The recession has hit franchise owners particularly hard. In February, the Small Business Administration (SBA) reporting record loan default rates for 2008. According to the SBA, individuals who took on SBA loans to finance a franchise were 43% more likely to fail in 2008 than in the prior year. In total, those franchise losses cost the SBA $93.3 million last year - nearly 170% higher than the year before. Since 2004, franchise loan defaults have increased by nearly 10% (from 3.1% to 13.4%), highlighting that franchise owners have had an increasingly difficult time making a successful go of their new ventures.
On October 28, 2009, Investopedia.com posted a similar article on franchise loan failures. This is an updated version of that piece. Here we look at 10 companies that the Coleman Report labeled as the worst performers based on loan failures over the 2000 to 2008 period. (For two different takes on owning a franchise, seeIs Buying A Franchise Wise? and Share The Wealth With Franchises.)
This company was founded in Denver in 1991, but things have not been looking so hot for this franchiser for the past few years. The number of franchises under the Executive Tans brand has been dropping: from 87 in 2005 to 35 in 2007, according to Entrepreneur.com. It also hit the No.2 slot on the Coleman Report's list of Worst Franchise Performances when 66% of the 47 franchises that received SBA loans failed on them in the period between 2000 and 2008; 19% of those borrowers failed in 2008.
Mr. Goodcents Subs & Pastas
According to Entrepreneur.com, this 21-year-old company had 105 U.S. franchises in 2009, down from 115 in 2005. However, based on the Coleman Report, many of these companies are failing thrive on their soup, salad, pasta and submarine sandwich diet. In fact, 55% of the 55 franchises that received SBA loans between 2000 and 2008 failed on them loans, landing this company at No.9 on the SBA's Worst Franchise Performance list.
Noble Roman's Pizza
Billing itself as "The Better Pizza People," this Indianapolis-based franchiser has had a tough time selling that proposition to customers. While the company reported a 30% net income increase in Q1 of 2009, Q2 total revenues were down more than $500,000 from the comparable period in 2008. Maybe that's why 53% of the 19 franchises with SBA loans defaulted on them in 2008, landing Noble Roman's to No.13 on the SBA's list.
At the height of the market, working families expanded their spending to include luxuries such as cleaning services, lawn services and even assemble-your-own dinner services. Super Suppers jumped on the concept and experienced exponential franchise growth between 2005 (40), to 2006 (152), and 2007 (206), according to Entrepreneur.com. However, the growth stalled with no new franchise owners coming on board in 2008, and of the 12 owners with SBA loans, 42% failed in 2008, putting this company at No. 14 on the SBA's Worst list.
This franchiser offers smoothies, wraps, salads, soups, juices and more, but apparently not enough more to keep all operators in business. Thirty percent of Amazon franchises that received SBA loans in 2008 failed on them, and more than 52% of the 23 franchises that received loans since 2000 have defaulted, landing this company at No.15 on the Coleman Report's list of worst franchise performances.
PJ's Coffee and Tea Café
PJ's Coffee and Tea Café started out as a small business in New Orleans 31 years ago and only recently began selling franchise rights across the South, Southeast and Southwest. According to a November press release from the company, it now boasts 63 locations, although a few of them are corporate-owned. Unfortunately, PJ's hit the No.19 slot in the Coleman Report's "30 Worst Franchise Performances Receiving SBA 7(a) and 504 Loans" when 50% of the 10 franchises that received SBA loans in 2008 failed on them.
If the SBA's list proves anything, it should be that entrepreneurs might do well to avoid pizza franchises - there are three pizza franchises in the 30 Worst list alone. Twenty-four percent of the 21 Pizza Factory owners who received SBA funding took a pass on repaying their SBA loans in 2008 - that number jumps to 43% over the period of 2000 to 2008.
With a rising unemployment rate, workers aren't knocking off early to hit the links. Perhaps that's what led 24% Pro Golf franchise owners with SBA loans down the path to default. But the fact that 64% of all borrowers have failed to repay their loans since 2000 makes you think that perhaps the business model is the real news, not the recession.
The moral of this story? If you're going to take on an SBA loan to finance your franchise, take a close look at which fellow entrepreneurs are struggling to repay their loans. Borrowing is a common and often necessary part of starting a business, but if you don't pick a business with good revenue-generating potential, you could end up closing up shop – and defaulting on your loan.