Think in an uncertain economy there's some safety in buying a franchise of an already-established brand? A new report suggests that's true only if you choose very, very carefully.
Seeing a Pattern
The report found that 11 franchises—more than half ice cream or fast food—had the highest rates of failure of their federally guaranteed loans used to buy them in the first place, according to analysis of U.S. Small Business Administration figures done by BlueMauMau.com, a franchising news website.
This is the same list that the agency provides loan officers of its most trusted lenders and banks throughout the country, the site says.
The SBA calculates failure rates by adding the number of liquidations to the number of loans charged off, divided by the total number of loans taken out within a franchise system. SBA borrowers (the franchise owners) personally guarantee these loans, often putting up their homes or other personal assets as collateral. Blue MauMau's analysis includes only franchise systems with more than 50 SBA loans.
The Best of the Worst
Don Sniegowski, who runs the website, told the Orange County Register that the brands on his "lemon list" criticize his methodology, primarily because he includes only SBA-guaranteed loans, which tend to have riskier borrowers. Plus, some bank officers don't fill out SBA's form correctly.
"Franchisors that appear on this list don't like it, and others have their own lists, but the brilliance of the government [information] is that we know how they came up with the list," he told the OC Register.
Winning the dubious honor of highest percentage of failed SBA loans was Golf Etc., a golf retail shop franchise, with 71 percent failing. Last year's "winner" was Kansas-City based Mr Goodcents Sub, with a 64 percent loan failure rate. Though the sub company's franchises' fortunes continued to fail this year, they climbed to 65 percent.
Here are the other 9 franchise systems where more than half the SBA loans failed:
Dream Dinners, 60 percent
Planet Beach (a spa franchise), 58 percent
Carvel Ice Cream, 56 percent
Philly Connection, 56 percent
Petland, 56 percent
Beef O'Brady's, 54 percent
Cottman Transmission, 52 percent
Taco Del Mar, 51 percent
Juice It Up, 51 percent
To sum up the report, BlueMauMau asked this essential question: "Loan officers and franchise buyers realize that there are thousands of franchise opportunities to buy from, so why mess with the riskiest?"
It went on to say that, "Unless there is a miraculous reason why concepts with high failure rates are great investments, franchise investors may want to move on to other brands that have lower failure rates."
For more franchises that may be poor bets, click here.
