25 Worst Franchises to Buy, 2011

A just shuttered Quiznos franchise among many in Kentucky
The scattered remains of a Quiznos franchise in Kentucky. photo/bmm

LEXINGTON, Ky. — 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.

Sandwich shop failure rate compared
Source:SBA, May 2011. The higher the loan default, the riskier it is.

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

An Atlanta Bread Company franchise in Kentucky. photo/bmm

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

25 brands with 50 or more loan disbursements. Disbursement $ x 1,000


Franchise Brand



























































































































































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.

Related readings:

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Restaurant issues, relating to worst franchises to buy

With foodservice about 50% of franchising activity, one can&#39;t talk about loan failure patterns without&nbsp;noting restaurant issues. While said many times in many ways by many people on this site, a few common denominators deserve noting again:</p>
(1) heavy sandwich chain loan chargeoffs show up so often partially because the sandwich business&nbsp;inheriently appeals to one daypart: lunch. Of course, breakfast, dinner, catering, snack and overnight options can exist, but our experience is that restaurants need <strong>more than one daypart</strong> of (at least) &nbsp;<strong>steady business</strong> to survive. The same trend is true of snack&nbsp;concepts: treats might be very tasty but you have to have daylong demand to make it.</p>
(2) franchisee economics are such that&nbsp;royalties must be paid to the corporate parent. That fact, and the fact that almost always the franchisor has access to more territory to develop and access to lower (or any, for that matter)&nbsp;cost of capital, means that franchisee (especially single unit zee)&nbsp;economics will be challenging.&nbsp;</p>
(3) The item 19 FDD &quot;earnings&quot; disclosure isn&#39;t earnings. It&#39;s gross sales (not net sales, for which you keep), if shown at all.&nbsp;Sales does not equal profit or earnings!&nbsp; We have opined many times that we&#39;d be so better off if average weekly net sales and store level EBITDA (before owners return, taxes, depreciation) etc could be tracked or revealed. In fact, franchisee associations can take the lead to track and own that information ! Most franchisors don&#39;t have that data, really.</p>
(4) the restaurant physical plant&nbsp;must be&nbsp;renewed and remodeled, new equipment must be purchased, and the franchisor will specify upgrades from time to time, for which there is a real cash expense. Most in store&nbsp;financial statements are missing depreciation expense. Without depreciation expense and (its)&nbsp;cash flow being generated, fixes and upgrades will always be a unpleasant surprise and&nbsp;store level costs&nbsp;understated.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</p>
<hr />
John A. Gordon, chain restaurant earnings and economics experts, <a href="http://www.pacificmanagementconsultinggroup.com">www.pacificmanagementc…;

I smell SBA rats and mice

It would seem that the list refers to some huge money lost overall and also individually to some spectacular brand disasters. As a prompt for the SBA on safer lending practices surely it must register the financial performance of the worst of the worst franchise brands as an indicator that it should pick up its act.

SBA would seem to have ample dealings with enough disaster brands to determine that it is lending to many of the wrong franchisees and to many of the wrong franchise brands.

Surely SBA would sample some of these bigger disasters to look at its performance in handing out such loans and work out where lending decisions went wrong?  Surely SBA would have enough history to look at the accuracy of financial performance projections provided on loan applications and question what might obviously seem to be a common thread [or a lending system for franchising if you prefer] of inaccurate applications.

Can anyone seriously look at these costs of failure and not at least suspect that there is more at work here than poor business performance from franchisee operators.

I’d suggest SBA look for where the inaccurate information originates, whether failure rates are grounded in organized fraud and what influences have encouraged such massive losses to continue for so long.

When there is serious money up for grabs there will always be those who will take it. Here it seems that the SBA loan process has been manipulated and abused and most probably it involves organized systems of fraud and a web of culprits.

Such practices always cost someone and in this instance the first to pay will be US taxpayers followed by gullible franchisees and to at least some degree this has got to undermine traditional lending.


Ray writes,
"Such practices always cost someone and in this instance the first to pay will be US taxpayers followed by gullible franchisees and to at least some degree this has got to undermine traditional lending."

