal to Denny's, believing it was a concept that would stick around for a long time. When Denny's began franchising again, Mansouri was the first one to acquire a franchise. Since then, Mansouri has purchased, sold, and even built several

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By Claudia Rivas

Interesting Facts about Javid Mansouri:

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Favorite Denny's menu item is the Caesar Salad. Has recently acquired the Denny's in Los Alamitos, CA, and in a joint venture with his son Christopher, acquired the Denny's in Lake Forest, CA. Men he admires are: Harold Butler, founder of Denny's; Jim Lyons, Denny's chief franchise and development officer; and Michael Arrowsmith, Denny's franchise finance controller.

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Is your Lender Competitive?

12. forecasts the timing and regularly reports on the loan application status. Loan Process Continuity: Some lenders will provide you with a written "Loan Process" with contacts and estimated timing. Others cannot provide you with such as they do not have clear guidelines. Type of Interest: If interest rates are sure to go up, fixed rates are best. If interest rates are sure to go down, variable rates are best. If the future of interest rates are unknown, fixed interest would be the most conservative, and variable would be a more aggressive approach. Additional Security Required: Obviously none is best. But in addition to common additional security such as real estate, personal residence, and other business assets, be careful of clauses that give the lender a right to future assets you acquire. Life Insurance Requirement: This can be an added cost to a loan if required by a lender. It can be particularly troublesome if the borrower is not in good health and can add thousands of dollars a year to the loan cost. OR if not recognized early in the loan application process, it can be a deal killer for an uninsurable borrower. Loan documents: Although it is always best to have an attorney review loan documents, they should be written so that an average borrower can understand them. The more complex they are made, the more costly to review, and the more likely that there are unfavorable clauses. Also, make sure the lender customarily delivers them 10 to 15 days prior to loan closing so you have time to review. Attorney's Opinion Statement: Like loan documents, it is always best to have an attorney review the transaction. However, you need to make plans for this, if it is required so as to not spend extra for a "rush job". Loan Pool: These often look attractive up front as they may have lower costs going in. Make sure you understand if your loan is part of a loan pool. If it is, you may be liable for a portion of the principal of any loan defaults in the pool. Annual Reporting: All lenders require some type of annual reporting in order to monitor the loan. This might include everything from audited financial statements, to compiled statements, to CPA prepared statements to tax returns, to simply providing a year end operating statement for the subject business. Providing the information, which facilities developing a relationship with the lender, is a good idea. But make sure that the reporting requirements are not a burden, and that a bad year does not trigger a loan default if the performance falls below the lender's parameters for cash flow coverage ratios.

1. Interest Rate: Often regarded as the most important element. Shop and compare, but remember, if you are not going to require a long amortization, or if you plan on paying off the loan in a few years, this diminishes in importance. Current rates range from high eights to over 11 percent. 100% loans with mezzanine financing or lender equity position may be effectively higher. Equipment leasing generally starts over ten percent and can go over 20 percent will all factors counted. 2. Amortization: Can be as short as three to five years, or have balloons due before full amortization. Enterprise loans may be as long as ten to twelve years. Real Estate may be as long as 25 to 30 years. 3. Loan Fees: Some lenders can charge loan fees equivalent to more than 2 points. Loan fees can be very expensive if a loan is not amortized over a long period. Be sure to ask about other fees. 4. Cash Flow Coverage Ratio: Most lenders look for 1.2 to 1, or 1.3 to 1. But, some will require as much as 1.5 to one. 5. Basis for Cash Flow Coverage Ratio: The definition may be more important than the statement. Be sure to ask if the ratio is a fixed cost coverage ratio thus requiring the cash flow coverage on both the debt and the rent, vs. just the debt expense. Also check to see how the owner income requirements or ROI are factored. 6. Loan to Value: This is sometimes used rather than cash flow to determine lending limits. It is subject to the "valuation" prepared by the lender and rarely utilizes a true market value. Thus, loan amounts are often much less than the borrower desires. 7. State of Jurisdiction: Optimally, this should be the state where the business is located, not some remote location where the lender's headquarters is located. The cost of litigation in another state and the logistics of it dealing with the different laws could be extremely expensive for the borrower. 8. Prepayment Penalties: This can be deadly. Securitized lenders, to assure bondholders a certain return, often utilize it. In practice, it impairs a borrower's ability to sell the business, often forcing a multiunit operator to retain under-performing assets. 9. Recourse: The other side of the coin with securitized lenders is their willingness to place "non recourse" financing. Portfolio lenders are likely to require personal guarantees from all major principals. 10. Amount of Paperwork: A loan packager or broker can be of tremendous help here. Otherwise, simply put, applications and related materials can vary from ½ inch thick to over four inches of documents required. 11. BDO Accountability: Some BDOs have done their job when they receive the application from you. On the other end of the spectrum, the BDO accurately

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Franchisee Profile : Javid Mansouri

job. But Javid's expertise in the restaurant business, as he sees it, is by having worked it. Mansouri believes that to become a good restaurant owner operator you must know how to bus tables, how to wash dishes, and how to cook. Most importantly, how to cook. "Become a good cook," Mansouri says, "Cook any chance you get. While you're learning, become innovative. Be an artist." Mansouri finds pleasure in feeding people, in cooking for them and believes, "If you don't like to cook, don't find pleasure in cooking, you have no right to work in a restaurant or own and operate one." Javid believes that his greatest attribute is his ability to relate to any and every worker employed at his restaurants, based on the simple fact that he has played each role and therefore no one is below him. This became evident as I watched him greet his servers, his staff, and customers alike. Everyone was equally important. "To be a good operator or a good franchisee," Mansouri states, "you have to learn everything, learn it good yourself so that you have the confidence to work with other people." That confidence lives in Javid Mansouri and exudes from his very presence. When asked what advice he had for those who wished to become franchisees, his response was, "Do it." Advice I would expect any wise man to take.

