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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Citing evidence of a dramatic power imbalance between the nation’s top franchisors and their franchisees, the Service Employees International Union petitioned the Federal Trade Commission on May 18 to launch an investigation into the franchise sector and issue recommendations for curbing ”abusive and predatory” practices by franchisors.
The request for investigation marshals evidence from an extensive review of franchise agreements and disclosure documents for 14 of the country’s largest franchise systems. The review found that franchise agreements are consistently one-sided, often allowing franchisors to terminate franchisees for minor violations of thousands of pages of ever-changing rules and to refuse to renew franchise agreements for any reason or no reason at all.
[Read SEIU’s petition to the FTC]
The 32-page petition also contends that franchisors often provide inadequate information on the main issue of concern to potential franchisees: the financial performance of franchised units. This makes it all but impossible for many potential franchisees to make an informed decision on whether to invest.
The petition calls on the FTC to use its investigative authority to compel top franchise companies to turn over information about their franchising practices.
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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.”
A new poll finds that a majority of owners of franchised businesses have taken on significant debt to buy their franchise, have experienced franchisor-imposed changes that raised costs but not revenue and have faced the threat that their franchisor will take away their business. The poll of over 1,100 franchised business owners also found that franchisees are overwhelmingly small enterprises: Most own only one unit, and most run their businesses at break-even or a loss.
The survey was conducted as franchisee rights legislation advances in California, and the poll finds that in some areas California franchisees face stiffer challenges than those in the rest of the country. The poll was conducted by FranchiseGrade.com, Inc., a leading market research and analysis firm for the franchising industry and was commissioned by Change to Win, a federation of unions that includes the Service Employees International Union, the United Food & Commercial Workers, the Teamsters and the United Farm Workers.