Special Report | September 2011 | By Blair Chancey

Securing Financial Assurance

The CFO of Marco’s Pizza, and presenter at this year’s Dine America conference, didn’t let the frozen credit market stop his growing franchise.

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Fresh off of a crippling recession, debt-ceiling debates, and a credit down grade, the American financial climate is merely crawling along. But an executive at Marco’s Pizza isn’t letting that stop the growth of his brand, or yours.

Ken Switzer, CFO of the 225-unit pizza chain, has big growth plans for the concept and developed a series of internal programs that he says will finance more than 1,000 new stores, despite the frozen credit market.

“Back in 2007, we recognized that traditional banking sources might not always be available, so even before the meltdown in the banking world, we started our own capital leasing company,” he says.

Marco’s uses that to lease complete stores to franchisees, who put down 25 percent and have the franchisor lease them the rest of the store and all the depreciable assets.

What really stands out about Switzer’s efforts, however, is his Marco’s Assurance program.

The initiative works similar to private mortgage insurance, when buying a home.

“I went to the bank and said, ‘What if there was something like an insurance company that could guarantee franchisee financing, at least in part? There would be real money, a real balance sheet behind the franchisees. Would that help?’ They, of course, said yes,” he explains.

The Marco’s Assurance solution came to Switzer when he saw that banks were requiring more money down from franchisees.

“They want more like 40-50 percent down instead of 20 percent,” he says.

In addition, thanks to the failing housing market, franchisees were having trouble offering up houses as a form of possible loan repayment.

“It didn’t do banks any good to have a mortgage on their books,” Switzer says.

As a result, Marco’s Assurance was created. It will guarantee $50,000 of a typical $200,000 loan.

“So the bank now has equipment as collateral, they have the franchisee’s signature, and they have $50,000 coming from Marco’s Assurance,” Switzer says.

The assurance concept, however, does not stop at the Marco’s franchise. Switzer is looking at extending the program into a national initiative for other franchises.

“The idea is a dozen franchisors get together and go to a company like Nationwide or State Farm and have them administer and manage it, but they back it up,” he says. “Then we get a company like FRANdata to assign risk ratings.”

Switzer has spoken to a number of brands about the effort. “I think any franchisor that really believes in their business model can do this and propel their growth,” he says.

While Switzer originally had to justify the program to his company’s management team, they’ve planned accordingly to minimize risks.

“We looked at our loss history and developed a loss-history assumption to make sure we funded that potential loss up front by deferring a portion of our franchise fees and royalties into Marco’s Assurance,” he says.

According to Switzer’s the national franchise assurance model is right for, “those franchisors that really believe their success is tied to their franchisees.”