It is a common misconception that every well-known brand has successful franchises. In reality, there are some popular companies that have higher-than-average default rates. According to a recent report in the Wall Street Journal, Cold Stone Creamery, Quiznos, Huntington Learning Centers Inc. and Planet Beach Franchising ranked among the 10 worst brands for loan defaults. Franchisees of these brands defaulted more than twice as often as small business administration (SBA) borrowers who invested in other chains.
Other companies on the list of top franchise defaulters include: Aamco Transmissions, Cici’s Pizza, Curves International, Minuteman Press, Sylvan Learning and Cartridge World. These franchises cost taxpayers $121 million in SBA-guaranteed loans between 2004 and 2013. That is how much franchisees of those 10 brands were unable to pay back. This doesn’t mean every individual franchise associated with these businesses failed. But, it should be a warning sign to individuals considering starting a new franchise.
Franchising is booming right now. Many entrepreneurs see it as an opportunity to start a company with an established name. Instead of starting from scratch and building a loyal customer base, franchises come with a well-known brand. Not all franchise purchases are worthwhile. Chains are not required by law to provide information to buyers regarding first-year average sales and failure rates. So, many franchisees have no idea what they are getting into.
According to the WSJ report, there many franchises performed very well between 2004 and 2013, including Jimmy John’s, Little Caesar’s Pizza and Days Inn. Those companies had default rates of 2 percent or less.
If you are considering buying a franchise, be sure to do your research. Factors to consider are the success rate of other franchisees and the demands of your market. What business you choose and where you choose to locate your business make all the difference. A New York City business attorney can help make sure you get off to a great start.