Another Quiznos franchisee is closing shop, accusing the sandwich chain of “leaving me out to dry.” After almost 20 years of running a St. Louis-area shop, Mike Barron joined the thousands of Quiznos franchisees who have shut their stores in recent years, as Quiznos shrank from 5,000 units in 2006 to about 1,000 last year. Barron told his hometown paper that:
…the company has done little to support franchisees while shifting away from its menu with new items that have not been as successful. … “They don’t want to help. I thought if I stuck around I would reap the rewards of it all. Everything would come my way, but my sales went down.”
Earlier this year Quiznos told franchisees it planned to “aggressively close underperforming stores, and to aggressively default franchisees and bring back fines for franchisees that are not following company operating procedures.”
Unfortunately, the problem of franchisee financial distress goes far beyond Quiznos: A WeAreMainSt report found that federally guaranteed loans to franchisees are failing at a high and rising rate. As the head of franchising research group FranDATA observed:
…for most single-unit franchisees the cost of a failed unit is absolute and often devastating.
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Nearly three in ten Small Business Administration loans to California franchisees in recent years have failed. That’s according to a new analysis by the Service Employees International Union of over 7,000 loans made to California franchisees over a 20-year period. As the San Jose Mercury News reported, the study shows that franchise owners in California “have a harder time staying current on their loans than in the rest of the nation.”
The failure rate on California SBA franchise loans made between 2006 and 2010 – the most recent period analyzed – is more than double the failure rates in earlier periods. The loans analyzed were made by banks and other private lenders through the SBA’s flagship 7(a) Loan Program.
The failure rate is the percentage of loans to California franchisees that the SBA charged off its books. Such charge offs happen after lenders liquidate all the borrowers’ collateral, which can include their home or other personal assets. Loan failures represent a financial disaster for the borrower, who may have lost both business and personal assets, and a loss for taxpayers, since the SBA has to write off the uncollected value of the loan.
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Full report: “Risky Business: Franchisees’ High and Rising Risk of SBA Loan Failure“
That’s the headline of a BloombergBusiness article about We Are Main Street’s study of Small Business Administration loans to franchised businesses.
“Buying a franchise is a risky business. Seventeen percent of franchise loans guaranteed by the U.S. Small Business Administration failed between 1991 and 2010, new data show. At the end of the period, nearly one in five franchise owners went splat.”
“The loans, made by private lenders, weren’t merely delinquent. Failed loans are those charged off by the SBA, which guarantees up to 85 percent of the value of working-capital loans through its 7(a) program. Even after liquidating collateral, which can include franchise owners’ homes, the government had to use taxpayer dollars to make the lenders whole.”
“Data provided to Bloomberg by the SBA show that working-capital loans to franchises haven’t performed as well as loans to non-franchise businesses.”