Worst 25 Franchises to Buy with the Highest Failure Rates, 2012

A shuttered Quiznos sub shop in Kentucky

LEXINGTON, Ky. — Blue MauMau dares say what other publications won't. Here is our annual listing of major franchise lemons to avoid investing in. It's hard to believe but there are 23 major brands in 2012, where franchised stores actually fail worse than Quiznos. Ice cream shops have not done well.

Two franchising conglomerates, Kahala Corp and NexCen Brands, have the dubious honor of having two of their brands represented in the worst 25 with the highest franchise failure rates. Phoenix-based Kahala Corp. has #15 Blimpie and #19 Cold Stone Creamery franchises and New York City-based NexCen Brands has #18 Marble Slab and #22 Maggie Moo's. In a similar vein, #9 Cottman and #21 Aamco Transmissions were acquired in 2006 under American Capital Strategies Ltd. to eventually combine together under Aamco.

How bad are these failures? Franchise owners must make a personal pledge to use their own homes and assets as collateral should they not be able to pay back their Small Business Administration backed loans. Yet franchisees under these concepts still can't pay back their loans. That's how bad.

This data has been given to Blue MauMau directly from the Small Business Administration. It is the same list that the agency provides loan officers of its most trusted lenders and banks throughout the country.

This year ice cream shop and quick service restaurant franchises top the list. It's hard to believe that there are ice cream shops with higher failure rates than Cold Stone Creamery, since Blue MauMau has devoted so many articles to the brand and its lawsuits by franchisees, but Marble Slab and Carvel Ice Cream fail even more.

Huntington Learning is ranked 12th worst of all major franchise chains on the list with its 49 percent failure rate. It is by far the worst performing of the learning center concepts. Compare that to Goddard schools, franchising since 1988, which at 4.4 percent has one-tenth Huntington's failure rate.

Sub sandwich shops have done poorly. Unobtrusive Blimpie, Philly Connection and Mr. Goodcents have been quietly dying at the worst rates, despite all the attention Blue MauMau has given to loud Quiznos, ranked the 24th worst.

Many of these are well-known concepts to Blue MauMau writers. Some have been accompanied by news stories of financial ruin by franchisees, lawsuits, anger and even suicides.

How to use this list

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 (worst 16%) by loan failure rate of major franchise brands on the most recent SBA list of franchise brands.

Last year Kansas City-based franchising system Mr. Goodcents Sub had the dubious honor of being ranked second worst, having a 64.3 percent failure rate. This year its failures have climbed slightly to 64.71 percent. Compare that to another sub chain, Jimmy John's, which has only 3.5 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 investors may want to move on to other brands that have lower failure rates.

Each franchise brand listed has Small Business Administration backed loans with at least 50 disbursements, a substantial number. Using large figures for loan disbursements filters out smaller franchise systems.

Explanation of the table

This is ONLY a list of franchises that have received SBA loans. It does not account for conventional, traditional bank loans. Banks aren't about to release their conventional loan statistics anytime soon or reveal their methodology and weaknesses. But since it is part of the executive branch of the United States government, the Small Business Administration does. The SBA 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 2011. Blue MauMau then eliminated brands with fewer than 50 loans.

Chart: BMM; Source: SBA

There is criticism of the accuracy of this list because bank officers sometimes do not fill out the form correctly. They sometimes have difficulty identifying whether their loan was to a franchise or not. Critics say that private lenders need better training. Others criticize that these are only Small Business Administration backed loans, which they claim are the worst performing of their loans and do not reflect their full system.

Nonetheless, it's one of the best peeks we have of franchise performance within brands.

It's not Blue MauMau's intent to publish only the worst brands. This journal will also shortly release the latest figures for the best franchises to buy with the lowest SBA loan failure rates.

• Use Blue MauMau's Interactive Spreadsheet: Sort and filter your
  worst franchise brands by failure rates using your own criteria
  

Editor's note: In the original SBA list, bankers inserted two names for Quiznos, Quiznos Subs and Quiznos, which both sorted into Blue MauMau's worst 25 franchises list. Blue MauMau combined both categories, which pulled Budget Blinds into the dubious honor of being in our list of the 25 worst franchise investments at #25.

Related reading:

• SBA Loan Failure Rates of Franchisees by Brand, 2012 (full list of 580+ brand codes, sortable)
• 25 Worst Franchises to Buy, 2011
• SBA Loan Failure Rates for Franchisees by Franchise Brand, 2010
• Franchise Brands by Franchisee Failure to Pay Back SBA Loans, 2000 - 2007
• Franchise Brands by Franchisee Failure to Pay Back SBA Loans, 2000 - 2005 (Sortable)
• SBA's List of Franchise Loan Performance, a Tip Sheet at the Races
• Bank Rankings of Franchises Not for Buyers
• 15 Worst Franchises, 2005
• SBA Loans Sink