First to pay is the gullible franchisee. Upon the gullible franchisee's bankruptcy, the next in line is the underwriting bank. The underwriting bank will then seek the SBA (US taxpayer) to cover the majority of the loss. That's the way I understand the waterfall of SBA default. Franchisor is off the hook and free to refranchise the defaulted asset.

RE: Correction; thank you

Franchisor is off the hook and free to refranchise the defaulted asset.

I take it this would involve another SBA loan where the SBA's record suggests it is obviously into recycling.

what about the Zees?

Why do Zees keep including these alledgedly fake finacial projections in THEIR loan apps?

Nobody else wrote our loan apps for us.  WE determined what figures we'd use. But then we've never used an SBA loan. AFAIK only a small minority of weak players in our system ever turn to SBA.  (My opinion is that SBA should be abolished, but that's just me - if you can't get conventional financing then you don't get a bank loan; if you can't come up with some alternate creative financing then you're no entrepreneur and don't open a small business.)

people get dizzy

Heat of the moment, LSD, poor upbringing … whatever.  It appears they are using the data supplied by franchisors as being what is necessary to get the SBA loan because franchisors are selling that data as the only way to 'be in business for yourself budda bing'.

In my humble opinion the SBA loan program, with or without the s*amming, sounds like something the Australian government will eventually take on to add to their portfolio of total screw ups. It seems to be a second rate fix for a first rate small business growth problem.

Re: people get dizzy (then sick to their stomach, then suicidal)

"It appears they are using the data supplied by franchisors as being what is necessary to get the SBA loan because franchisors are selling that data as the only way to 'be in business for yourself budda bing'."

Ray, I need to correct you.  The numbers are being "sold" to franchisees as THE real numbers.  No one wants a damn loan if the reality is you won't make enough money to pay it back.  The only reason they are accepted is because the franchisor, or their buddies, hold them out as real based on past franchisee experience.

Important Info

Take a look at the list for 2008 and you'll find Mr. Goodcents ranked 9, Philly Connection ranked 16 and Cottman ranked 20. I would expect that since it takes a period of time for the loan defaults to take place these franchises reflect a significant period of poor performance. Also, since the SBA doesn't lend but rather guarantees the loans perhaps the banks that lend under the SBA program have caught up with these poorly structured franchise concepts. I agree  that certain conglomerates do more harm than good. Operating a large diversified franchise organization requires strong successful brands, profitable franchise programs, excellent management and a keen understanding of franchising. There are some pretenders out there and only one Yum Brands. BTW, we need more information like this. Thanks, Don

Ed, I can't conclude from

Ed, I can't conclude from anything published about Yum's franchising record that it is a healthy place to invest.


I surmise from your comment that Yum is not successful. Would you prefer that they operate like Kahala and a few other conglomerates?

Re: Yum

I wouldn't suggest Yum operates like Kahala and I wouldn't suggest Yum! franchising isn't successful for Yum!.

I would suggest Yum! lean toward brutal and have used nonrenewal to add to its success for Yum!  It appears that Yum!, like all the conglomerates, have no interest in the success of franchisees. And none of them ever will have.

Re: Important Info

"Also, since the SBA doesn't lend but rather guarantees the loans perhaps the banks that lend under the SBA program have caught up with these poorly structured franchise concepts."

Unfortunately, Ed, nothing could be further from the truth.  Just look at Cold Stone and Quiznos - two very well known poor performers for years.  Yet the banks keep providing the SBA loans.  Why?  Because enough of the loan is guaranteed that it still makes sense for their bottom line to continue making these loans.  One profitable loan can offset multiple defaulted loans simply because the bank loses only a small portion of the principal. 

The real question, Ed, is HOW - not why.  How do these franchise system continue to receive approval from the banks?  Simple:  False, grossly inflated revenue projections (so the banks can claim the application meets SBA minimum standards) and NO oversight by the SBA (which enables the banks to continue this approval process with fraudulent projections).

Without strict SBA oversight and severe, punitive fines the banks will continue this charade.  The franchisors know it and they and the IFA are working hand in hand with the banks and the SBA to keep the funds flowing.

Oliver Stone

I understand there is a secret meeting among the parties and its being chaired by Oliver Stone. BTW, where is the oversight of the SBA? Case closed.

