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Tropical Smoothie Café Lending Directly

Diane Schullstrom and Lance Albers have good timing. Albers owned a Tropical Smoothie Café location in Melbourne, Florida. Schullstrom, his girlfriend, began working there part-time while she went back to school. She began running the store, and the two became business partners.

And then they decided the best way to succeed in the food business is to run multiple locations, so they began to look for financing to open a second unit last year. That was about the time the Atlanta-based smoothie chain started a $20-million financing program for its franchisees.

They started filling out the paperwork in October. By April, their second store in Melbourne was open for business.

“I think it’s great,” Schullstrom said. “Because we are a current franchisee, they know us. They’ve seen what we’ve done, and how we’ve progressed. The bank may not believe in the brand so much.”

Yes, financing has improved in the franchise sector. But some operators and some brands still struggle to build new units, and small operators like Schullstrom and Albers in particular have a difficult time. “It was very hard to get financing through a bank,” Schullstrom said.

“I have a couple of friends who are commercial bankers. I talked with them about the ins and outs of the business. One good friend told me it would be very difficult to borrow any money.

“Banks are not willing to loan you money unless you have a lot of money in the bank to back it up. If we had a lot of money in the bank to back it up, we’d just use our own money.”

Many franchisors therefore have to turn to other methods to encourage development. In Tropical Smoothie Cafe’s case, this means a direct lending program, funded by the company’s private equity owner, BIP Capital.

The chain is the perfect example of a concept performing well in the restaurant space but not in the loan officer’s office.

Tropical Smoothie Café has reported strong sales in recent years. The company opened 40 new restaurants last year and had a 6.4 percent increase in same-store sales, a key measurement of a restaurant’s performance. The 385-unit chain has had a 9.2 percent increase in same-store sales through July and expects to open 70 new locations. In July alone, the chain’s same-store sales rose 12 percent, said CFO Tim Tanguay.

These sales were gained largely by adding more food to its menu in an effort to find ways to get customers to come in more often. The company has added new food items like flatbreads, tacos and noodle bowls, and is backing those efforts with its first national ad campaign. And although there’s more food on its menu, it’s still selling plenty of smoothies. Roughly half the company’s sales are food, half are smoothies, and the company isn’t losing smoothie sales by offering food.

“As our food has grown, our AUVs have grown, but the mix has been relatively steady,” Tanguay said. He expects the company’s average unit volumes to exceed $560,000 this year, up from $526,000 last year.

The rising sales have fueled demand by franchisees—like Schullstrom and Albers—to add new units. About 60 percent of operators have just one unit and most of the rest own just two or three. While the company’s sales have been strong, lenders are still shy about loaning money to less experienced franchisees of low-cost systems like Tropical Smoothie.

Thus, the company took it upon itself to make the loans. BIP committed $20 million to the lending program, making it a somewhat rare instance in which a franchisor lends directly to the franchisees. The amount is enough to fund 100 new locations.

“There’s demand for more franchisees to expand,” Tanguay said. The sales increase, he said, and the financing program, are “two prime factors to get single-unit operators to want to become multi-unit operators.”

The program offers five-year, fixed-rate loans to operators with good credit and a good operating history. Tropical Smoothie Café can approve a deal in four to five weeks. “We can be pretty nimble,” Tanguay said. The chain’s initial investment ranges from $250,000 to just more than $300,000, but the company is working to get that investment lower.

Tropical Smoothie Café has a credit process, taking a typical credit application and collecting store financials. “The credit process is very similar to what they’d go through at a traditional lender,” Tanguay said.

What’s not traditional is the company’s standards. Yes, credit is important. But the brand already knows how it operates. And it knows which franchisees are doing the right things. So the lender in this instance isn’t examining the brand, and it isn’t looking extensively at operating experience only in terms of length.

“Operators’ character, how compliant they’ve been, that holds more equity with us than with a third-party lender,” Tanguay said. “If we have an operator that’s only been open 18 months but has done well and has done what we’ve asked them to do, they’re a prime candidate for this.

“We have intimate knowledge of the market, and the viability of success for a new location. We’re able to get deals done that wouldn’t get done otherwise.”

As for Schullstrom and Albers, they ultimately want to run four or five Tropical Smoothie Café locations. But Schullstrom has something to do first. “I just want to finish school,” she said. “I’ve got six classes left.”

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