SBA Studies Say Franchises More Likely to Fail than Small Businesses
WASHINGTON - Separate studies by Professor Timothy Bates and now two studies by the Small Business Administration report that franchises fail more than independent small businesses.
"Despite the popular view that franchisees are much more successful than non-franchisees, SBA’s experience with defaulted loans does not support this."
Over the years, studies have emerged with opposing views when comparing “success rates” of franchising to independent business ownership. Franchise experts are familiar with the reports from the U.S. Commerce Department and those authored by Bates (1996). There are numerous private studies as well delving into franchise ‘success’ and franchise regulation, such as those cited and discussed in “Beguiling Heresy: Regulating the Franchise Relationship," co-written by Paul Steinberg and Gerald Lescatre.
However, two lesser known studies undertaken by the Small Business Administration have received little to no attention. In September of 2002, the U.S. Small Business Administration’s Office of Inspector General’s Inspection and Evaluation Division published a report comparing the failure rate of the SBA’s non-franchise loans to the SBA’s franchise loans. Titled “SBA’s Experience With Defaulted Franchise Loans," the SBA queried:
“If franchise-based businesses are indeed “safer”, then Section 7(a) and Section 504 loans to franchisees – hereafter called franchise loans – should perform better than non-franchise loans in terms of SBA having to purchase defaulted guaranteed loans. In other words, franchise loans should have significantly lower purchase rates than those of non-franchise loans.” (pg 1)
The SBA’s findings?
“Despite the popular view that franchisees are much more successful than non-franchisees, SBA’s experience with defaulted loans does not support this.”(pg. iii)
The SBA also found:
“There is also potentially more exposure per loan on franchise loans. In FY 2000, the average (mean) franchise loan origination was 40% larger than that of the average non-franchise loan. In FY 1991, the comparable figure was only 1%.” (pg iii)
Equally interesting was the following point:
“Moreover, a previously mentioned SBA-funded study [Shane’s 1997 study] found that a franchisor must reach a minimum efficient scale to lower its (as opposed to a franchisee’s) costs. Given this necessity plus the need to collect franchisee-paid fees, franchisors have an incentive to encourage as many prospective entrepreneurs as possible to become franchisees and find financing. Moreover, there is always a risk of some franchisors’ overly optimistic financial projections enabling under qualified prospective franchisees to obtain – and default on – SBA guaranteed loans.” (pg. 1&2)
Prior to publishing, the OIG’s Office of Inspection and Evaluation forwarded this report to the SBA’s Office of Financial Assistance (OFA) for review. In James Rivera’s, the Associate Administrator for the OFA, response to this request for review he stated “A member of my staff conducted a similar study and analysis of the SBA loan data base for the same period under inspection and came to the same conclusion supported by your finding related to the relative success of franchise verses non-franchise loans.” While a copy of this specific OFA’s report is not currently available, the aforementioned letter appears as Appendix C to the attached report.
Although not looking into franchisee success rates as the other studies did, Prof. Scott Shane and Foo conducted research (1997) that shone a light on the high mortality of franchisors, revealing that 1,292 franchise brands studied between 1979 and 1996, only 15% of the franchisors lived to be 17 years old, a rate comparable to independent start-up failures.
Editor’s note: This article was written by Blue MauMau member Oldsword, a former franchise owner-operator. This article has been edited and the facts verified by this journal’s editor.
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Related Reading:
- 2008's SBA Loan Failure Rates by Franchise Brand
- What Is The Success Rate of a Franchise versus an Independent?
- 10 Points of Probability in Selecting a Successful Franchisor
- Startup Failure Rates, The REAL Numbers
- Making New Franchises Work (pdf)
- New firm survival: An institutional explanation for franchisor mortality (pdf)
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For some time I have been searching through the Internet for Prof. Timothy Bates' now famous franchise study, Firms Started As Franchises Have Lower Survival Rates Than Independent Small Business Startups. There are a number of franchise experts who from time to time refer to it.
I found it yesterday (Friday) at the U.S. Census Bureau. A representative at the Bureau was kind enough to quickly respond to my emails and sent this copy of the empirical study of some 20,554 businesses.
Here it is. It is now an encyclopedia entry in Blue MauMau's Franchipedia.
Unless there is more than one franchise study from a researcher in the mid-1990s at Wayne State University you are likely referring to Dr. Bates?
the last 12 years? You probably also didn't know that the IFA so called Dept of Comerce "study" (giggle) was the product of a gentlemen's agreement/fix. They Dept of Commerce guy who did it used to joke about it when he had a lot to drink,
Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School
The article pulled information from the findings of the SBA - the LARGEST franchise lender in the U.S. - with little to no editorial comment. The "slant" was due to the findings which verified 3 other SBA studies performed between 1996 and 2002 - its tough for the findings not to be "slanted" since these studies are apt to find for one group or the other. Unfortunately, these reports regardless of the author, consistently find against franchising. The data being 7 years old has to do with the fact that there are no new studies AND over the past few years the market has seen an even larger influx of franchise scams which has created an INCREASE in SBA franchise loan failures (so if you want the SBA to perform another study be prepared for an even greater "slant"). Yes, while only 12 loans were examined in detail, you should note on page iii under "Methodology" (had you actually read the complete study) you would have seen that 423,393 Section 7(a) and 504 loans from FY1991 to FY2000 were used in the database research for this study . Your statement is unclear to the reader and appears to be an attempt to make the reader believe that ONLY 12 loans were looked at in total which is clearly not the case..
The findings of the SBA are quite clear. They have loaned money to non-franchise businesses and to franchise businesses over decades. In their loan database, which is the largest franchise loan database in the U.S., given they are the lead lender, franchise loans fail at the same if not higher rate than non-franchise loans - based on a review of 423,393 franchise loans. I believe that a statistical sampling of that magnitude can be viewed as quite thorough.
What is most important is the SBA's own acknowledgement that franchisors will have an incentive to inflate revenues in order to get a prospective franchisee approval for an SBA loan (thereby guaranteeing the sale of the franchise). The very reason why there is such a significant failure rate on SBA franchise loans is exactly for that reason. Franchisees are getting these loans after having been "coached" into the projections - projections that the franchisee is led to believe are true. When those numbers do not pan out the franchisee no longer has enough working capital to make the business work. Had the franchisee been told beforehand that those projections were not true and that instead of expecting a net profit of "x" in the first and second years they should actually have expected a loss of "y", they not only would have been unlikely to seek the loan but, most importantly, they never would have qualified for the loan in the first place.
