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Why Franchise Owners At Top Chains Can't Pay Their Bills

One of the most popular financing methods for entrepreneurs looking to buy a franchise business is a loan guaranteed by the Small Business Administration. It turns out the SBA tracks default rates by chain, and recently released data on the top franchise chains over the past decade. A healthy chain might have a default rate of 7 percent or so, as is the case with sandwich giant and top franchisee Subway. But other chains have proved to be a bad bet for the SBA, a recent CNNMoney article showed. The biggest losers:
  • Matco Tools topped the loser hit parade with a 36 percent SBA loan failure rate. One possible reason is the franchise's relatively low barrier to entry, which may lure unqualified franchise buyers into the grueling business of selling tools out of a truck.
  • Franchisees at Cold Stone Creamery's franchisees didn't pay on 31 percent of the more than 700 SBA loans chain owners got. Primary problem here: overpriced, faddish product that likely hasn't fared well in the downturn. Domestic unit-count sank more than 100 stores over the past few years. For an ice cream shop, their stores are pretty pricey to open, too -- upwards of $400,000 is required. It just takes an awful lot of ice-cream scoops sold to make that nut back, even at $8 and up a cup. Problems here may also include being lost in the din at giant foodservice conglomerate Kahala Corp., which owns an even dozen fast-food brands.
  • Notoriously unhappy and litigious Quiznos franchisees had a 25 percent failure rate. Owners may have been too busy griping about their perceived lack of support from the parent company on their Toasted Subs Franchisee Association Web site to make their businesses make money. The TSFA site is so busy, it recently crashed. Most recently, franchisees' attempts to sue Quiznos in a class action over slow site approvals were rebuffed, so now some owners are suing individually.
  • Gym chain Curves for Women saw 16 percent of its franchisees default on SBA loans. The chain may be proving tough to make a go of in Blue States, as company founder Gary Heavin is a vocal right-winger who gives big to anti-abortion causes. The privately held company doesn't disclose its store count, so it's hard to know if a substantial number of gyms have closed.
Photo via Flickr user Grilled Ahi