The 825,000 franchise businesses in the U.S. representattractive targets for insurance producers—easily identifiableprospects, many with multiple units, who are generally required topurchase insurance by their franchise and loanagreements. 

However, each system has its own particular requirements andmany larger systems have national preferred vendor programs inplace. For the independent producer, tackling the franchise sectorrequires understanding the system. Learn requirements and specialrisks before approaching the prospect with a clear case for theadvantages of a local insurance relationship. 

Read the sidebar “Guarantee Insurance in Action:Marco's Pizza.”

Know the franchise system

Producers need to be aware of the added complexity that comeswith handling a franchise client, according to Dan Rossen, vicepresident with Burns & Wilcox. For example, franchisors mayhave limitations or requirements that each franchisee must follow.Some may require higher limits on liability insurance or higherstandards on the level of insurance carried. Others may haverestrictions on the insurance carriers used. Research or work withfranchise clients to navigate these franchisor-dictated standardsbefore making insurance recommendations.

Related: Read the article by Chad Hemenway “As anIncreasing Target for Claims, Nonprofits Seek More D&OCoverage.”

“While some franchise systems may have a national insurancecarrier and program in place, local reps still can compete forbusiness,” Rossen said. “Producers shouldn't be put off by thefranchisors' national program.”

Understand the market dynamics

Producers should be strategic in their approaches to thefranchise market, understanding the general industry dynamics andspecial requirements. For example, according to FRANdata, franchisecategories showing the greatest growth over the past 5 yearsinclude health (fitness centers, healthcare facilities andpharmacies), fast food restaurants, educational programs and taxservices. Systems in these categories are more likely to bring innew prospects and locations. Given the significant advantages thatfranchises have in their ability to scale quickly, developing astrong relationship with a smaller system in a high-growth categorycan quickly turn into a large book of business.

Use the system to customize yourofferings

By combining knowledge of the system with the franchisee'sparticular needs, a producer can develop an offering that meets thesystem requirements and protects the client. Some tips toapproaching a franchisee prospect include:

• Do your homework on specific franchise requirements.
• Set up a meeting and demonstrate the advantages of having alocal representative for leveraging area business networks thatbenefit the franchisee.
• Explain the advantages of providing insurance coverage orproducts that may not be offered by the national carrier—such aslife insurance, guarantee insurance or employment practicesliability insurance (EPLI).
• Add these products to the checklist of what you offer alongwith standard offerings like general liability and environmentalcoverage.

Always look for the upsell. “While asking for three or morereferrals is standard practice when closing a sale,” Rossen said,“with franchisees you should also ask for an introduction to theircorporate contact. If you can successfully cultivate a relationshipwith the corporate contact you may be able to set up a system-wideprogram.”

An opportunity for producers todifferentiate

A key issue for the U.S. franchise sector is the lack ofavailable credit due to current economic conditions. The lack ofcredit has stymied franchise system growth. To make matters worse,franchisees­—as with most small business borrowers—usually arerequired to sign a personal guarantee as a condition of approvalfrom the lender. This guarantee allows banks to go after personalassets—including homes and bank accounts and—if business assets donot sufficiently cover the debt incurred because of a default onthe loan. In fact, the lenders can pursue the guarantor's personalassets first if they wish.

Related: Read the articles “SBA Warns BusinessesAbout Loan Scams.”

This not only puts the franchisees in a bind, requiring them tosign a document that could mean the loss of personal assets in theevent of a business failure, but it further constrains the growthof the franchisor's network. 

However, these franchise finance challenges can be anopportunity for producers. The innovative guarantee insuranceproduct outlined below can help both credit-strapped franchisees aswell as franchisors looking to build their network. 

The recession and credit availability

Just 4 years ago, lenders were eager to supply the capitalnecessary for franchisees to start up and run new ventures. Forthis reason, direct franchisor involvement in franchisee financingwas generally unnecessary.

But today, more needs to be done. According to a March 2011survey by the International Franchise Assn. (IFA), about one-thirdof franchisors said more than 50 percent of their franchisees andprospective franchisees were unable to obtain necessary financing.Research conducted in the spring of 2011 by FRANdata laid out theissue in stark terms: banks were expected to meet just 80 percentof the loan demand projected by franchisors for 2011, leaving a $2billion shortfall in franchise lending.

Of the banks willing to extend credit to franchisees, many havebeen doing so with the assistance of federal Small BusinessAdministration (SBA) guarantee programs, which covered a record $30billion in loans in 2011. While the loan is actually made through abank, the SBA guarantees a portion of it, making it more palatableto the lender and making more credit available to franchiseborrowers.

But SBA loans are not pain free. “While they are available, theycan take considerable time, effort and expense to get through theprocess, a real challenge when someone can't start earning anincome again until the franchise is open,” said Jeannie Hylant,executive vice president of Toledo, Ohio-based Hylant Group, aninsurance broker that works with franchise clients.

Guarantee insurance: Twoways

Guarantee insurance allows producers to help franchisees addressthe twin issues of credit availability and the risk they take on insigning a personal guarantee. Producers also can work withfranchisors to make guarantee insurance available for businessowners in their network.

“A franchisee is someone who is an entrepreneur and is willingto take risks, but wants the safety net and backing of a franchisesystem,” Rossen said. “Guarantee insurance works the same way: thefranchisee takes the personal risk of signing a guarantee against acommercial loan, but with the safety net and backing of guaranteeinsurance. It's a good fit.” 

Related: Read the article “As Social-Service GroupsLook for Alternative Revenue Streams, Insurance Risks Grow” byBonnie Cavanaugh.

1. To assistfranchisees. Just as with other business or realestate owners, guarantee insurance can help prospective franchiseecustomers seeking credit for a launch, expansion, renovation,hiring or working capital. It allows them to sign a personalguarantee and reduce some of the anxiety related to putting theirpersonal assets on the line.

Given the issue of credit availability for franchisees and therisk inherent in signing a personal guarantee this optionrepresents a value-add that producers can offer them.

2. To assist franchisors. Amodel program has been established under which guarantee insurancecan be used by franchisors to help credit-strapped franchisees. Thefranchisor provides a guarantee to the bank for a portion of theloan. Then, through an agreement with the carrier, the franchisorpurchases guarantee insurance to help manage the risk. The lendergets the benefit of an additional guarantee backed by an insurancepolicy, and the cost of the insurance is passed along to thefranchisee in the form of a fee.

“Guarantee insurance is an interesting product, as the majorchallenge for franchisors since 2008 has been new franchisees beingunable to obtain capital to open a franchise,” Hylant said. “In ourdue diligence on the product, we found that bankers indicated theywould be more comfortable knowing it supported either franchisor orfranchisee guarantees even though it cannot be placed until afterthe loan is made.”

This program would only be available to franchisees who met aset of predefined conditions agreed to by the franchisor, thelender and the insurer. That way, the franchisor can be confidentthat the insurance will be available after the loan closes. Allparties in the transaction benefit.:

• Franchisee obtains the capital they require with less risk
• Franchisor attracts more franchisees to its system. With thisoption, it can grow and expand more quickly without being hinderedby the SBA loan process
• Lender obtains a strong secondary source of collateral throughthe franchisor and the insurance policy 
• Producer provides a valuable service to the franchise industrywhile adding to their revenue stream and significantly improvingtheir opportunity to sell other coverage throughout thesystem.

A guarantee insurance policy can be applied to a variety ofcommercial loans, making it easier for the franchisee to start,renovate or expand, or for the franchisor to help more directlyaddress the financing challenges in today's market. A producertherefore may be creative in suggesting or designing the rightprogram to meet a system's specific challenges.