Re: Oliver Stone (Michael Moore, Woody Allen, Mel Brooks)

Oh, Ed, you are too funny!!  Unfortunately, when one can prove that franchisees are not coming close to hitting the numbers the franchisors have helped provide for in the proformas AND one is sitting on proof that not even the franchisor's corporate owned stores are coming close to hitting those numbers in the first or second year, well, let's just say Oliver Stone would be interested. 

Better yet, Ed, isn't it soooo convenient that the CEO of FRANdata just happens to come out and state how the FDD, as a disclosure document, is essentially garbage - at the same time the banks clamor (to cover their asses with the SBA) that they need more franchise financial info for loan approval {especially given the latest SBA franchise loan performance} and who comes to the rescue?  Why, none other than FRANdata.  Yes, Ed, they are going to provide even more financial info on the franchisors - unfortunately, that's not the info the banks really need (but the banks won't tell you that).   No, the banks need the performance numbers from the franchisees not the zors (to verify projections) but they are hoping no one will notice (especially the inept SBA) - AND WHAT THE HELL, Ed, the CEO of FRANdata just happens to sit on the board of the IFA! 

So, the banks look good because they are claiming they are doing even more due diligence by requiring additional info for SBA franchise loans, the franchisors look good because they can claim better disclosure, the IFA looks good because they can claim they are helping create more disclosure of franchisors and FRANdata looks good because they can claim they have come up with even greater transparency for franchises.  BUUUTTTT!!!!  The data is meaningless, Ed.  Just like Item 19 it is nothing but a head fake (as per FRANdata CEO).  The real info needed to make an informed decision by a potential franchisee is FRANCHISEE revenues/earnings.  Something franchisors will never disclose (because then, potential franchisees will only choose those franchises that actually produce real earnings) - you know, Ed, "proven, successful business models". 

And, oh, btw Ed, disclosure of those real revenue numbers will prevent most franchisors from selling franchises to those in need of SBA loans because the numbers will prove once and for all that most of these systems do not produce the revenues required to meet minimum SBA loan approval standards.

Take the Money and Run

I really don't disagree with your comments. BTW, at least Virgil Starkwell Public Enemy Number 1 went in the front door to rob the bank. Ed

Failure Rate Is One Thing Quiznos Is Hell

Good. Quiznos is not the worst franchise out there by percentages. By numbers of failed businesses; it is number one. There have been more franchise owners ruined by Rick Schaden than any other chain of it's size. Hell has a hot seat with Rick Schaden's name on it awaiting him.

Don't forget Cold Stone's Dan Beem and Kevin Blackwell!!!

Dan Beem and Kevin Blackwell of Kahala/Cold Stone Creamery have excruciatingly hot seats awaiting their arrival as well.

Might as well put Smash Burgers on the list!

Yeah.......... Anywhere you look Quiznos out of business. They continue to blame the Franchise Owners still to this day, but they have no clue about those trenches. What happen to the 600 corporate re-opens huh? yep. All in the toilet just like Quiznos franchise owner's retirement savings and what little they had. Rick Schaden has a seat reserved in Hell with his father, the devil and myself. I can't wait to pork Schaden with a hot poker and bust a nut on his fathers face every day in hell.
I was a store owner and when it was profitable I sold my stores, both of them. Then I was hired on to work in the corp. Then did a little work for Smash Burgers. I always looked the other way when it came to spending franchise owner's monies and their truly sad stories. For my own greed I joined the corp, knowingly it wasn't right, but wanted to put my two kids through college.

This is why my seat is guaranteed in hell with Schaden and his father too.

Silly Rick.......... You've done it again!!!!!!!!!!!!

Rick Schaden you pooper scooper you! :) I find it sooo hot that your going nowhere! You took all those poor soul's money and look at where your stores are now? Its unfortunate at other's cost at what you have done, but well deserved! Now its your stupid "Smash Burgers" that needs to fail! We all know your Spanish/Mexican spin of a restaurant failed here ........ You should have focused on one thing and made a stronger/ better brand. Your not Yum! you know!?

And we were thinking of building 5!!!!!!!!

