Six years ago, Jim Treliving started to see troubling signals in his business. The restaurant franchising boom that had been rolling since the end of the 2001 recession was starting to slow because money was getting tight and financing for franchisees was drying up. Thus, the robust growth that Treliving’s company, Boston’s Restaurant & Sports Bar, had enjoyed for the previous half-dozen years was starting to slacken. c
“The main challenge I’ve had to deal with these last few years has been with the financial portion of our business,” says Treliving, whose company today operates 400 franchises in the United States, Canada and Mexico and generates systemwide sales of more than $1 billion. “The financing situation has really changed a lot since 2006 or so. Up until then, the franchisees we dealt with had lots of avenues to get financing for their business.”
The easy-money trend in restaurant franchising started to tail off in 2006 and 2007, and then it began dropping at an even faster rate in 2008 during the most recent recession.
“The financing really dried up,” he says.
Treliving started as a franchisee with Canada-based Boston Pizza in British Columbia in 1968 and eventually bought out the entire Boston’s restaurant chain in 1983.
“This has really affected just about everybody in most small-business market sectors. Small-business growth in the United States has really been negatively impacted by the inability to find sources of financing.”
Nowhere has that trend been felt more acutely than in the restaurant-chain business.
“It has taken a toll on us, especially when it comes to trying to attract new franchisees into the business,” Treliving says. “New franchisees generally need to have a down payment of 20 to 35 percent of the cash available to go into business. Nowadays, even [potential franchisees] who do have that amount on hand are having trouble getting banks and other financial institutions to do any kind of work with them in the sense of taking a chance on them.”
Today’s persistently low interest rates make it hard on those who want to start businesses because finance companies are less inclined to take chances on small businesses when their potential returns are so low.
“Most of the banks we’ve talked to in the U.S. — even though they’re in a situation where their balance sheets are OK — they’re not lending money for small businesses,” Treliving says. “And it’s not just the banks; it’s all types of financial institutions. Obviously, any type of lender is going to require a return on its money, and if you’re buying the money at a bank at 2 percent and you’re lending it out at 3 or 4 or even 5 percent, you’re not going to make a lot of money on it. That’s why they’re not taking many chances on people who want to start small businesses.
“It’s funny; these days a lot of people in this business are saying, ‘The good thing is we’ve got these low interest rates — and the bad thing is we’ve got these low interest rates.’ It’s really a tough problem.”
Give partners slack
The financing problems that Boston’s and other small and midsized restaurant companies have been facing isn’t limited to just attracting new franchisees. It’s also affecting the ability of the company’s existing franchisees that want to expand their businesses by opening new restaurants within their territories.
“A lot of our franchisees bought territorial pieces,” Treliving says. “We entered into agreements with them back when we sold them their first store that they would open a certain number of additional restaurants in their territory over a certain period of years. We mutually agreed, and an important part of that agreement was that we had to make sure that they’re on solid financial footing before moving to the next level.
“Unfortunately we’ve had a fair amount of franchisees that, even though they have a good solid track record, when they’ve reached the date when they’re supposed to build that next store in their territory, they couldn’t get the financing they needed to do it.”
Boston’s approach in these situations has generally been to give its existing franchisees more time to strengthen their market footing so they would eventually be able to obtain financing to build the additional stores in their territories.
“The plan was that they agreed to build a certain number of stores in their territory in a certain period of time, and if they didn’t — if they failed to do that — then they would lose their territory, and they would lose the money they had paid in upfront fees to hold their territory,” Treliving says.
“We began to see with many of them that we’d have to wait a little while, until the money [for financing] started to loosen up again. We saw that we would need to reset those dates so our franchisees would have more time to build those new stores and not lose their territories. We basically had to rectify the dates so we wouldn’t go offside with our franchisees.”
“So this financing situation has really slowed down the growth of everybody — not just new franchisees, but old franchisees as well.”
Find other sources
Even though the lending picture hasn’t been good from traditional sources of financing for restaurant franchises — i.e., banks and large finance companies such as GE Capital and others — Boston’s and other restaurant chains have had a degree of success finding financing for some of their franchisees via nontraditional sources such as private equity firms.