There are over 200 franchise systems with SBA loan failure rates of 20% and higher. While Joe likes to make personal attacks and talks about jihad, he might want to talk about the facts. The SBA has looked at a huge database of loans, a statistically relevant sampling, and for the fourth time has found that AS A WHOLE franchising is not safer than independent business ownership. That is not to say that there are not franchises that do work. What this study and the other 3 before it conclude is that the myth that franchising as a whole is safer is just that - a myth.
Yes and Oldsword's anti-franchising view is in stark contrast to franchise businesses representing approximately 11% of the US economy. Are all these franchisees year after year propping up their businesses to support a franchising myth?
Oldsword is in denial of his own culpability in his franchise failure.
Oldsword, BMM offers no absolution. Alternatively, you can offer your experience to prospective franchise buyers without expectation of any self-redemption. Yes it is a selfless act that may be unattainable for you, but I hope you can at least make an attempt at it.
My God, you are Tyrone's clone!! You both use exactly the same tactic and language: attack the messenger, forget about facts. Plus, "absolution", "self-redemption"., "denial of own culpability". I can go back into other stories where "Tyrone" used the same exact vitriol and tried to pull the same stunt.
The facts and ALL the studies speak for themselves. I am not claiming that ALL franchising is bad. The reports, yes, ALL OF THEM, are making the point that, as a whole, franchising is not safer than independent business ownership. That does not mean that there are no "good" franchise systems out there. This report looked at over 420,000 SBA loans and just stated the facts. Read it. It might do you some good.
Oldsword you have been disingenuous with editorializing your source documents and I take exception to it.
4 Studies over 6 years. The last one utilizing over 420,000 loans. ALL either authored by or commissioned by a government agency who's best interest (given franchisors are a major client) is to find in favor of franchising. YET, ALL concluding the same thing. Franchising, as a whole, is not safer than independent business ownership. No editorializing here. Just stating the facts.
You aren't chillin you are seething with anger.
You need to go back to your Don and Oldsword blog and read it again. You abused relevant franchise loan performance studies to support your anti-franchise position.
Again, 4 Studies over 6 years. The last one utilizing over 420,000 loans. ALL either authored by or commissioned by a government agency who's best interest (given franchisors are a major client) is to find in favor of franchising. YET, ALL concluding the same thing. Franchising, as a whole, is not safer than independent business ownership. No editorializing here. Just stating the facts
Oldsword -
In your blog you approach franchising as though it was "monolithic" and it is, in fact, diverse and wide-ranging since it cuts across many different industries. It is a faulty approach and you relied on highly opinionated and narrow studies yielding no actionable or conclusive results proving nothing of any great import to serve your ego.
What would a prospective franchise buyer do with your generalized analysis?
How would it help them choose wisely for example a supplemental education franchise?
How would it have helped you make your decision had you had the benefit of the information you now hold out as a "Smoking Gun"?
Would you have eschewed your franchised supplemental education business choice and opened an independent supplemental education business or bought a different supplemental education franchise?
Could you endeavor to seriously assess your franchise search, purchase, ownership experience and what role you played in the process?
What role did cognitive dissonance play in your pre-purchase franchise due diligence?
You may choose not to address the questions I've asked, but if you set aside your well worn ax and did, you might actually provide a sobering, informative and instructive review of your experience to the BMM community.
Away for most of the day so am just catching up on the comments. Oh, and Joe, this will be fun. I'll even write it with one hand tied behind my back. (I'll also write V. . .E . . .R . . Y S. . .L. . .O. . .W. . .L. . .Y so that even you, Joe, can understand.)
A. Highly opinionated? (This has been covered already.) The U.S. Small Business Administration. The largest lender to franchise systems in the U.S. An agency that benefits by writing more loans and therefore is motivated to expand lending to the franchise community. And they’re considered opinionated? A high level member of the SBA OIG's office, after telling me of this study, even said they were shocked at the findings.
B. Narrow? Well, I guess if reviewing over 420,000 loans, encompassing ALL "diverse and wide-ranging" industries over a 9 year period is your definition of narrow then you truly are just a franchisor apologist. C. No actionable or conclusive results? A major agency of the U.S. government has now made clear that after 4 studies they "should ensure that the Agency's printed and electronic information on franchisees no longer states that franchise-based businesses are significantly more successful than independent businesses." Well, the SBA concluded that franchise based business are not more successful than independent businesses and recommended the action that they pull any comments alluding to that in their literature. That's pretty conclusive and they deemed the results pretty actionable, didn't they? The other "action" to be taken from this study is for potential franchisees to understand how few franchise systems actually perform financially as they claim. (or salesperson claims)
Let’s see, the franchisor salesperson said the closing rate was 5%. First, she was using the definition of “closing” that the IFA has conjured up – which, Joe, no one knows until after they get involved in these things (while most potential franchisees inquire about “failures”, franchise salespeople respond with the word “closing” because they know the IFA has redefined the word to mean something other than what the franchisee means). Second, that rate was the rate that the IFA uses (used?) for ALL franchises based on the Commerce Dept study even though it was not true. Third, had I known that instead of making $75,000 in the first year (as stipulated by my salesperson and restated by my loan consultant – provided to me, kindly, by my franchisor), I should expect, given historical data of DECADES that I could expect to LOSE $100,000 - $150,000 in my first year and lose money again in my second year, no Joe, I don’t think I would have taken the loan out that put my home at risk and, more importantly, put my family’s financial well being at risk. What in the study would have helped me? The failure rate lie for starters. I would have realized right then I was being lied to. Plus, the SBA’s very poignant comment that EVEN THEY EXPECTED FRANCHISORS TO INFLATE THE NUMBERS IN ORDER TO GET MORE POTENTIAL FRANCHISEES TO BE APPROVED FOR THEIR SBA LOAN. I don’t know how many more times I have to say these things but I am getting tired and bored repeating the FACTS that you so strongly try to ignore. So, yes, I would have “eschewed” (nice word) my choice of franchisor and the business as a whole.
Don’t need to. This string is about how the SBA has determined that franchisees ARE NOT more successful than non-franchisees and how the SBA is concerned that franchisors will inflate their numbers to get potential franchisees to get SBA loans.
Joe, keep on asking so I can keep on repeating. The more I respond to you, the more people out there get to know the truth.
So, I guess an honest and unemotional firsthand franchise experience account by Oldsword is just asking too much?
It is unfortunate that you have not focused on one specific point I have made, which is in stark contrast to other posters that have engaged in thoughtful dialogue.
And I am not interested in being drawn into senseless fight with an anonymous guest who wants to throw insults like hand grenades. What I have posted has been thoughtful, legitimate and experienced points of view that you don't like, so be it.
It would be really healthy if both sides of the argument accepted the validity of both sides of the franchising argument. One side promotes what it could/is/should be and the other side has been screwed or has been typically heavily involved with those that have been screwed when it isn’t how it could/is/should be.
