Will your first franchise unit get the second one financed?

A second unit is financed on three things: the first unit's demonstrated performance, the combined coverage through the ramp, and how much of the project cost you are putting in. The first of those is the one owners talk about. The second is the one that decides the answer.

Model the trough, not the steady state

Combined annual debt service is 41,400 + 67,360 = 108,760.

Unit two, once mature, should produce 112,000 of EBITDA. It will not produce that in year one. Assume a loss of 21,000 across the opening quarter — pre-opening payroll, training, soft opening, the inventory you write off learning the market — then nine months at 50 percent of the mature run rate, which is 112,000 × 0.75 × 0.50 = 42,000. Unit two's year one is −21,000 + 42,000 = 21,000.

Now the three years:

• Year 1: combined EBITDA 96,000 + 21,000 = 117,000. Coverage 117,000 ÷ 108,760 = 1.08.
• Year 2 at 80 percent of mature: 96,000 + 89,600 = 185,600. Coverage 1.71.
• Year 3 at full run rate: 96,000 + 112,000 = 208,000. Coverage 1.91.

If the lender's covenant floor is 1.20, the year one number fails by 13,511 of EBITDA. That is not a large sum, and it is entirely solvable — but only if you find it before closing rather than at the first covenant test.

Now break it. Suppose the build runs a quarter late: a bigger opening loss of 28,000 and only six months of trading at 50 percent, so 112,000 × 0.50 × 0.50 = 28,000. Unit two contributes nothing. Combined EBITDA is 96,000, and coverage is 96,000 ÷ 108,760 = 0.88.

A delayed opening is not an exotic risk. Permits, fit-out, equipment lead times and hiring all slip. Model it as your base case, not your stress case.

What to do with that number before you close

1. Ask for an interest-only or reduced-payment period covering the construction window and the first two or three months of trading. It is the most commonly granted accommodation on a second-unit deal and it is far easier to get before closing than after.
2. Ask for the first covenant test to be set after the ramp, or for the first-year test to be set at a level the model actually clears. A covenant you know you will breach is a default you have agreed to in advance.
3. Fund the shortfall yourself and say so. Showing a lender that you are holding 15,000 to 20,000 of unrestricted cash specifically to cover the year one gap is more persuasive than arguing the gap will not occur.
4. Do not cross-collateralise unit one unless you must. If the lender takes a blanket position over both units, a problem at unit two reaches the unit that is working. Ask whether the security can be limited to unit two's assets plus your guarantee. Sometimes it can, and it is never offered unprompted.
5. Check the cross-default language. A default under unit two's loan that automatically defaults unit one's existing financing turns a slow opening into a total failure.

What the franchisor's paperwork does and does not prove

The disclosure document a franchisor provides may contain a financial performance representation. Where it exists, it describes outlets that already exist, usually as an average or a band, and it is not a forecast of your unit. Lenders read it as context, not as evidence.

What carries real weight is your own first unit's twelve months, because it is the only observation of this operator running this brand in this market. If unit one is under two years old, expect the lender to lean much harder on the ramp assumptions and on your injection.

Three franchisor-specific items will be requested and are worth assembling early:

• The franchise agreement for the new unit, including the term, the renewal rights, and the transfer provisions. A lender taking security in a franchised business needs to know it can transfer the unit on default, and the franchisor's consent rights govern that.
• The franchisor's consent or comfort letter. Many lenders require one. Some franchisors have a standard form and turn it round quickly; some do not. Ask at the start.
• Development obligations. If your agreement commits you to open a third and fourth unit on a schedule, that is future capital expenditure the lender will treat as a known obligation. Disclose it.

The injection question

Your contribution is not just a number in the structure; it changes the coverage arithmetic directly. Every 10,000 less borrowed on the illustrative terms above removes about 1,620 of annual debt service. Raising the injection from 104,000 to 156,000 — 30 percent rather than 20 — cuts the new loan to 364,000 and annual debt service to roughly 58,940, which lifts year one coverage from 1.08 to about 1.17.

That is the lever with the most mechanical effect, and it is worth pricing against the alternative: holding the cash back as the buffer that carries you through the ramp. Both are defensible. Deciding deliberately is the point.

What to have ready

Unit one's last two years of tax returns and trailing twelve months of statements. A month-by-month combined cash flow model for the first eighteen months, with the opening date as a variable you can move. The full project budget with contingency. The franchise agreement and the franchisor's consent process. Your debt schedule for unit one, current.

What to refuse

Refuse to underwrite your own deal on the mature run rate. Every failed second unit was modelled on year three.

Refuse a covenant package you have not tested against a delayed opening. And refuse to sign a blanket security agreement over both units without asking, in writing, whether a narrower one is available.