A Look at the Performance of Loans That Are Guaranteed by the SBA

Only one of these five, Atlanta Bread Co., [defaults > 25%] responded to requests for comment. The company says a concept revitalization that required its bakery cafes to remodel had caused some franchisees to leave the system, as did others who no longer were actively involved in day-to-day operations.

The Wall Street Journal
July 1, 2008

A Look at the Performance of Loans That Are Guaranteed by the SBA
Richard Gibson

There's no sure way for would-be franchisees to gauge their likely success with a potential franchise. But like bettors at a racetrack, they do have a tip sheet they can use for guidance.

It's the Small Business Administration's annual compilation of performance data on thousands of franchisee loans it has guaranteed.

The latest report — covering loans made from Oct. 1, 2000, to Sept. 30, 2007 — is one indicator of the relative health of 500 franchises. Among other statistics, it shows how many loans were made to a franchise, the dollars disbursed, and what percentage of loans went into liquidation, something the SBA classifies as a "failure." Wells Fargo & Co., a major SBA lender, says it uses the data to help spot negative trends and reduce future loan losses, as well as to prospect for business. "We select new franchisers to target for sales opportunities based on the strength of their performance," says Thomas W. Burke, senior vice president. "High delinquencies will cause us to avoid a particular franchiser."

There are several caveats to the list, which is compiled by the SBA and published by Coleman Report, an SBA industry trade publication based in La Canada, Calif.

First, the list isn't all-inclusive. Banker lenders aren't required to disclose whether borrowers are franchisees. Franchises with fewer than 10 loans aren't counted. And many franchisees may have obtained conventional loans, which aren't included in the list.

What's more, the "failure" rate doesn't necessarily mean the franchise is a bad one. It just means that for some reason the borrower ran into difficulty paying off a loan.

That said, here's a look at how some franchises fared.

Among the best loan performers — franchises with more than 60 SBA-guaranteed loans that have failure rates of less than 5% — were numerous motel chains. They included Best Western, Choice Hotels International, Comfort Inn, Econo Lodge, Hampton Inn, Holiday Inn Express, Super 8 Motel and Travelodge hotels.

The category also included Anytime Fitness health clubs, Arco gas stations and convenience stores, Bruster's Real Ice Cream, Cartridge World stores, Culver's Frozen Custard, Dunkin' Donuts, Edible Arrangements fruit bouquets, Fastsigns signage and graphics, Goddard schools, IHOP, Little Caesars Pizza, Massage Envy, Primrose schools, Rita's Water Ice, Sport Clips hair salons, Subway sandwich shops and Zaxby's chicken restaurants.

Franchises with more than 60 SBA-guaranteed loans that have failure rates greater than 25% included Atlanta Bread Co. bakery cafes, All Tune and Lube, Cottman Transmission, Mr. Goodcents Subs & Pastas and Philly Connection.

Only one of these five, Atlanta Bread Co., responded to requests for comment. The company says a concept revitalization that required its bakery cafes to remodel had caused some franchisees to leave the system, as did others who no longer were actively involved in day-to-day operations.

Write to Richard Gibson at moc.senojwod|nosbig.kcid#moc.senojwod|nosbig.kcid


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