To be honest; I don’t give a rats ass about any study for or against; let us be honest – they are all interpreted to support an argument or they are challenged because we cannot use a particular study to support a particular side of the argument. Examples of the reality of franchising are here at BMM; many work and many more are very freekin dangerous. The facts to be interpreted are here every week in the midst of the commentary and within the blogs.
I know what it could/is/should be and it simply isn’t in the majority of franchising even taking into consideration degrees of damage associated with deliberate scams vs any idiot can start a FranWhack and then considering there are some that perform well and others that perform very well.
The fact that there is serious crap happening in franchising isn’t healthy for the reputation of the business model. The crap doesn’t seem to be going away so neither will the ongoing damage to the industry’s reputation.
I would at some time like to explore an opinion that we all should be working together accepting that franchising is potentially a better model for the ‘little folk’ against big business destroying competition and controlling all markets including the trafficking of future generations as slaves in a big business controlled quality-of-life environment. Is it big business or the legal industry behind big business that should be feared?
It strikes me that the arguments will continue on into the nether world and achieve nothing until we all accept that the concept is necessary but regulation and education needs some serious freekin work – and assholes need to be dealt with loudly, efficiently, ruthlessly, affordably and speedily as a deterrent to future asshole behaviour.
I accept that governments are not there to protect stupid people from making uninformed decisions. But what I cannot accept is that government relies on that argument to avoid the challenge of effectively regulating thieves and scams within a franchising industry predominantly built on abuse. You can point your finger at the stupidity of a drunken woman walking through a park at midnight but we still expect her rapist to be locked up.
I have a question on the SBA mess. Those that were so badly in control had to have seen that loans were going to hit the fan. Did they decide that the people that were going to be those now reported failure rates were ‘statistically insignificant’?
The more things change; the more they stay the same.
I'll come at this from a different (but very simple) perspective altogether in deference to all others who are good thinkers, and then try to just leave it alone.
R. Borradale suggests everyone reason together on this subject by asking "Is it big business or the legal industry behind big business that should be feared?"
Well, it's neither, and that's the root of logic that has to be dug up.
First ... Take big government out of the picture. Take big business out of the picture. Take franchising out of the picture.
What’s left is 'FREE WILL'.
If one lives in an environment where they are free to make personal decisions, then responsibility for those decisions rests with the 'person’, not anyone or anything else. One is not duped if they make a decision to buy an item that is encased in disclosure, unless they choose to say that they were duped by themselves. Now, one may not be able to decipher the ‘disclosure’, but if that’s the case, it’s their duty to get help.
It doesn’t matter what the SBA might say about franchise loan default (and btw, there are more important reasons than stated by the SBA why certain loans default). It doesn’t matter if franchising is even ‘safe’. All that really matters is that a person has the ‘right’ and the ‘responsibility’ to investigate (with help if necessary) and make a personal decision.
A rational person does not go to the circus, play 'knock down the milk bottles' and then complain to the FTC that the game was fixed because they lost their bet.
So, when it comes to 'fear', it isn't even our ability or inability to make a good decision that should concern us. It's our foolish pride, our gullibility, our ego (or whatever you want to call it) that we should fear because those are the things that get us in trouble.
Good luck and God bless as life marches on.
Nick Bibby founded BibbyGroup.com, an organization dedicated to franchise and entrepreneurial excellence.
Free will?
Let's wrap ourselves in a convenient, catchy phrase that essentially says it is alright to scam someone out of their life savings, leave families destitute - as long as they did it "of their own free will". When will "franchise specialists" use phrases such as "full disclosure"?
"It doesn’t matter if franchising is even ‘safe’. All that really matters is that a person has the ‘right’ and the ‘responsibility’ to investigate (with help if necessary) and make a personal decision."
That statement says it all. Keep the real information from the one who is taking the most risk. As long as you get paid. All we wanted to do was to start a business that is supposed to be a proven, successful business model. We were trying to do something honest with ourselves. Disgraceful and pathetic.
Not only are you an insulting cuss, you are obviously bent on turning absolutely everyone against your sorry self. So, I guess you've been successful at something.
Here's newsflash for all serious prospective franchisees: Take a lesson from the new "troll' in town. If you lack any degree of common sense, or the ability to get along at all in society, or the insight to see beyond hatred, or...., then just don't bother to go out of the house because the world is too nasty a place where everyone is out to get you, no one tells the truth, and if you ever fail it's everyone else's fault. - by Ole Sorry Sword.
Got it Sword ole boy? Now fire one back from behind your scared mask of invisibility to make yourself feel better sitting on your couch in the cellar. That way you can have the last word and show everyone what a bad ass you really are.
Thanks for the laugh.
Nick Bibby founded BibbyGroup.com, an organization dedicated to franchise and entrepreneurial excellence.
My comment had to do with "FULL DISCLOSURE", a phrase that sends most franchisors and franchise salespeople running for cover under the banner "free will". With full disclosure, there would be a dearth of franchise sales and therefore a true shakeout between those franchise systems that work and those that don't. While Ray may say to read all of the posts, I have - including his. The theme: most franchise systems don't work, and, in essence, are scams.
The study mentioned at the top of this string is not "stand alone". If you read it properly, starting from page 1, the SBA is including the results of it's multiple studies along with the conclusions/findings of this one. Why not ask yourself WHY the SBA is pulling ALL references to franchising being safer than independent ownership after all these years? You can insult me all you want. Where the above and your previous comments fail is that, as all legal personnel have stated here and elsewhere, it is nearly impossible to determine the true worth of a franchise system because the information is skewed, obfuscated and, yes, lied about, in order to continue the charade. If you truly want to consider franchise sales to be an honest sales program rather than just a system whereby one is able to part an individual from their years of wealth creation, then start using the words FULL DISCLOSURE.
The studies speak for themselves - all of them. Franchising is not safer than independent business ownership. If people want to weed out the scams, which all the franchise salespeople/consultants ALL seem to cite as their goal, then talk FULL DISCLOSURE.
Oldsword I understand your anger and recently I was given some old advice ‘privately’ that I had forgotten. When your content contains venom people only hear the anger and the content of your arguments is lost. I just don't believe you come here to vent your anger but then at times you end up doing just that.
I tend agree with most of the commentary here but definately not all; and every now and again something incites me and I fail myself in how I react. There was a time recently when a number of problems I was dealing with, including having to deal with a series of franchisees and their wives in tears, and I was angry and I lost my perspective. But if I attacked everyone here that has had a shot at me or disagreed with my take on an issue, and that is a regular event, than no one would bother to at least consider what I try to present.
Could I suggest that you take some time off and read what the people here have to say overall and consider their individual approach to their message? Start with this; Nick Bibby
The more things change; the more they stay the same.
