From the Financial Post – Monday, Jul. 26, 2010 By: Derek Sankey
Anywhere there are hungry university students, you will find Ryan Smolkin. “That’s my feasibility,” he says.
The 36-year-old entrepreneur launched a fast-food chain of poutine restaurants in Toronto 18 months ago and the growth has been insatiable. “It just exploded on me,” Mr. Smolkin says. “I was immediately in expansion mode.”
Serving 22 kinds of poutine, Smokes Poutinerie is now launching its 10th franchise location in Kingston, Ont., having already set up shop around Toronto, London, Ont., Ottawa and at Mont Tremblant, Que., north of Montreal.
For Mr. Smolkin the problem isn’t finding an appetite for his product, but rather finding enough money to fuel the rapid growth of his company. Despite a track record as a successful entrepreneur — he’s already launched and sold several companies, maintaining a spotless credit rating — the big banks told him he was growing too quickly for them. “They can’t keep up with me,” Mr. Smolkin says.
So, like a growing number of franchisors, he is turning to the private-equity market to seek growth capital.
“For the first time, I’ve started considering equity investment and alternative sources of finance,” he says, adding the offers have been piling up. “I’ve been holding them back, but just in the last little while … it’s good timing.”
Private-equity firms, while still not the primary source of financing for franchise growth, are showing an increasing interest in franchising: It’s relatively stable, the model has been proven and there is an opportunity for long-term cash flow.
“Franchises that are successful … are one of the more stable, cash-flowing enterprises you can have and a nicely diversified risk,” says Jason Sparaga of Oakville, Ont.-based Spara Capital Partners Inc., which invests in, and advises, a variety of mid-market franchise systems across Canada. His company is part of a growing trend toward private-equity investment in the franchise world.
“We’ve got a very good sense of what will work, what won’t work and … what you should be looking for when investing into a franchise,” Mr. Sparaga says.
When the banks say no, private-equity groups, along with venture capitalists, are the second-most common form of financing, and they are quickly realizing the upside of investing in franchise systems in Canada.
“A lot of this on the private [equity] side … really comes down to the banking situation,” says Gareth Parry, president of Markham, Ont.-based franchise brokers and advisors CanFranGlobal Consultants Inc. “What we’ve seen in the last month or so is a lot of inquiries from private-equity companies … looking to invest in the franchise industry in Canada.”
Jeff Hanlan, spokesman for the Canadian Franchise Association, says the trend is a reflection of the fact lending rules among the merchant banks remain tight following the recession, so it’s natural for private-equity firms to fill the gap.
“When times are tough, entrepreneurs are often looking for other sources of financing to help sustain their business and keep it going,” Mr. Hanlan says. “If [the banks] aren’t panning out, then as an entrepreneur your job is to survive and do everything you can to support your business.”
Increasingly, that means turning to private-equity firms that will invest in a franchisor for a variety of reasons — among them steady, long-term cash-flow or buying up underperforming chains and turning them around — for a tidy profit.
Mr. Smolkin’s goal, meanwhile, is to take his venture national in the next year and then “global domination” by the third year. He has received calls from around the world asking about franchise opportunities.
“Anybody can get me into [venture-capitalist] dollars or private-equity investment — that doesn’t seem to the tough part,” he says. “The tough part is finding somebody who is more of a value-add beyond just the dollars.”
He wants expertise, not just cash. The right kind of expertise that will help fuel his aggressive growth plans. He envisions opening 30 or 40 locations in the next year or so in Canada.
He’s not about to give up controlling interest in the business venture, either, but he is willing to take on the right partner for a long-term relationship as it grows.
Mr. Parry says the increase in movement and activity among private-equity firms in franchising will only continue — a point not to be lost on franchisors looking to fuel their ambitious growth plans.
“There’s definitely a window of opportunity right now,” Mr. Parry says. “There is money out there.”