Deal Killer?
The table showing the “Worst Franchise Loan Failures” is an interesting resource, as is the proposed tool. However, should it be a “Deal Killer” for anyone considering investing in one of these concepts? I say NO! Six of the 15 concepts listed in the table I’m personally familiar with and believe them to be great concepts for the right franchise candidate, that’s not to say that some of the others concepts are not also viable concepts.
The table and the proposed tool should only be seen and used as additional information for the evaluation of a concept. One must drill down into this data like any other data, to get a better understanding of what it actually means. For instance when talking to a franchisee that has left the system one must find out WHY they left the system, did the system fail them or did they fail the system?
Although with the data presented there is not an accurate way to average the failure rate, we can do some ‘Precision Guesswork’ and divide the sum by 15 which provides a result of 34%. Significantly lower than the well publicized 80% failure rate of the average small business within the same 5 year time frame. SBA loan rates have historically had a higher failure rates than non SBA guaranteed loans. It should also be noted than it some years, the SBA failure loan default rates have been as high as 40%.Why do SBA loans have higher failure rates? The answer may be in the fact that SBA loans have typically been turned down by traditional lenders prior to receiving the SBA guarantee. The average SBA guaranteed loan recipient has injected a lower percentage of personal capital into the venture, resulting in a lower commitment to the venture. The bank funding the loan is more likely to make the loan when their risk is limited to 20 to 30% of the loan, combined with the fact that most banks sale their SBA loans. By agreement between the SBA and the lending institution if and when a SBA loan becomes 60 days delinquent the loan is considered in default and purchased from the bank by the SBA, the loan is then considered “in default” yet many are ultimately put back in line.
Now look at the names on the list of ‘15 Worst Franchise Loan Failures’ some of these companies like Lee Myles in business since 1947, Cottman since 1962, Godfathers since 1973. The average company on the list has been in business since 1977 and franchising since 1987. Some of these companies have a significant number of franchisees like Blimpies with more than 1,500, Godfathers with more than 700, Lady of America with more than 500 and Cottman’s with more than 400. I would think it would be fair to assume that some of these organizations are viable concepts, worthy of consideration.Rolly Polly Rolled Sandwhiches, Country Clutter (Bed & Breakfast) and Hair Color Express have all but disappeared from the scene and I do not believe any are actively franchising. Copy Club lost a large percentage at one time. Take a look at Quick Printing magazine.
I don’t know the whole story behind the rise and fall of Copy Club, perhaps someone can chime in. However I do know that there have been some challenges. I believe the downfall began with a trademark issue and with an area developer which ultimately resulted in a division and the creation of Copy Club, Inc. and Copy Club West, Inc.
Now back the basics of the SBA loan and the “Worst Franchise Loan Failures”, when you see a table like this, you don’t eliminate the concept(s) from consideration but you ask yourself WHY are they on the list, and WHAT does it mean? Obviously there were issues and concerns with a few on the list and they have all but disappeared, which the investor lost regardless of whre the funds originated, SBA or otherwise. With others, I believe it’s much more a statement about SBA Lending. You may find the following links interesting:
This link is particularly interesting, and by changing the year and/or state in your address bar you can see who is receiving SBA Financing and where.
I want to suggest to anyone who may be looking at one of these concepts not to rule it out based solely on this data alone. If anything I think it tells those of us in franchising that we need to pay attention to how our franchisees receive their financing and why they use the sources that they use. The SBA has been a great program for many business owners, and there are numerous billion dollar companies which got their start with an SBA guaranteed loan. However, at the end of the day, the SBA funds less than 2% of start-ups and have a higher overall failure rate.
It was also pointed out that the list was filled with Sub Shops, Fitness Centers, and auto shops. Well over the past 5 years which the report covers, these were some of the hottest and fastest growing concepts in franchising. In closing I want to thank Mr. Blue MauMau for continuing to provide this great resource of information.
FranSynergy
www.fransynergy.com
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