I'm very happy you got to me before Richard. You have eloquently covered the irresponsibility of the woman in the park. Does anyone want to consider her lover’s free pass and the reputation of the park because she was foolish?
The more things change; the more they stay the same.
I think the hope of some on this site is that the easily ravaged woman will pay the money for the right shotgun and binoculars to better see her attacker and to keep him at bay.
The attacker appreciates the freedom of the wide open badlands. So did the woman, until she was attacked.
You ask about what happens when the reputation of the park becomes really, really bad? (Free will spawns the world of Mad Max.)
That's when it is either abandoned or enough citizens ask for effective rules and a park ranger (sheriff).
Probably because that is their only hope Bob.
The more things change; the more they stay the same.
It sounds like you've answered your own question about letting the abusive franchisor man go free and on the consequences to the park's reputation. The focus is that it's a jungle out there and training the operators on how to cope with it is their only hope.
A natural extension of that argument is to keep franchising completely unregulated and free of having the government pretend it is looking at disclosure documents and looking out for investors. If it is the law of the jungle, then let's not waste money in hiring a park ranger to pretend that this wilderness is actually a garden park.
Should Australia, Canada and the U.S. just follow Great Britain in dismissing any charade of franchise disclosure regulation? The U.S. is arguably the most regulated franchise market in the world. How much has that helped franchising?
Come to think of it, does the U.S. have the most franchises in the world per thousand people because of our regulations or despite it? Don't know.
I'm torn. Get the government out, or should there be better regulation?
Frankly, I doubt if I would have been able to spot the Bernie Madoffs in the industry. And I doubt if the industry's top consultants could, despite their self-confidence. As for me, I'll take luck over brains any day.
Hey Bob; you are torn? I had a new one torn for me too!
On one hand; the sheriff is drunk and hiding out the back of his bureaucracy so why bother? I should be able to accept that my being disgusted that franchising thieves are ignored is just the way it is …. but unfortunately I just cannot.
And that ain’t saying I seriously believe it will change. I don’t! I’m just disgusted and I just don’t understand why it is acceptable. AND I am not making excuses for people that don’t do their due diligence.
Give a stranger access to your life savings and you get robbed – you are foolish. But the crook gets goal time. Surely there should be something as a deterrent? Is there a penalty for the foolish that overrides the need for a penalty for those that scam people deliberately because they are foolish – I would have thought so and while there seems to be many that will argue that the fallout entirely belongs to the foolish …. that just doesn’t pass the pub test in any local community.
First question:
Second question:
When franchising investors don’t have a franchising sheriff, and there simply isn’t one anywhere; then investors better learn how to distinguish good from bad investments [or hire an expert that can], and if they can’t/won’t then they would be best to stay employed or go it alone because there is no recourse if your bottom line is designed to be hanging out your pants.
Forget the glitter and the bullsiht – there are many more scams than justifiable investments in franchising. And that sickens me as well given that I am passionate about good franchising investments.
And on the other hand I have a blister … Nah! .. make that two ..
The more things change; the more they stay the same.
Well if you know you are in the park and you are scared then you ain’t drunk. So here is some free advice for you, and if not you, for those franchisees that are really in deep financial poo.
Firstly; shut your public mouth and even then remember that the grapevine is quick and the rattler at the end is sometimes just as quick. Franchisees in trouble tend to multiply their problems by attacking while ‘believing’ they have support. Seriously consider ‘your support’ because supporters will cover their ass before yours.
The vast majority of supporters will prefer you shoot your mouth off while they hide under the counter. They will support you until you are gone. Attacking the franchisor without coordinated support is really dumb. You will get burned. But there is a way to overcome that problem …
Secondly; get some expert advice even if you really want to hide the pennies. Put your hand in your pocket because without help the pennies will be gone anyway and so will everything else you hold dear [like your home and maybe even your spouse]. I am not joking …
You either get an expert franchising lawyer or you get an expert franchising lawyer to drive your group into a franchisee association and become your spokesperson; and even then that depends on whether you a) have franchisee support, b) you can/will access money and c) you have a legitimate bitch.
If you have a legitimate bitch then you need to know that even if you can substantiate whatever the issues are you might get your ass kicked anyway but you will never know until you find out what a good franchising lawyer IS and where to find one. If you really are being scammed and would like a second experience then go get a franchising lawyer pretender.
If you really are scared then you need to appreciate that the ex-franchisees of the world support the anti-depressant industry and you should talk to a qualified person and get some balance or your decisions from now on may haunt you forever.
Otherwise; you are screwed in the park whether you are drunk or not. You didn’t want to hear that? Sorry – but you possibly needed to. If you do nothing then take your time getting over your franchising experience and then come back here one day and tell us about it so the next person might take some free advice at BMM seriously.
If you believe the primary issue is the loan then they should look back to the investment and your due diligence.
The more things change; the more they stay the same.
Bob, interesting question. While many here seem to not like my comments I would like to take this opportunity to respond and then step out of the way.
"Get the government out, or should there be better regulation?"
Some of the lawyers and franchise consultants/salespeople accuse me of wanting the government to "hold my hand" and that, in actuality, the government should get out of the way and let the "free market" do its thing. Tell you what, let's do just that. Let's get the government the hell out of the way. Why? Because the government "distorts" the marketplace by being in the way. Isn't that always the argument. So get them out --- Including the SBA. You see, the SBA massively distorts the franchise market by providing a "stop loss" to the banks. Little due diligence is performed by the banks because they know that 75% (or is it now up to 90%) of the loan amount is guaranteed by --- the Government!! Take out the SBA and the banks will require franchisors to provide real numbers by showing historicals. Do you really think that banks will invest THEIR money in most of these things?
What will be left? The real franchise systems that are truly profitable. My guess (yes just my opinion) about 25% of the franchise systems that are currently out there. Why? Because no bank is going to lend money to a business that has true historical averages showing major losses in year one and two. So, now let's hear from the franchise sales people and consultants about keeping the government out of franchising. There is no greater distortion to the franchise sales marketplace than the SBA.
(BTW just received an email from a franchisee from my former system. Informed corporate he is selling. Then was called by head of franchise sales and told in the conversation that if he is not grossing $500,000 per year he won't make money - funny how that matches the SBA's loan projections but is double the actual average for a first year center - just further confirmation that they know.)
Having to provre up investment worthiness on real market terms through qualification for loan support would do far more than the bullshit the government provides. By inculcating a false sense of security the government actually does more harm than good.
Good show OldFart
Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School
If Oldsword wants to argue that the SBA process allows franchise fraud loans to be processed and distorts the capital markets to the detriment of good franchise systems, I am all ears.
