One of the most important metrics a potential franchise investor can analyze is the rate of failure of previous franchisees’. The more expensive franchises require investors to finance their new business start up with a bank loan and many franchisors use the Small Business Administration, SBA, to provide this financing. The SBA is a United States government agency that provides support to entrepreneurs and small businesses and offers qualified franchisees the opportunity to borrow money at competitive interest rates. When analyzing a franchise for potential investment, one should look at the rate at which franchisees default on their SBA loans to give an indication as to whether or not a franchise actually delivers the profit they seem to ensure.
Lowest SBA Default Rate Franchises
The seemingly safest franchise opportunity based on a low rate of default of its SBA loans is Super 8 franchise. Super 8 is a leader in the motel industry. A franchise can cost up to $4 million dollars, so most franchisees go the financing route. The default rate on Super 8 SBA franchises for the period 2000-2009 was the best in the franchise industry at only 4%.
The second lowest SBA default rate belonged to the Days Inn franchise, also in the hotel/motel franchise industry. Days Inn franchise cost up to $7.8 million and has an SBA loan default rate of 6%.
Subway Sandwiches, Dairy Queen, and Dunking Donuts are the next three least-risky franchise investment with SBA failure rates of 7%, 8%, and 8% respectively.
Highest SBA Default Rate Franchises
On the opposite end of the risk spectrum, a Matco Tools franchise has the worst SBA failure rate at 36%. A Matco Tools franchise can cost between $100,000 and a $250,000. The company manufactures, distributes, and services automotive equipment, tools, and toolboxes.
Approximately one in three “Cold Stone Creamery” franchises fail according to the failure rate of their SBA loans which is 31%. With an initial investment of up to $467,000, servicing a loan of that magnitude can be a tough nut to crack every month.
One last high failure rate franchise is Quiznos Subs. Quiznos franchisees default on the SBA loans at a rate of about one in four. The company has had a history of misstating their royalties and fees and have recently settled millions of dollars of lawsuits with franchisees.
Before you dive headlong into buying the franchise of your dreams, it is a good idea to see if other are actually making money at what you are proposing to do. In addition to meeting and talking to other franchisees, examining the SBA loan default rates may sound an early warning bell and keep you from making a bad investment.
