2012's Best 10 Franchises to Buy, Lowest Loan Default Rates

LEXINGTON, Ky. — Knowing a franchise's bottom line and ability to get a return on investment is the holy grail for a franchise investor. That's no easy feat. 

What Blue MauMau has been able to do is to find chains where franchisees have healthy enough earnings to at least pay back their loans at better levels than other brands. Here are the ten best franchise brands in which franchisees have enough staying power to pay back their lenders.

Hotels dominate best list

Why are hotel owners so dominant for being best able to pay back their loans? Hotel brands occupy six of the top ten slots. They also dominate right below the top ten positions.

One reason is that hotel franchisees typically own their properties. As long as their property appreciates, it gives them room to pay back their loans if they have to sell the property. In contrast, franchisees from other sectors often lease property, frequently from their franchisor.

Another reason is that hoteling is up.

New York-based hotel consultant Stanley Turkel observes, "Perhaps hotel owners pay back their SBA loans because their business is better than the franchisees in other sectors." The author of Built To Last: 100+ Year-Old Hotels in New York cites a recent survey from PKF Trends in which the U.S. lodging industry has produced a 12.7% profit growth in 2011. "80.5% of participating hotels enjoyed an increase in total revenue while 72.3% achieved growth in profits," Turkel states.

Turkel also points out that the positive hotel industry trend is likely to continue. He states that last month the Lodging Industry Investment Council, in which members control billions of dollars in lodging properties and is considered a leading think-tank servicing the hospitality business, published the following projections for the industry in the upcoming twelve months:

• Hotel property values will continue to increase
• Quality of hotel product will continue to improve
• In 2013, lodging transaction volume to increase
• Debt financing is returning
• Hotel development is beginning

How to use this list

These are the best franchise brands, where franchise owners are more easily able to pay back their SBA loans as reported in the most recent SBA list of franchise brands.

Atlanta-based franchising system Mellow Mushroom franchise owners have the honor of being ranked the eighth best in paying back their loans. Compare that to another pizza chain, Red Brick Pizza. 53 percent of SBA loans to that brand’s franchisees fail. Christian Brothers Automotive franchise owners, a network of 100 garages largely based in the south, each have enough money that none have defaulted on their loans. But 40 percent of loans for national chain AAMCO Transmissions and 50 percent of Cottman Transmission loans to franchisees failed.

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. Using large figures for loan disbursements filters out small franchise systems and outliers caused by a small numeric base.

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 less than 50 loans.

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.

Now read the 25 Worst Franchises to Buy, 2012

Related reading:

• 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