Franchises always make money, right? WRONG. We wanted to delve deeper into the matter and actually figure out how many franchises fail. So we released the hounds to sniff around and we came across some pretty interesting and startling data. The table below shows the Small Business Administration (SBA) loan failure rates for select franchises. To no surprise, Quiznos is on the wrong side of the list with a 25 percent failure rate. But they are not alone. Blimpie, Blockbuster (recently filed for bankruptcy), Coldstone and many others have 20-plus percent default rates. Sound the alarms! On the other hand, Pizza Hut, Jimmy John's, Burger King, Wingstop and Papa John's lead the pack with below 15 percent failure rates. Which franchise would you invest in?
We asked a former Subway franchisee what he thought about the list and he said, "I don't think it's a perfect list since many people that use the SBA generally invest a lower equity amount which makes the investment inherently more risky BUT it still is a great indicator for how franchises fare as investments. If you put a lower than average equity amount into your investment and can still manage to make a profit I'd see that as a very positive sign."
There are a few things we'd like you to know about this particular data:
1. We gathered it from the SBA. Not all franchise loans originate from the SBA so it does not represent the entire loan population.
2. The data represents only loans approved between 2000 and 2009.
3. Failure rate is equal to the number of loans in liquidation plus the number charged off all divided by the total number disbursed.
Although this data is from the Small Business Administration, we encourage you to do your own due diligence.
This article is also available at Thefranchisehound.com.