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



Failure Rate

Disb #

Disb $ x 1,000



















































Source: Data from Small Business Administration loan default rates for 504 and 7(a) loans

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.

Which would you want to invest in?

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:

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Mellow Mushroom???

Thought it would be a psychoacitve substance dispensery.

Reading their history, founded by college students, featuring psychadelic & tie dye decor, maybe not far from the reality, in spirit if not substances!

Best Franchises

The franchise industry still lacks a credible ranking of the best franchise opportunties or at minimum top 25. Too often rankings are based upon system size and rate of growth. An index that could be used to evaluate best franchise performance could serve as a measure by which other franchises could be compared. JD Powers does it and consumer reports has done it so it can be done. I don't understand why an academic institution like UNH and its Rosenberg Center with its relationship to the franchise industry provides virtually no data on the industry.

Ed, 'top franchises' in

Ed, 'top franchises' in Australia are a farce paid for by the franchisors who make it to the list. How does anyone measure any industry performance when we know so little about the industry. Not just who went and who arrived; we don't even see reliable numbers on total franchisors or franchisees. General 'list' providers do no service to the industry where the failures are equally promoted with quality products and while most small franchises seem to be Whack jobs; some of the best are small.

Top franchises

Ray, this is exactly the reason why it can't be The Entreprenuer 500 or other source directly related to franchisors. I was thinking of an academic institution but who would fund it? I don't think we'll see it in our lifetime.

The rock and the hard place;

The rock and the hard place; who funds it owns it.

The establishment of a "Franchising Chair" in the faculty of a

respected university, either in the business school or the law, school would require a sufficient endowment the earnings of which would sustain the office of a tenured professor.

LSU has some arrangement with the IFA in which Robert Justice teaches franchise law according to the gospel of the IFA. I don't know if it such an endowment or rather an arrangement such that if the curriculum were more ecumenical the support can be withdrawn.

Franchising for Academics

There is no general understanding amongst most academics what an unusual corporate system a franchise is.  There is no corresponding "Theory of the Firm" to excite and attract a mass of academics to franchising.

Gimmie a break, please! Anyone in franchise marketing can

confect a "theory of the firm" that would arouse Hosni Mubarak.

A few tastes of Guinness and I could do it meself.


Richard, go ahead start writing on wiki:


Franchise understanding in academia

Michael is correct, and there is even less understanding in government, and precious little in the business world outside of people who are parties to franchise agreements.

There are some academics that do have a strong grasp of franchising: Patrick Kufman of BU (also an attorney and marketing expert) and Ben Lawrence of Cornell come immediately to mind. Robert Kok of Johnson & Wales (formerly of Arbys)
as well.

What ya callin' "best"????

Let's say that all data was publically available.  Even with ALL the information, how do define "best" and don't people realize that it can be a moving target? So the hot money would chase last year's "best" franchise to buy, just like it chases last year's hottest mutual fund. But "past results do not predict future performance".

Also, an implicit fundamental flaw to a one size fits all "best" approach is that it buys into the "a trained monkey could do it, just follow the proven system" fallacy. (And that YOU, the prospective F'see, is the monkey.) Can any one franchise business actually be the best for ANYONE, is there NO skill, temperment or aptitude involved whatsoever? Is the only qualification required, the ability to cough up the franchise fee?  REALLY???

Interesting that when buying a franchise people do actually think that anyone can run any type of business so long as it is a franchise with a "proven system", yet when the go try to hire a manager, it is so hard to find someone who can handle the job. (Why can't the manager "just follow the proven system" also?)

This is only a list of

This is only a list of franchises that have received SBA loans. It does not account for conventional, traditional bank loans.That's really a great thing.