Michael Webster, a franchisee attorney in Toronto, Ontario, publishes a website on business opportunities and franchises called "The BizOp News"
Michael, this is what I have been saying the entire time(both on this string and elsewhere) - and by the way, the SBA alluded to it in this very study. Secondly, the banks don't care about the numbers because the loan is guaranteed by the government - who cares if the loan goes under? (yes, if the banks are found to have been "negligent" in following the rules the SBA can refuse to pay the guarantee - but SBA audits are few and far between). Third, SBA 7(a) - I don't know about 504 - loans can only be provided to those who are unable to obtain a traditional loan.
So, SBA loans are going to people who could not have otherwise acquired a loan to purchase the business. Take away SBA loans and how does it decrease total franchise sales?
Plus, the major problem with SBA loans is that the projections used for many of the SBA loans are inflated in order to hit the SBA's requirements. So, if everyone wants to get the government out of the way let's do it -- completely. Don't tell me that we need to get rid of regulation and yet provide a false, government provided safety net to the banks so that loan money can be freely distributed without any real verification of the application projections. This will ultimately concentrate a much smaller capital pool of real market money into the franchise system and therefore a more discriminating view of what is truly proven to be a profitable franchise system will play out.
the reality of doing business with a rogue zor, how can you even give your opinion about what hurt zees go through?
Oldsword has investigated SBA loans and has given facts that many zees should of never been qualified to buy a franchise.
Franchising is not safer if you are with a rogue zor.
You have to focus on the trees, here.
The SBA study has its limitations, which you should acknowledge.
There are a number of interesting points made, which hopefully we can could update.
And your conclusion is not borne out by this study: all this study did was to suggest, for good reasons, that the SBA refrain from making any statement about the relative safety of franchising versus independent start up.
That would be an excellent starting point for most people: there is no conclusive data which demontrates that buying a job with an FDD is better than starting your own business.
Now, given a particular choice between buying a job with an FDD and starting by yourself, what are the factors, risk reward fornula, and other considerations which are in play?
Stop focussing on the forest and start looking at the trees.
Michael Webster, a franchisee attorney in Toronto, Ontario, publishes a website on business opportunities and franchises called "The BizOp News"
Michael, not sure where you were going with your comments. However, you may want to reread the report. There is a distinct difference between the 'findings" and the "recommendations". In your comment:
"And your conclusion is not borne out by this study: all this study did was to suggest, for good reasons, that the SBA refrain from making any statement about the relative safety of franchising versus independent start up."
That, Michael, was the SBA's RECOMMENDATION - not finding. Please refer to page iii where in the "Findings" they state that between FY 1991 and FY 2000 franchise loans fail at a slightly higher rate than non-franchise loans and that the SBA's experience with defaulted loans does not support the popular view that franchisees are much more successful than non-franchisees.
As for forest and trees, I don't understand your point. All I know is that the SBA recommended, after completing this study, that ALL references to franchising being safer than independent ownership be removed from their website and literature. That should speak for itself.
Oldsword suffers anti-franchising disillusionment syndrome and Don is enabling him. He should be pitied, but not reviled for his lashing out against all things franchised. He had a franchise failure which is unfortunate and deserves proper deference. It does not however give him the right to use shoddy data in support of his jihad. There are good and bad franchises and it is incumbent on prospective franchisees to choose wisely.
LeStat writes: "Oldsword's hobby horse is franchise liar loans. Those are bogus proforma financial statements filled out by lending brokers in cahoots with franchisors in order to falsely qualify franchise buyers for government-backed loans."
I wish that he would stay on this topic, because what he has to say about franchising in general is wrong.
We had a great debate about this very issue in talking about Funding Solutions. It is a very important topic, but frankly Oldsword is not adding anything of interest to the topic because of his lack of focus.
Some questions of interest would be:
1. When did he see his pro forma?
2. How did he check out the pro forma?
3. How did the pro forma match up with Item 19 earnings?
4. Before seeing the pro forma, what did Oldsword determine in advance were going to be red flags? Or did he just drive through them after getting the FDD?
There are a lot of interesting angles, but Oldsword is using up his alotted attention span from us by making the same general errors in reasoning that probably lead him to disaster in the first place.
Michael Webster, a franchisee attorney in Toronto, Ontario, publishes a website on business opportunities and franchises called "The BizOp News"
It seems to me that Oldsword has been trying under this article to avoid his hobby horse. Let's not push him into it. The topic of this article and this thread, which he has been pretty good at trying to focus on, is "Failure rates for franchises are higher than independent startups."
Let's keep to it.
He and others should post elsewhere on his favorite topic of liar loans that the SBA enables and the absence of reasonable disclosure for franchisees.
Les,
You are the first person to summarize my position correctly. And, yes, I do state this same argument frequently. Why? Look at Richard Solomon's response to my comments on Quiznos. Quiznos is an "aberration" according to him. In my humble opinion, if you don't want to look at the projections on Quiznos, how about Subway? No? Then how about Blimpie? No? Cold Stone Creamery? No? Hollywoood Tans? No? Cuppy's Coffee? Need I go on? The SBA requires that their loan payments must be made through a franchisee's "excess cash flow". That excess cash flow is shown on the loan projections and MUST meet or exceed the minimum debt coverage ratio stipulated by the SBA and their representative banks. If you have a system whereby 40% of ALL the franchisees do not make any money at all (stated by head of Quiznos), then how the hell can any significant number of BRAND NEW franchisees be hitting their "projected" profits. By the way, its funny how that 40% is close to Timothy Bates' findings that one third of all franchisees don't make any money (but he doesn't know what he is talking about, does he?). Over 200 franchise systems have SBA loan failure rates higher than mine and my system has about 40-50% of franchisees that are not breaking even. Think about that last sentence. Look at those numbers.
This is widespread and no one talks about it because many don't understand how numbers work (exactly the kind of people franchise salespeople love). Even if they do, the way franchises report (read: skew, obfuscate) the numbers it is near impossible (which Richard Solomon agrees with) to figure it out without specific representation that few know exist.
I could delve deep into specifics but I don't want to bore the readership.
Oldsword: "Over 200 franchise systems have SBA loan failure rates higher than mine and my system has about 40-50% of franchisees that are not breaking even. Think about that last sentence. Look at those numbers."
Let's assume your facts are true.
What else could we conclude - as matter of logical thinking?
What causes an SBA loan to fail? Could it be that the capital requirements needed to see break even are more than most franchisees who obtained an SBA loan have? Could the build out requirements taken up more of working capital than the franchisee foresaw?
Is there a difference in a particular system between a) people who didn't need loans, b) people who obtained conventional loans, and c) people who obtained SBA loans?
Are the SBA loan failure rates, relative to geography, higher than the base rates for other comparable loans? (We wouldn't be surprised, for example, to see that a lot of businesses located in the New Orleans area failed in the last several years.)
