The Small Business Administration (SBA) has released its list of the worst franchise investments for 2011. The businesses, largely concentrated in the food and auto industries, are listed based on their need for additional SBA disbursements and their failure to pay back those loans. Sports franchise Golf Etc. of America tops a list that also includes recognizable names like Quizno’s and Blimpie sub shops and ice cream vendor Cold Stone Creamery. Analysts note that with so many franchise options available, interested investors may want to first consult the SBA list. For more on this continue reading the following article from BlueMauMau.
Some of the perennial worst franchises to buy — hoagie sandwich shops, ice cream stops, and auto repair garages — dominate this year’s list. The recession has only helped their failure rates climb.
Once again the Small Business Administration has given its banking list to Blue MauMau. We are publishing it to help inform franchise investment decisions. Taken straight from an SBA loan performance list covering the years from 2001 to 2010, it’s the same list that the agency provides loan officers of its most trusted lenders and banks throughout the country.
Many of these worst concepts are no strangers to Blue MauMau, where lawsuits between franchisors and franchisees have been reported on such brands as Atlanta Bread, Quiznos, or franchising conglomerate Kahala’s Blimpie and Cold Stone Creamery. In fact, brands of diversified franchising firms seem to lose their focus, appearing frequently in the worst list. For example, Marble Slab Creamery and The Athlete’s Foot of franchising conglomerate NexCen Brands appear in the worst performing brands. (The loan disbursements for The Athlete’s Foot are too few to appear in our top 25 list, but its failure rate is 12th worst among the full 580 franchising brands listed.) The stressed-out store owners from these brands often create public forums, sharing information on all sorts of problems in their systems.
Business media often bless these concepts as good buys, either oblivious to the financial struggles of owner-operators or uncaring. For example, with a 71 percent failure rate, the hole in one of worst is Golf Etc of America. The franchisor displays proudly on its web page the accolades of the media and franchise sellers. "Fox News Small Business Center’s ‘Franchise King’ [Cleveland-based franchise broker Joel Libava] recommends Golf, Etc. franchises," it declares.
How to use this list
This list is a quick filter of loan risk, of what franchise brands to navigate around and what looks less risky. For example, with a 48 percent failure rate on SBA loans in 2008, Mr. Goodcents Sub had the dubious honor of having the worst record. This year it is ranked second, but its failure rate has climbed to 64.3 percent. Compare that to another sub chain, Jimmy John’s, which has only 4 percent in defaults.
Loan officers and franchise buyers realize that there are thousands of franchise opportunities to buy from, so why mess with the riskiest? Unless there is a miraculous reason why concepts with high failure rates are great investments, franchise buyers may want to move on to other brands with lower failure rates.
Each franchise brand listed has Small Business Administration backed loans with at least 50 disbursements, a substantial number. Using larger figures filters out many of the smaller franchise systems.
These are the worst franchise brands, where franchise owners struggled more than others to pay back their SBA loans. To put it another way, this group is in the lowest performing quintile (20%) by loan failure rate of major franchise brands on the SBA list.
So here it is: The list of 25 of the worst franchise investments, ranked from worst to bad, from the viewpoint of being a lender of SBA loans and wanting to ensure the best chance of having the loan repaid by franchisee borrowers.
Worst SBA Loan Performance among Franchises
Worst SBA Loan Performance among Franchises
25 brands with 50 or more loan disbursements. Disbursement $ x 1,000
GOLF ETC. OF AMERICA
MR. GOODCENTS SUBS AND PASTA
ALL TUNE AND LUBE
CARVEL ICE CREAM
TACO DEL MAR
ATLANTA BREAD COMPANY
HUNTINGTON LEARNING CENTER
CORNWELL QUALITY TOOL COMPANY,INC
MARBLE SLAB CREAMERY
JUICE IT UP
FOX’S PIZZA DEN
MATCO TOOLS (RENT TOOLS)
COLD STONE CREAMERY, INC.
Explanation of the table
This is ONLY a list of franchises that have received SBA loans. It does not account for conventional, non-SBA loans. Banks aren’t about to release their conventional loan statistics anytime soon. The Small Business Administration notes that the failure rate equals the number of liquidations plus number charged off divided by total number disbursed. The disbursement dollars are for the total amount of loans disbursed x $1,000. Franchise networks that have received less than 10 disbursements (small business loans) have been left off, leaving a list of some 580+ franchise systems from 2001 to 2010. Blue MauMau then eliminated brands with less than 50 loans.
It’s not our intent to just ding. Blue MauMau will shortly release the latest figures for the best franchises to buy with the lowest failure rates.
This article was republished with permission from BlueMauMau.