“A lot of people are going out and finding independent money on the side,” Treliving says. “So we started looking as well for some of these new sources that would deal with us. For many years, we had been dealing with a couple of major companies for financing, but now one of them had pulled out of the business completely, and the other one had quit lending new money for restaurant franchises.
“So we had to look for other avenues, whether it was banks or individuals or private equity that had been sitting on the sidelines and were now saying, you know, ‘Maybe we should jump into this business.’”
With some legwork, Boston’s was able to uncover some of these smaller, off-the-beaten-path financing sources. In so doing, the company was able to keep growing, albeit at a slower pace, even during the four-year downturn when traditional financing was very tight for the restaurant business.
“We had to go and look for some of those individuals and private firms,” Treliving says. “Most of them are regional. People are more likely to lend money to nearby sources, wherever they happen to be, because they can drive by and see the property, so they know where the money’s being spent and how it’s being spent. If you look at 90 percent of the restaurant chains around the country, everybody was going through the same thing. They were knocking on doors everywhere.”
Do it yourself
Lending from the traditional sources has started to loosen up a bit over the past year, but Boston’s has decided it isn’t going to rely so heavily on those traditional sources anymore. The company has decided to take a big step forward and create its own financing division to help its franchisees grow.
“We’re putting a package together right now to do that,” Treliving says. “We’re well on our way to develop our own financing. The first thing we’re going to do is go and help our existing franchisees that want to expand but can’t get the capital they need to do it. We’ll be willing to lend them money, because we’ve seen what they’ve been capable of doing over the last five or 10 years. They’ll be our first customers.
“The next ones will be potential new franchisees that we think have a great opportunity to get into the business now. We’ve been starting to receive a fair amount of inquiries about this, now that things have started to loosen up a little bit financewise.”
Asked what he has learned and what advice he would give other executives facing similar problems with tight lending inhibiting their growth, Treliving says he suggests that you choose your dance partners very carefully.
“I’ve talked to other CEOs in various businesses, and it’s really all about quality now — the quality of who you’re going to do business with,” he says. “The quality of franchisees you’re getting is what you should be looking at now — the strength of the person going in. It’s not just simply about grabbing anybody that’s got a warm body and going into business with them anymore.”
Treliving says that containing costs and reinvesting in quality service are more important now than ever, and not just in the restaurant-chain sector or the food-service sector but in all service-oriented businesses.
“You really need to be watching your costs right now,” he says. “It’s an absolute necessity. And your service has to be absolutely top-notch all the way through your operation. You can’t get away with anything less than that. If you’re willing to do these things, this can really be a great time to get into a business and have success with it.”
How to reach: Boston’s Restaurant & Sports Bar, (972) 484-9022 or www.bostonsgourmet.com
The Treliving File
Chairman and CEO
Boston’s Restaurant & Sports Bar
Born: Virden, Manitoba
What was your first job, and what business lessons did you learn from it that you use today?
I delivered groceries for a family that owned a small grocery store, and I think the biggest thing I learned was persistence — the stick-with-it sort of thing. The place where I delivered groceries — it was very important that they be delivered on time. You had to come there clean and ready to go to work. And you had to provide great service. That was extremely important, the service aspect of it — being on time and getting the groceries out to people right away. Those things stuck in my mind when I went into the restaurant business.
Do you have a main business philosophy that you use to guide you?
I believe very much in dealing with people on a face-to-face basis. And I want to do business with people that I can have fun with — people that enjoy the same things I do.
What trait do you think is most important for a business executive to have in order to be a successful leader?
You have to have honesty and integrity. You have to be honest with your people, and honest with the franchisees you’re dealing with. Of course it’s inevitable that you’re going to have problems with your franchisees from time to time. But you sit down and discuss it with them so that you understand their side and they understand your side. And then you both make a decision on what you’re going to do, and you go forward with it together, as a team.
What’s the best advice anyone ever gave you?
My dad gave me a couple of good pieces of advice a long time ago: Always leave a little something on the table for somebody else, and always work hard and do the things that you want to do, that you enjoy doing.