There a myriad of possibilities - none of which you explore because you have a pet theory which you are seeking only evidence which confirms that theory. This is the type of thinking that got you in trouble the first go around. Confirmation bias - seeking only evidence which is consistent with your theory. That is why you lost your money. (This post on confirmation bias may be of some use.)
This time, all you are losing is our collective attention - which may have turned out to be more valuable than your capital investment.
Michael Webster, a franchisee attorney in Toronto, Ontario, publishes a website on business opportunities and franchises called "The BizOp News"
Michael, I am going to respond to both your comments (this one and "Old Swords Hobby Horse) right here. Regarding the "horse'", (and with all due respect) I honestly have answered all those questions several times on various strings. Yes, I hired an accountant, a franchise attorney, spoke with numerous franchisees (both current and closed), visited franchisees. And, yes, the UFOC did not raise a red flag. It is easy to twist and turn the numbers, both income/expenses and closures/failures. Your new partner has, innumerable times, stated that only a handful of true franchise experts know how to decipher "the code".
As for your questions here. Michael, 50 states, 420,000 loans. An average of 8000 loans per state - and that is assuming that Montana, Wyoming, Alaska, North and South Dakota, and Maine all have their fair share. Do you really think that New Orleans is really going to skew the results? Even before Katrina that city was an economic nightmare.
This story is about the culmination of 4 major studies (even Bates accounted for over 20,000 loans) that all converge to the same point. There is a hugely significant sample in the above study that confirms the results of the "smaller" ones. The database is nationwide, reaches all franchise industries, accounts for an economy that was both booming and in difficulties (very early and late 90's) and is compiled by both the largest lender and most neutral body in this arena. (As stated before, the SBA has a compelling reason to want to find in favor of franchisors: their mandate to lend more money to small businesses. Yet, consistently they find against them.) The results are clear, concise and, given the number of studies and size of the database, very compelling: Franchisees are not more successful than non-franchisees (pg 3), SBA franchise loans fail at a higher rate than SBA non-franchise loans (pg 3) and the SBA is concerned that franchisors have an incentive to encourage as many potential entrepreneurs as possible to become franchisees and provide "overly optimistic financial projections enabling underqualified prospective franchisees to obtain-and default on- SBA loans." (pg2)
This is my last post in response to Oldsword and this particular SBA Study.
It is clear to me that you have not read the significance of this study, and indeed many of the more important observations such as the dramatic increase in the size of franchise loans from 1991 to 2000 have escaped your attention.
There is nobody on this site who believes that franchising qua franchising is a guarantee of safety.
One can agree with that and yet think the various studies comparing franchises with independent business are shoddy. In fact this particular study raises the very question about the accuracy of their own database!
This SBA study also confuses the requirement to register a UFOC with the requirement to have a UFOC, and explains that it is hard to know what a franchise system! This is an outrageous statement, based an a clear error of understanding the law.
Now, on the other hand, the 12 loans that were analyzed as a case study do reveal some interesting details, which you should be following up on.
As for your previously information on what you did wrong, according to you, you did nothing wrong. Ok. Seems unlikely.
Finally, this was one of the most misleading headlines for an article that has ever been on BMM. And you ought to re-write it.
Michael Webster, a franchisee attorney in Toronto, Ontario, publishes a website on business opportunities and franchises called "The BizOp News"
Some argue that SBA loans are low quality, high risk loans compared to conventional loans and so are skewed to higher failure. But actually SBA failure rates for small businesses are the same or less than the base rates of conventional loans. That is what banker Ted Morgan, head of the credit department at Broadway National Bank in New York, told BusinessWeek about his experience:
If memory serves correct (I'm looking to find it), the SBA observes that SBA-backed loans nationwide default somewhat less than conventional loans. e.g. Franchisees fail to pay back their conventional loans at higher rates than defaulting on their SBA loans.
Uh oh.
The bad news is that franchise failure rates for SBA-backed loans are this year on the rise. But hey, given the economy, one would think that so are conventional loan failure rates.
If I am reading Joe Caruso correctly, he is saying that:
I would agree with both of those points, although I do think that the numbers have a useful purpose.
It is true that saying that "franchising" is good or bad is rather like saying that "stocks" are good or bad: there is a difference between buying shares in the local electric utility versus those Canadian tar sand penny-stocks that Webster's relatives hawk to Florida retirees (and Mike, my grandma wants her money back).
The value in the SBA numbers is to rebut the traditional IFA position that franchising is a sure thing since you have a "proven" business model and "ongoing support."
There are some very good franchises out there, and far more crappy franchise systems. All franchises are not created equal, and in my personal experience the good franchisors discuss their own systems, while the shaky franchisors rely on the "franchising means you have a 95% chance of success" pitch.
In the United States, the last few years have seen a greater scepticism of the sure-bet-if-you-buy-a-franchise sales pitch, and these SBA numbers should serve as a cautionary lesson.
Paul Steinberg, Franchisee Attorney, New York City, Ph: 212-529-5400
One of the oddities in Scott Shanes' 1996's SBA report is that of the 157 franchise systems he studied, the ones that survied had the lowest ratio of support staff to franchise operators!
He has some other ideas for due diligence, but I found this idea very interesting and wonder what people think.
Oh and Paul, Granny ain't getting a dime. She knew, in advance, that my very well respected cousins on the Vancouver Exchange were investing her money in a blind pool. Then, your Granny turns out not to be blind, so no soup for her.
Michael Webster, a franchisee attorney in Toronto, Ontario, publishes a website on business opportunities and franchises called "The BizOp News"
Interesting. It seems the franchisor lesson here is to be stingy at first in hiring support staff for franchisees in order for the franchisor to survive as a business entity.
That's one reason among many that I'm not interested in a newbie franchisor.
If Shane is correct, and I am not convinced that he is, one explanation might be that good franchisors select franchisees who are capable and don't need hand holding. Just a thought. I haven't seen any other academic work which updated Shane's observations.
Michael Webster, a franchisee attorney in Toronto, Ontario, publishes a website on business opportunities and franchises called "The BizOp News"
newbie franchisor. It isn't a nice guy issue. It is a preparedness issue.
The reason good potential new franchisors fail is mainly that they have not done the homework properly. I've seen some who haven't even put together an ops manual and try to write an ops manual into the contract itself. Jeff Annon here in Houston tried to do that with his fish taco franchise (Berryhill's). It was when I read the contract that I knew he was lying to my client about what he had to offer in the deal. When we called him on it, he became more reasonable about the terms of the deal. I don't think there are any of his stores open anymore. Why my client bought an area from him anyway could make one hell of a sitcom.