Wow! The picture says it all! My husband and I were thinking too, that all this money we have in our pockets is burning a hole and we were planning to build 5 new Quiznos stores. Its a good thing I surfed the internet today! Whew Weeee!!!!!!! I guess we"ll just build 1 successful Mc. Donalds then! Thanks Mau Mau.

Are you qualified?

Mildred says: "I guess we"ll just build 1 successful Mc. Donalds then! "

And what does McDonald's say about this?  Do they consider you operationally qualifed to own a McDonald's? Going by what you posted here and the lack of knowledge it demonstrates, I doubt it.

Does reality really matter...

in the land of rose colored glasses?

Do not go gentle into that good night

What is amazing is that there are 23 concepts that fail at worse rates than Quiznos yet their franchisees are so polite and quiet as they one by one go insolvent. Quiznos franchisees are certainly a loud, rowdy and whiny bunch.</p>

Re: Do not go gentle into that good night

Guest, mine is one of them.  Most franchisees don't have the ba!!$ to fight - even anonymously in any way shape or form.  Partly due to the aggressive behavior of franchisors and their attorneys to stifle any dissent by suing anyone who speaks ill of the system.  However, there are ways to do battle under the radar but unfortunately, they are either too stupid, lazy or scared to do that either.  (Not to mention that many are trying to sell their sites so they don't want bad publicity.)

Which is exactly what franchisors want and exactly why this fraud continues.  Franchisees refuse to stand up to protect the next group by voicing their stories.  Its a damn shame and an embarrassment that franchisees have no excuse for.

Franchisee movers and shakers

OS; franchisees play as big a role in screwing other franchisees as do rogue franchisors when the franchisees say nothing. They shake a lot. Their post-franchising movements reek.

But I would never suggest that their fears are not real.

Quiznos owners I'm sorry are

Quiznos owners I'm sorry are not a whiny bunch by any means. I own a Quiznos, and am very successful with it. So successful that I shut down my store early last year to only rebuild it again new and much larger. I also own numerous other franchises with staff upwards of 30+ and 60+ employees per store. I didn't start that way, and am not here by any means to tout my stuff.
I am here to tell you that franchise owners are lied to by Quiznos Corporation and or were lied to. Originally Quiznos had numerous Area Regional Directors, who were in charge of expanding their markets. Markets they bought into for hundreds of thousands of dollars. They also were paid for each store they opened up usually around the 6000.00 dollar mark. The Area Regional Directors used a program then called a Performa. With that Performa they would falsified information, or sometimes referred to it as supposed numbers for that store if you build it, for that location that is what you'll make. I seen many numbers in my time that other owners would bring to me with outrageous data. Basically telling owners they would make upwards of 100k in net profits.
None of my other franchises that I have showed me or told me anything like they had been told. Instead other franchise corporations tell me more about the risks and tell me about the downsides, basically the grim reality. The risk they say is up to me.
Quiznos doesn't do that. They lie to small fortune, retirement, etc. owner. They sell them dreams that do not exist for their own greed. Many owners do not speak up because they move on quickly getting jobs to continue to pay their mortgages and re-focus their energy on that. Many other owners do not speak up simply in fear of retaliation. The Q corporation put fear in many owners. Some owners wish not to speak in hopes of selling their stores and moving on.
I would say they more off owners get jobs and move on and never try to bring up their past experience with Q corporation simply because they blame themselves and just embarrassment that couldn't be the lucky few, not realizing it isn't their fault.
I don't run my Quiznos store, never have. I have a management team of over 150 people that over see all my restaurants. We do not accept coupons and are open in an area where we are 24 hours. I see that store maybe once a month. I only own one Quiznos, but I own numerous other same franchises.

Is Quiznos still around?

I have not heard much about Quiznos Corporate lately. Are they still around? How many stores still open...let me re-word...are there still Quiznos stores open? If so, how many? Anybody know?

I closed my store 3 years ago...and am still haunted by the financial nightmare caused by those greedy SOBs.

Business Model or Human Capital Selection Failures???

