Franchise Financing: What A Lender Is Looking For? Part 1: Franchisor Review

Posted by Tony Kaiser on December 20, 2023

Tony Kaiser

Franchising offers entrepreneurs a remarkable opportunity to tap into proven business models while benefiting from the support of an established brand. However, securing financing can be a daunting task for franchisees who are busy running their operations and seeking ways to maximize cash flow and profitability. At Osgood Bank, we understand the unique challenges faced by franchisees, and our goal is to make the financing process easy and efficient. In this blog post, we will shed light on what lenders look for and evaluate when helping franchisees secure financing.

Let's start with the first step: the franchisor review.

Franchisor Review

One of the advantages of working with franchisors is the abundance of information available in their Franchise Disclosure Document. Evaluating the health of a franchisor involves considering various metrics and sources of information. Here is a list of the most common factors that lenders, including Osgood Bank,  take into account.

1. Franchise Concept & Brand StrengthTony and Keith at HQ

As a lender, one of the first aspects we consider is the franchise concept and the strength of the brand. Established and reputable franchises with a proven track record tend to be more attractive to lenders because they offer a higher degree of stability and a greater likelihood of success. We assess the brand's history, market presence, growth potential, and overall industry outlook to ensure it aligns with our lending criteria.

2. Management

When it comes to evaluating a franchisor, the management team is a critical factor that lenders take into account. The expertise and experience of the management team can greatly impact the success and growth potential of the franchise.

Lenders want to know how long the current management team has been in place. A well-established and experienced management team demonstrates stability and a deep understanding of the business. This can instill confidence in lenders that the franchisor has a solid foundation and is capable of guiding the franchise to success.

In addition to the length of time the management team has been in place, lenders also consider their track records and resumes. They want to see a proven track record of success, with previous achievements and accomplishments that showcase their abilities. A management team with a strong background in the industry and a history of successful franchise development and support can give lenders confidence in the franchisor's ability to provide ongoing support and guidance to franchisees.

Furthermore, lenders will also investigate if there are any existing lawsuits against the franchisor. Legal issues can be a red flag for lenders, as they indicate potential risks and challenges that may impact the franchisor's stability and reputation. Lenders want to ensure that the franchisor is operating within legal boundaries and can effectively manage any legal issues that may arise.

8The importance of trust between the franchisor and franchisee base cannot be overstated. A healthy relationship between the management team and franchisees is crucial for the overall success of the franchise. When the franchisor has a strong and trustworthy management team, it fosters a positive environment that encourages franchisees to thrive and grow their businesses. This trust and collaboration between the franchisor and franchisees ultimately contribute to the continuity, growth, and unit success of the brand.

3. Financial Performance

Understanding the financial performance and cash flow of a franchise operation is crucial for both the lender and the franchisee. Lenders typically evaluate key financial statements, such as income statements, balance sheets, and cash flow statements, to assess the franchise's profitability, revenue trends, and ability to generate consistent cash flow. Positive cash flow is especially important as it indicates the franchisee's capacity to meet their loan obligations.Sola Ft. Lauderdale FL

What lenders look at can depend on the type and size of the franchise. For example, at Osgood Bank, when we work with food-related brands, we look at distribution income and COGS margins. And, for any sizable franchisor, we want to see that their bulk purchasing power translates not only into income for the franchisor, but also lower costs and better profit margins for their franchisees. 

4. Same-Store Sales Trends

Every business faces increased costs year-over-year, whether it be payroll, inventory increases, or some other expense. However, it is essential for the long-term success of a franchise that these increased costs are balanced by an increase in average unit volumes (AUVs). AUVs refer to the average sales generated by each unit of the franchise.

If overall AUVs are not increasing, it can be an indication that the brand is stagnating or even declining. This is a cause for concern for both lenders and franchisees. Lenders want to ensure that the franchise they are financing has the potential for growth and profitability, while franchisees rely on increasing AUVs to maximize their cash flow and profitability.

When AUVs are not increasing, it can be a sign that the franchise is facing challenges such as competition, changing consumer preferences, or ineffective marketing strategies. It may also indicate that the franchise is not adapting to market trends or failing to meet customer demands.

On the other hand, when AUVs are increasing, it suggests that the franchise is thriving and attracting more customers. This can be a positive sign for lenders as it indicates the potential for higher returns on their investment. Franchisees can also benefit from increasing AUVs as it means more revenue and higher profits.

Therefore, it is crucial for both lenders and franchisees to closely monitor and analyze AUV trends. By identifying the factors that contribute to the growth or decline of AUVs, franchisees can make informed decisions to optimize their operations and marketing strategies. Lenders can also assess the franchise's potential for long-term success and profitability based on the AUV trends.

5. Collateral and Personal Guarantees

Collateral and personal guarantees are often required by lenders to mitigate risk. Collateral can include tangible assets such as real estate or equipment that can be used as security against the loan. Lenders often require collateral to mitigate the risk associated with lending money. Collateral refers to tangible assets like real estate or equipment that can be used as security for the loan. By providing collateral, franchisees offer lenders an added layer of protection in case they default on their loan obligations.

Having collateral gives lenders a sense of security because they know that if the franchisee is unable to repay the loan, they can seize and sell the collateral to recover their losses. This reduces the lender's risk and increases their confidence in the loan application.Jerry Uvira Moes Buffalo

In addition to collateral, lenders may also require personal guarantees from franchisees. A personal guarantee is a legal promise that the franchisee will personally assume responsibility for the loan if the business cannot meet its obligations. This means that if the franchisee is unable to repay the loan, the lender can pursue the franchisee's personal assets and income to recover their losses.

Personal guarantees provide lenders with an extra layer of assurance that the franchisee is committed to repaying the loan. It shows that the franchisee is personally invested in the success of their business and is willing to take on the financial responsibility if things don't go as planned.

For franchisees, providing collateral and personal guarantees may seem like a daunting prospect. However, it is important to remember that these measures are in place to protect both the lender and the franchisee. Collateral and personal guarantees demonstrate the franchisee's commitment to the business and can help secure the necessary financing to grow and expand their franchise.



At Osgood Bank, we strive to simplify the franchise financing process, understanding that franchisees are busy running their operations. By evaluating these key factors and providing tailored financing solutions with long terms and low rates, we aim to support franchisees in maximizing cash flow and profitability.

If you're a franchisee seeking financing, reach out to Osgood Bank today. Our experienced team will guide you through the process, making financing easy, so you can focus on what matters most—growing your franchise and achieving success.


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Topics: Business Finance, Franchise Finance

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