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Interview 14 February 2019

BBVA Compass Food Franchise Finance Director: “We are a national platform.”

BBVA Compass Director of Food Franchise Finance James Short has a team that can be fittingly described as well-seasoned.

According to the industry veteran, everyone in his group has more than 15 years of experience in the restaurant sector. As a result, the team frequently serves up well-rounded financial service to both experienced and slightly green restaurant owners alike.

Short recently broke bread with the bank’s external communications team to talk about a diverse menu of topics, ranging from his background, his team’s capabilities, the digitization of both the industry and the bank’s corresponding services, and things to consider when investing.

Below is a question and answer with James Short, where he dives into the large world of restaurant financing:

Alejandro Ortiz

Can you tell me a little bit about yourself and how you got into the role you’re currently in?

James Short

I’ve been in the restaurant finance space for almost 20 years, so I almost right out of college fell into that part of the industry. The company I worked for right away was really one of the first pioneers of restaurant finance. Very shortly after that, they were purchased by and merged with another company, to which I spent 10 years there and helped grow that company to a $13 billion restaurant finance platform. In 2010, I came over to BBVA Compass and started a group here in August of 2012. Myself and the entire team here are all alumni of that first company. So we’ve all really been immersed in this business for the past 20 years.

Alejandro Ortiz

How many people are on your team at the bank?

James Short

We have eight people on the sales team. That’s direct financial sales, both in the large and smaller deal side. We have a vertical platform, so indirectly we have about four or five people on the underwriting and credit approval side. That really helps our team because we have the expertise up and down the approval process and it helps create certainty of execution.

Alejandro Ortiz

What do you take into consideration when financing a food franchise?

James Short

Brand is very important, because one of the things we do is enterprise lending. So we lend on the value of the brand in a lot of cases. As a result, the sustainable brand value of the national and regional chains is very important to us. The experience of the operator of that franchise is very important, as is the geography. Certain brands, certainly regional brands, are much stronger in different areas of the country than others. So we like to make sure we’re lending into a brand in an area where that brand is strong.

Alejandro Ortiz

Does the SBA (7a) program play a substantial part in the lending that your team does?

James Short

Yes it does. The program is not directly managed by myself and my team. We work as partners with the bank’s small business team. So for BBVA Compass, it really creates a great vertical business. Our small business team is highly engaged within the restaurant segment. They do a lot of business in it. What’s nice is we have the ability to start an operator with one or two units, and grow them to the point where my team comes in and flips it into a conventional loan. So we’ll continue to grow that operator.

Alejandro Ortiz

How does BBVA’s restaurant group differentiate itself from banks that don’t have restaurant specialty groups and other banks that do have a specialty group?

James Short

The restaurant finance industry is a niche business, so I think there is a natural advantage for banks that have a group like mine vs. those banks that don’t. There’s a reason why there are restaurant specialty groups in a lot of the larger banks. When you’re in the restaurant lending space, you really need to know the people in that brand - the executives who run that brand. You have to understand what their initiatives are, any new products they’re rolling out, and things of that nature. Most brands require development agreements of their franchisees to achieve growth of their restaurant system. We offer a development line of credit product that utilizes the embedded equity of any operator’s existing operations to then provide a capital line for future expansion, remodeling and acquisition. As it relates to differentiation from banks that do have a specialty group, it really comes down to the fact that you have people on this team that are experienced in restructuring transactions. You pair that with bank pricing, and we’re really able to find a nice middle ground of structure and pricing that a lot of customers find very favorable.

Alejandro Ortiz

Does BBVA Compass finance franchises whose corporate headquarters are outside of the bank’s traditional seven-state footprint?

James Short

We do! We are a national platform, so for the larger franchisees within the brands themselves, we have seasoned bankers who finance them in the 48 contiguous states. For smaller and mid-size franchisees who really like to have that local feel, we finance within the seven states where that BBVA Compass operates. We have local bankers that have touch points within the local markets, who are shadowed by an industry expert within my team. They help structure transactions and bring industry expertise to light. Additionally, our SBA program has a nationwide scope.

Alejandro Ortiz

What digital capabilities does the bank have that can make banking with BBVA Compass easier than with others?

James Short

Over the years of being in the restaurant industry, a lot of times it takes some time for operators to grow into investing into their back office. With BBVA Compass net cash™, PositivePay™ and ARP™ treasury management platforms, it really allows operators to automate back office operations and eliminate cutting of checks, manual invoices and digitizes functions into what is essentially digital banking for a franchise business. It brings a majority of operations from paper to digital, frees up the back office, and makes them a lot more efficient.

Alejandro Ortiz

There are some business outlets suggesting that there might be a saturation in franchise lending. Are you finding that to be the case, and if so, what issues could that present?

James Short

There’s been a significant number of additional competitors that have come into the restaurant finance space. When we started our group, there were maybe 10 or 15 viable competitors that had any size. That has continued to grow over the years. At a recent industry conference, it was estimated that there were over 100 different enterprise and real estate-type financing shops in the industry today, and of various sizes. Of course that’s made things a little more competitive. At the end of the day, what’s unique about this business is that you have entrepreneurs that run these franchise businesses and they’ve been in this business for 10, 20, 30 years. When you have a team like ours here at BBVA Compass, that has people who have also been in this industry for 20 years, relationships come into play. In the long run, shops like ours that have gained significant size and long-term relationships, will stick around after a downturn.

Alejandro Ortiz

What do you see for the future of the food franchise industry?

James Short

As we sit here and talk about digital banking, I think that digital improvements within the restaurant space are going to continue to evolve. We’ve seen things like kiosks and mobile delivery ordering pop up in this industry. I think that’s going to continue such that the operators and the brands themselves will continue to see streamlined operations in multiple facets. It is a natural progression, and a necessity, in the face of material increases to the minimum wage.

Alejandro Ortiz

What should people consider as they think about investing in a franchise?

James Short

Investors need to think about what geography they want to be in, and what brand they feel passionate about within that geography. They need to think about how big they want to be and how many restaurants they ultimately want to own. There are certain brands where there is the potential to grow much quicker than a seasoned brand. A seasoned brand offers a little more stability versus a growth brand. Obviously a newer brand that’s up-and-coming has more risk, but there’s an opportunity to grow quickly. Those are the most important things when thinking about getting into this industry.

Alejandro Ortiz

What’s the main criteria potential investors should meet as they prepare to apply for financing to purchase a franchise?

James Short

Usually, by the time an operator makes it to us for financing, they’ve been vetted by the restaurant brand. They have substantial liquidity behind them. If it’s a strong brand, there’s a high bar you have to achieve to become a franchisee. So net worth is involved, as is industry experience. However, in the past few years, a lot of private equity and family offices have come into our space. They bring in a lot of cash and liquidity into the equation. So in that case, we have to make sure they hire a seasoned operator or chief operating officer to run the restaurants that they are acquiring.

Alejandro Ortiz

So at the end of the day, when a prospect is shopping around for their best option, why should they call you?

James Short

We have a group here at the bank where every team member has at least 15 years of experience in this industry. We have extensive structuring skills, knowledge of notable brands, and a long history of working through the industry cycle. You pair that with better bank pricing, products and full cash cycle of the operator - you really get the best of both worlds. We can help facilitate all of the different capital needs in the cash and debt life-cycle of the franchisee.

BBVA Compass Director of Food Franchise Financing

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