Franchise Update Magazine Issue IV, 2013

Grow Market Lead 56 Market trends By Darrell Johnson What the FRUNS? New coding system aims to improve SBA franchise lending A s franchising has changed over the decades, new terms have entered our vocabulary. Some words that used to mean one thing now mean something else, or several things. We come across this often when reading an FDD. The variability of how brands describe an area development program is an example. A more critical and frequently misleading term is “unit failure.” It’s time we start bringing consistency and common sense to these terms. Let’s start at the top, with what exactly a franchise is. Business format franchising is pretty clear on this point, at least by definition. We have franchisors with multiple brands, programs within a brand, affiliates, parent companies, and so forth. It all seems fairly straightforward—until it starts getting applied in the real world. We all know that SBA loan loss and failure data are inaccurate. One of the primary causes is confusion about which franchise brand, system, program, or entity to associate with a particular loan. With no “master list” of consistently defined franchise brands to allow lenders to properly code loans, the SBA turned to FRANdata to solve this problem. The initiative grew out of the desire to improve the SBA loan loss data reported on every franchise whose franchisees receive SBA-guaranteed loans. Though the SBA itself recommends that lenders do not use their data for risk assessment, and even though far more accurate and complete tools exist to assist lenders in underwriting franchise loans (such as the Bank Credit Report), too many lenders still use this data as part of their credit policy. The biggest challenge was to determine what was at the center of a franchise ecosystem. Was it the brand? The specific program within a brand? The brand’s legal owner? The franchisor? The parent company? Or was it some other identifiable thing that could be consistently applied? After mapping all the possibilities (I’ll spare you the complex diagram), it became clear that all things franchising emanated from a brand, not a legal entity. FRUNS was born. FRUNS (FRANdata Unique Numbering System) is a coding system that uniquely identifies every brand in the U.S. associated with franchising. This is similar in concept to the DUNS numbering system provided by Dun & Bradstreet. A FRUNS number replaces previous coding references to brands used by SBA lenders—and is now necessary for all SBA loans. Use of this coding system corrects several significant recurring errors in historical SBA franchise loan data, including the lack of a code for a brand, changes to brand names, and multiple codes issued for the same brand. Here’s Franchiseupdate Iss u e IV, 2 0 1 3 a “before and after” example: Previous SBA Code Brand Name 16920 Choice Hotels International Inc. FRUNS Code 11228 13214 13490 10868 10922 12260 13058 13679 10684 10285 Brand Name Econo Lodge Rodeway Inn Sleep Inn/Sleep Inn & Suites Clarion Hotel Comfort/Comfort Inn & Suites/Comfort Suites Mainstay Suites Quality Inn/Quality Suites, Hotel, or Resort Suburban Extended Stay Hotel Cambria Suites Ascend Collection FRUNS also benefits suppliers of all sorts. Relationships between franchise corporate entities can be confusing, not

Franchise Update Magazine Issue IV, 2013 | Page 58