Many newbies will take money from anyone no matter where they may be located. Doing that does not give you a tight wheel and spoke pattern that is easier to support and leaves remote franchisees out in the hinterlands with nothing but ther own selfs - no advert economics; no nothing; franchisor won't send a rep out to see you because it's too expensiove to send reps all over the country - and that's if you even have reps when you are a newbie.
It's a competence issue, not a nice guy issue. If you have done the work and are "ready" all you need is regular old good business manners.
Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School
I would add that quality, passionate, affordable support people in a newbie franchise ‘system’ would typically not happen. The newbie franchisor does not know where to begin and this is just one part of the homework. Franchisors often know as little about the ‘franchise’ front line as the franchisees they sell on the concept. Let’s face it; most newbies start off small and end up smaller and then they leave town.
Even the great big franchise systems were once newbies; but that doesn’t mean nuttin in most instances. Even with the best of intentions a new franchise concept is hard work and a hell of a gamble with other people's money.
The more things change; the more they stay the same.
Thank you for your thoughtful and reasoned opinion.
isn't real. And Quiznos should be an aberation. There should never be another deal with anyone with the name Schaden anywhere on it. And there are other names that make any deal a FranWhack, not just the Schadens.
The SBA, the ABA and the IFA aren't guilty of anything in any practical sense. Ranting about things that aren't going to be changed is useless noise.
Rant about people who don't get expert due diligence assistance before they sign contacts and write big checks. Educating franchise investors is something that has a potential for success. The government will never be what you want it to be, and the government is immune from all consequences. The SBA will be the same under Obama as it was under Bush.
Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School
First people need to understand exactly what due diligence means. Then maybe people will see the importance of getting or hiring a due diligence expert in franchising. Many of the zees who get scammed in franchising are extremely hard workers. How do you think they were established enough to even think they could buy a franchise?
When you discover that there is alot of misrepresentations from SBA Loans and everything in the business you go in sink or swim mode. Most of the rouge zors will get you at the beginning after you sign on the dotted line. In less than a year in many cases you have lost all you worked for. You go from having alot of assets to none. Riches to rags over night. Then you don't know what hit you.
It is not logical to tell people just move on. Many don't have thirty years to build what they had. What is even worse many are forced to get very low paying jobs. All because of a contract that is misleading and favors one party Oh no we have no reason to be angry at rogue zors and the banks that approve people for SBA loans. There is no honor in business anymore.
"SBA Studies Say Franchises More Likely to Fail Than Small Businesses" the title suggests that it has been empirically proven that franchises are more likely to fail than non-franchised businesses. Well Don and Oldsword you may be doing exactly what you are accusing other folks of doing using bad, incomplete and anecdotal statistics to make a biased point.
First of all SBA, by their own admission, states that the coding of franchise and non-franchise loans is inaccurate. The SBA study is about SBA franchise loan and SBA non-franchise loan performance and does not take into account franchises and businesses that do not avail themselves of the SBA 7A or SBA 504 guarantee programs. Many successful single-unit, multi-unit and multi-brand franchisees don't or can't use SBA guaranteed loans hence they are not counted.
Albeit interesting your blog does a poor job of supporting its title, does little to help people select good franchise investments over poor or scam franchise investments and in the end is inconclusive. If the aim of the article is for Oldsword to strike a blow against franchising and the franchisor that he purports scammed him then great, but don't try to cloak the attack as a reliable treatise on franchise vs. non-franchise business investments.
Your article is almost as bad as the often chanted and specious U.S. Department Commerce statistic on the success of franchises over non-franchised businesses. Whether people like it or not caveat emptor is alive and well in all business investing regardless of the type of investment e.g., independent, franchise, BizOp, MLM, etc... careful consideration of the merits of the proposed investment and thorough due diligence are prerequisite.
Joe writes: "Many successful single-unit, multi-unit and multi-brand franchisees don't or can't use SBA guaranteed loans hence they are not counted."
If you look at the tenor of the report, it is simply trying to dispel the myth that franchising per se is more likely to succeed than an independent business. I think most people agree with that, but everyone of us believes that certain franchise systems are more likely to succeed than an start-up. Only the most anti-franchising crusader would disagree with this, I believe.
Having said that, the SBA loan defaults are useful as guides away from bad systems, which inevitably have few multi unit operators. It is a reasonable decision to strike from one's list a franchise system with high SBA defaults, especially if one's own carrying costs have a low budget.
Now, on the other hand it may be that the SBA loan default for a particular franchise system is high because the franchisor took in an above average of franchisees who could not afford to pay the carrying costs until the unit became profitable. (I understand oldsword to be making this point about his system.) Again, this is where having a mandatory item 19 would be helpful for both the franchisor and franchisee, as the real carrying costs could be revealed.
Michael Webster, a franchisee attorney in Toronto, Ontario, publishes a website on business opportunities and franchises called "The BizOp News"
You know my position on crappy below investment grade franchises, and for those that don't...I am against them. On Item 19 FPrs I am for them. On the Oldsword blog I think it was a self-serving misrepresentation by an ax grinding failed franchisee offering nothing useful or helpful to prospective franchise buyers. However anecdotally the SBA loan failure rate is a worthwhile barometer on the health of individual franchise concepts.
Joe writes: "However anecdotally the SBA loan failure rate is a worthwhile barometer on the health of individual franchise concepts."
For those of you who don't know, Joe and I are good friends but who see things from very different points of view.
Joe has a wealth of franchisor executive experience, and we have argued in the past at franchise-chat.com about various issues.
On this issue, however, we probably agree: the SBA loan failure rate for a specific franchise system is a good touch stone. I would probably recommend against any franchise system with a high failure rate, and I guessing Joe might say investigate with extreme caution.
Michael Webster, a franchisee attorney in Toronto, Ontario, publishes a website on business opportunities and franchises called "The BizOp News"
That is why I read up on franchising.
One were partners who owned a McDonalds. They became wealthy owning a McDonalds in a bad area in Salinas, CA. Another was a lady who bought a Curves the one I was a member. She ended up opening two more Curves. Another zee opened a Jamba juice, Baskin Robbins. All were not owner operated.
Like Barbara, I have known people to succeed in a franchise.
Might I suggest a change in the title for the benefit of haphazard readers who might think the title says don't buy a franchise? It could be changed to: "DESPITE Studies SayING Franchises More Likely to Fail than Small Businesses, BUT THERE ARE GOOD CHOICES OUT THERE."
That title will make a lot of sales brokers begin to focus on the merits of the business that they are pitching as opposed to selling on the myth that because it's a franchise, it is magically a proven system with a better chance of succeeding.