Obviously this data is not only valuable but I am williing to go on the line and say that a great cause of these failures is not the business model nor the locations but rather the franchisee selection.  Out of the 150 brands, which Franchise Navigator has benchmarked their existing franchisee population, including some on the larger list, we have been able to demonstrate that there is a fewer percentage of high performers that what everyone believes.  This is because many franchisors have no clue as to the type of person they should be selecting to execute their business model.  Just because someone can afford the airplane doesn't mean they can pilot it! 

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Franchisee financials

Those are thoughtful comments John, especially around EBITDA and depreciation. My review of franchisee financials across industries indicates the rule of thirds is alive and well, with only a third making acceptable EBITDA given the personal effort, stress and risk involved in buying and operating the business. High caliber multi-unit operators seem to be faring better. Also as you suggest, the refurbishment costs can also dent ROI significantly. As the internet continues to change customer buying habits it will be interesting to see how Non food retailing is further impacted.

economic rationalism

Changes to internet buying habits on bricks and mortar franchisees will be significant in time. Franchisors and landlords will avoid any adjustment to the cost of doing business with them while economic rationalism unchecked will ensure failure rates increase. Eventually economic rationalism will clash with unemployment while social costs will continue to be buried. The playing field may change but the cycle of bandaid economic management will continue.

What a motley crew they are. They are the free marketeers, the people who believe in absolute free enterprise ..    Paul Keating Australian PM - 1981

Motley crew

Brilliant Ray! No-one says it quite as eloquently as our former PM Keating :)

Greg, for most of the BMM

Greg, for most of the BMM readers who have probably never heard of Paul Keating I think it is fair to say he was one of our most successful Treasurers and then Prime Minister. While offside with practically everyone at one time or another as a powerful public speaker he took the role of a part-time comic who could even put a smile on the face of politicians and anyone else within range who he was regularly insulting. And that he continues to do. He was driven by a dominant sense of improving the lot of all people and not just the influential and wealthy but even so, he was easy to dislke.

SBA loan failure should not be the only indicator

Talk to a The UPS Store owner who has owned their store for more than two years. The reason the SBA loan failures might not be that high is that it's nearly impossible to get a loan for one of these money pits in the first place. Owning one of these stores is a nightmare. UPS keeps stealing our shipping, and the franchisor thinks we should concentrate on printing and copying in order to survive. Many owners want to close but are tied to personal guarantees. The latest tactic by MBE/UPS is to try to get existing owners to buy other failing stores for pennies on the dollar. Other owners are in lawsuits and are afraid to file for bankruptcy because they may not receive a settlement. As a TUPSS owner you work for UPS, and you pay them instead of the other way around. In 2008, as a network, the stores took in more prepaid UPS packages than paid packages shipped through the stores, and it's gotten worse since then. Now UPS wants (and will force) the stores to receive packages for them for the convenience of UPS's customers. This is to save money on the cost of residential deliveries. On top of that, if an incoming package is lost, UPS will only pick up the first $250 in value. From $251 to $5000, we have to report it to our own insurance companies.

You may have a list compiled, but I know where I would put The UPS Store. Maybe you could put a list together based on "biggest nightmare."


Fortunately in the case of the SBA not lending for a UPS store, the banks are doing thier jobs. Others have not been so fortunate like the CS, Q or Coffee Beanery zee's. Had the banks done thier jobs alot of these would not have been destroyed

Tax Preperation

Any guidance on tax prep franchises would be appreciated. I know it is a seasonal business model. Liberty Tax appeared on the SBA list and I had ruled them out before reviewing the list due to all the negative online press from dissatisfied zees. Their director of sales also spooked me at a IFA convention when he baiscally blamed those who failed rather than LT. Are any of these companies reputable????

The bloom is off the tax prep rose. Forgetaboutit!

A large part of the propfitability of this business was the refund anticiption loan interest/fee revenue. The IRS used to publish the refund information so that it could    be reliably determined who was getting what refund. You knew how much to lend and had some chance for repayment. The IRS no longer provides that information, so the level of security about whether the anticipation loan will be repaid is no longer there.

This "payday loan" business is no longer available, and the lenders will no longer participate in providing loan capital. The franchisees used to have a big spread between what interest they paid and what interest they charged. Not any longer.