Denny's, backing up his statements, "I like to run Denny's. I like to build Denny's." So what has inspired and driven this successful, powerful man who began as a young bus boy with a life savings that couldn't even last him a few months? Javid attributes his success to several factors, most of which are personal convictions. Mansouri married at a young age and when he acquired his first franchise he had not only his wife to support but two young children as well. Over time those two children became five and Javid felt the responsibility of providing for those people which depended on him for survival. The responsibility of supporting a family drove Javid to succeed and pushed him from a position where he had no money, to becoming a money maker. When asked what his biggest challenge was, he refers to a comment once made by Walt Disney when faced with the same question. Disney's response, which Javid takes much as his own was, "I've had the same challenge since I was a young boy. Money. Never enough money." Javid's success also came from inspiring men such as the founder of Denny's, Harold Butler, who in Javid's eyes had a capacity and talent to allocate duties to others, hiring the right talented people for the right

You Need To Know What You Need To Know

By Bernie Goldberg

"How is it going down there?" barked the big walrus from his perch on the highest rock near the shore. He waited for the good word. Down below, the smaller walruses conferred hastily among themselves. Things weren't going well at all, but none wanted to tell the Old Man. He was the biggest and wisest walrus in the herd, knew his business, hated to hear bad news. Because of his terrible temper every walrus was terrified of his ferocious bark. "What will we tell him?" whispered Basil, the second-ranking walrus. He well remembered how the Old Man had ranted and raved the last time the herd caught less than its quota of herring. He had no desire to go through that experience again. Nevertheless, the walruses had noticed for several weeks that the bay's water level had been falling, and it had become necessary to travel much further to catch the dwindling supply of herring. Finally, Basil spoke up: "Things are going pretty well, Chief." The thought of the receding waterline made his heart feel heavy, but he went on: "As a matter of fact, the beach seems to be getting larger." The Old Man grunted. "Fine, fine." he said. "That will give us a bit more elbow room." He closed his eyes and continued basking in the sun. Then came more trouble. A new herd of walruses had moved in. With a dwindling supply of herring, this invasion was serious. No one wanted to tell the Old Man, though only he could take the steps necessary to meet this new competition. Reluctantly, Basil approached the big walrus, who was still sunning himself on the large rock. After some small talk he said, "Oh, by the way Chief, a new herd of walruses seems to have moved into our territory." The Old Man's eyes snapped open, and he filled his great lungs in preparation for a mighty bellow. But Basil added quickly, "Of course, we don't anticipate any trouble. They don't look like herring-eaters to me-more likely interested in minnows. And we don't bother with them." The Old Man let out the air with a long sigh. "Good, good." he said. "No point in our getting excited over

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A FINE IS A TAX FOR DOING WRONG. A TAX IS A FINE FOR DOING WELL.

N AT I O N AL F R AN C H I S E S AL E S

1520 Brookhollow Dr., Suite 45 Santa Ana, CA 92705

Phone: (714) 434-9400 Outside of California: (888) 982-4446 Fax: (714) 434-9401

www.nationalfranchisesales.com

Specializing in the resale of franchise businesses and small chains.

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nothing." Things didn't get any better in the following weeks. One day, peering down from the large rock, the Old Man noticed that part of his herd was missing. Summoning Basil, he grunted peevishly. "What's going on Basil? Where is everybody?" Poor Basil didn't have the courage to tell the Old Man that the younger walruses were leaving to join the new herd. Clearing his throat nervously, he said, "Well Chief, we've been tightening things up a bit. You know, getting rid of some of the dead wood. After all, a herd is only as good as the walruses in it." "Run a tight ship, I always say." the Old Man grunted. "Glad to hear that everything is going well." Before long, everyone but Basil had left to join the new herd, and Basil realized that the time had come to tell the Old Man the facts. Terrified but determined, he flopped up to the large rock. "Chief," he said, "I have bad news. The rest of the herd has left you." The old walrus was so astonished that he couldn't even work up a good bellow. "Left me?" he cried. "All of them? But why? How could this happen?" Basil didn't have the heart to tell him, so he merely shrugged helplessly. "I can't understand it," the old walrus said, "Everything was going so well." MORAL: What you like to hear isn't always what you need to know. Bernie Goldberg is president of Direct Marketing Publishers.

Did you know...

....Customer complaints are not a recent phenomenon: on a tavern wall of Pompeii we read the following scribble by a bar customer who is unhappy with his wine: May you soon, swindling Innkeeper, Feel the anger divine, You who sell people water and yourself drink pure wine.

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