I guess every study ever performed then is worthless. Since ALL studies take a statistical sampling of the population, just as this one, they all must be wrong. The study does NOT state that ALL franchises are bad. Neither did I state that. The study, taking a rather significant sampling - given that the SBA is a major financier to MOST franchise systems - found that franchising is no better and often times worse than independent business ownership.
As for coding, they made it clear that the coding problems are accounted for. They stated that any type of business that allows the use of its brand, whether falling under the exact definition of franchise or not, can be used to show how the "branding" effect has on business success.
Joe, you can try to spin this any way you want, but EVERY study performed by or commissioned by the SBA has come to the same exact conclusion . In fact, Joe, the SBA has a motive to find in the other direction. They make loans to franchisees. Without franchisees the SBA's business base would be smaller, their budget smaller and their own employee base smaller. By finding against one of their most important clientele base they are shooting themselves in the foot.
Again, while there may be franchise systems that do not utilize SBA lending, this study, by taking a significant sampling - given the number of franchises THAT THE SBA DOES LOAN TO (which are many more than the small sampling you are alluding to) - and looking at loan failure rates it is clear that, time and time again, the SBA has shown that franchising is NOT safer.
Oldsword -
The SBA and other sources for your blog are empirically inconclusive, incomplete and only anecdotally interesting, but otherwise not particularly useful or helpful to prospective franchise buyers.
Don't necessarily agree with the message but I must say that I like Caruso's wit.
Belinda loves 'em so much that she wishes she could be the boss of North Jersey, just like Tony Soprano.
If I didn't speak Italian and sing in Italian, she would leave me just as soon as she could someone else who could speak Italian and cook.
Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School
with Richard. In fact, I have been saying this for over 20 years.
A company interested in franchising their business must be either a Stage 3 organization or moving in that direction. This is based on an organizational development model (Franchisor Stages of Growth) we developed and copyrighted that indicates when a company should or should not franchise.
If a company is either a Stage 1 Entreprenurial or Stage 2 Management Discipline organization they should not franchise. They quite simply, are not ready. Even if the concept validates at the consumer level, the franchising efforts is a different business and must be handled differently and, in most cases, is not suited for an Entrepreneur to manage it. A professional business manager must be brought in to create and implement systems, processess and a more formalized business model.
When you hear stories about how a franchise consulting company is "the largest" and has put more "companies into franchising" than others please understand this is hyperbole and is very dangerous. This means, for the most part, they will take anyone's money and turn them into a franchise whether they are ready or not. These are nothing more than "franchise packagers" and not management consultants with a specialization in Indirect Channels of Distribution, which is what a franchise is.
Potential franchise owners should not only review the FDD and meet with legal profesionals, etc. but they should also inquire as to the stage of growth the company is in. If all decisions come from one source it is Stage 1. If a professional business manager has been brought in but has been on the job for less than one year the odds are the systems, formats and processes are not fully formalized nor tested.
If there is a clear organizational structure, with experienced department heads, and the founder/owner or President focuses on long-term issues while the department heads focus on day-to-day situations then the odds are the company is a Stage 3 company and very capable of franchising and transferening knowledge, information and technology to the distrubtion system participants.
For those of you that remember this was the basis of the Franchise Gold 100 I created for Success Magazine in 1988, It was a ranking based, not on who sold the most franchises, but which company could accomodate the franchising process.
Craig Slavin
craig@franchisecentral.com
Craig Slavin
Franchise Central
Franchise Architects
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847-465-0111
it is vaused mainly by the fact that so many new franchise concepts are not "real" franchise opportunities at all. They are merely scams.
I hope that this will help people recognize that no franchise investor can identify the scams without expert help. That's why I created FranWhack, among other things.
Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School
"so many new franchise concepts are not "real" franchise opportunities at all. They are merely scams."
And unfortunately there is a sucker born every minute. Somebody must be falling for those Nigerian money order scams too, or they wouldn't bother trolling them. And the bitter "hurt Zees" can't wait to tar ALL franchising as a scam, and blaming EVERYONE including their lender.
You took the loan, baby. Nobody made you. No OF COURSE the Zor was a run-before-you-can-walk, made for franchising, smoke & mirrors "hot concept". They got ya. So blame them, but sheesh where was your own innate BS detector? Assuming that just because it is a franchise that therefore it is a "proven concept" is your own dang fault and part of the blame can indded be on those who were suckered, depending on the situation.
And a crook every second.
That would mean that crooks outnumber suckers? I don't think so. Were that accurate then we would have economies collapsing everywhere. Then again; perhaps you are on to something.
The more things change; the more they stay the same.
Richard, you may have been saying it for over 10 years but I have said it more eloquently. OK, all kidding aside, where I find fault in your above statement is this: "it is (c)aused mainly by the fact that so many new franchise concepts (my emphasis) are not "real" franchise opportunities at all. They are merely scams."
It is NOT just NEW franchise concepts. In the article above, I included a quote from the study suggesting that franchisors have an “incentive to encourage as many prospective entrepreneurs as possible to become franchisees” and “there is always a risk of some franchisor’s overly optimistic financial projections enabling under qualified prospective franchisees to obtain – and default on – SBA guaranteed loans.”
Ask yourself this: Paul Steinberg mentioned in a recent comment that that “even the head of Quiznos admitted under oath in the Denver federal court proceeding that 40 percent of his franchisees were not even breaking even--and that is a large franchisor with a professional staff.” The SBA requires the projections in their loan application meet a minimum net profit equal to or greater than a specified debt coverage ratio (about 1.2x). If 40% of ALL franchisees are unprofitable (and I would wager that if he admitted to 40% then the real number is much higher) then what is the probability of their NEW franchisees hitting the required NET PROFIT RATIO in their FIRST YEAR of business?
If the franchisee’s projections do not meet the minimum requirement then they do NOT qualify for the loan. Therefore the “franchisor’s overly optimistic financial projections” enable “under qualified prospective franchisees to obtain – and default on – SBA guaranteed loans.” (quoted from SBA's study)
The scam starts right at this point. We (franchisees) are involved in LIAR LOANS – we never truly qualified for the SBA loan.
As for you, Craig, it doesn’t matter stage 1, 2, or 3. My franchisor, a supplemental education franchise has been around for many years and headquartered on the East Coast, published numbers showing that a brand new first year center averages approximately $250,000 in gross revenues (published 18 months AFTER I signed on). YET, it took a projection of first year gross revenues of over $520,000 (in order to hit the net profit requirement) for my SBA loan application to be approved. IN TERMS OF SBA LOANS, the TRUE gross revenues and, most important NET PROFITS of most first year franchisees, REGARDLESS OF THE FRANCHISE SYSTEM, do not meet the SBA’s standards and therefore the franchisee never truly qualified for the loan.
The SBA IS COMPLICIT IN THE FRANCHISE SCAM.
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