Outside Insights | September 2013 | By David Farwell

The Secret Sauce of Franchise Growth

Keys to a proactive, quick service–specific financial plan.

Managing daily cash flow and long-term finances is key to successful growth.
Managing both daily cash flow and long-term finances is a core element of successful growth plans. thinkstockphotos.com
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In the quick-service industry, the path to success is straightforward: offering good-tasting, quality food prepared quickly in a clean and courteous environment. Companies that focus on the fundamentals of meeting these needs—hiring the right people, emphasizing teamwork, and meeting the evolving expectations of their customers—are more likely to be successful.

Yet the challenge many quick-service and fast-casual restaurant owners often don’t fully understand is that a strong financial plan is just as essential to a successful business as the quality of their food and service. Successful operators know that a proactive approach to managing their daily cash flow and their long-term finances is a core element of their growth plan, as well as the only way to avoid the pitfalls of a haphazard or just-in-time approach.

This is an incredibly competitive business and, in most cases, the winner is the one with a fully developed growth plan, which by definition includes a sustainable plan for acquiring the capital needed to fuel that growth. Businesses that have a sound and detailed financial plan grow more quickly and are better able to deal with potential issues or setbacks without losing forward momentum.

Successful operators know that a proactive approach to managing their daily cash flow and their long-term finances is a core element of their growth plan.

The first step to determining if your capital plan is sufficient to drive your growth plan is finding a banker or other financial advisor who is intimately familiar with the quick-service space. As every restaurant owner knows, trends and activity in this space are cyclical. It is imperative that your primary financial advisor also understands this, and will stand by you and not be intimidated by every bump in the road. Before you get comfortable with an advisor, ask them to tell you how they, as an institution, reacted to the last major downturn or setback in your industry. You’re an expert, so you’ll know right away if they are, too. If they aren’t someone who spends every day working with companies like yours, they may not be right for you.

More and more, restaurant owners are consolidating their banking relationships with a bank that has a dedicated restaurant lending team. This gives the owner better counsel and ultimately more control by way of more financing solutions. Consider the following:

  • Credit markets today are very active, and many companies are able to secure financing at lower interest rates with more favorable terms and conditions. This is supported by the large number of refinancings taking place. If you haven’t reviewed your existing debt structure with your lender, you may be missing a significant savings opportunity. If your banker isn’t encouraging you to have this conversation, you may be want to consider talking to an established restaurant lender with a more proactive approach to helping your business grow.

  • With lower interest rates locked in for a longer period of time, an important component of a company’s costs can be kept predictably low, providing the opportunity for longer-term financial planning. Given the expense pressure of health-care costs, volatile commodity prices, and rising wages, the opportunity to lock in your interest costs at today’s low rates represents a significant opportunity. This approach also allows owners to consolidate debt and tap into more of their embedded equity, giving them the opportunity to take advantage of a potential acquisition or an early remodel, for which franchisors sometimes give reduced royalties and/or reduced franchise fees.

On the cash flow side, the franchise space is one where the benefits are obvious: Cash flow is the lifeblood of this industry, and the efficient management of cash receipts, payables, payroll, and other transactions is a strategic priority for the growth-oriented franchisee. Here are some of the cash-flow strategies that financially savvy operators are using today to get that competitive edge:

  • Understand your operating cycle: Regardless of size, every business must deposit, monitor, and manage cash receipts; make payments; fund purchases; and invest in the company. Reviewing and understanding each step in this cash-flow cycle can help a company work more efficiently. 

  • Review your payroll process: If you pay your employees twice a month instead of every other week, you will be managing 24 payroll periods instead of 26 during the course of a year, making your company more efficient. 

  • Buy more time using a credit card wisely: Banks can help establish relationships with credit card companies that can speed up payments from customers, while giving additional timing or flexibility for repayment to vendors when settling your account.

Given the quick-service industry’s strong performance through the economic downturn, M&A activity has heated up and is likely to continue. Private equity (PE) firms are looking more closely at the industry, but before you begin any substantive dialogue with a PE firm—or any other buyer or seller—be sure to talk with your banker or another trusted advisor. Even in today’s hot market, research, planning, and an investment in M&A advisory services can improve the likelihood of a successful sale or acquisition.

In the end, a strong banking relationship with a knowledgeable industry lender can help set up a loan structure that supports operational and growth strategies and will allow an owner to spend more time thinking about operating restaurants, rather than financing them.

David Farwell is executive vice president and head of franchise finance for RBS Citizens Financial Group, a $126 billion commercial bank.