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Failure Rates of the 10 Most Popular Franchises

April 26, 2010

Failure Rates of the 10 Most Popular Franchises What are the failure rates of the 10 most popular franchise opportunitiesCNNMoney.com recently published the list they determined were the “most popular” franchises based on the dispersal of SBA loans to franchise owners.

According to CNNMoney.com, the “loan data is from the Small Business Administration, covering loans made from October 2000 through September 2009. The failure rate represents the number of loans in liquidation or charged off, divided by the number of loans disbursed.”

The Matco Tools was deemed the riskiest franchise with a 36% franchise loan default rate.

Cold Stone Creamery franchise was listed as 2nd worst with a 31% failure rate.

The much maligned (& litigated) Quiznos franchise was 3rd worst with a 25% default rate.

The Curves franchise was the 4th worst, with a 16% SBA loan default rate (no surprise to readers of this site or to those who left 600+ comments on our Curves franchise discussion)

Also posting a double-digit default rate is heavily promoted The UPS Store franchise with a 12% SBA franchise loan default rate.

Franchise # SBA Loans $$$ Dispersed Avg. Loan Failure Rate
Subway 2,292 $391.8M $170,928 7%
Quiznos 2,019 $291.7M $144,458 25%
The UPS Store 1,085 $159.4M $146,943 12%
Cold Stone Creamery 774 $180.9M $233,687 31%
Dairy Queen 478 $157M $328,383 8%
Dunkin Donuts 464 $270.4M $582,726 8%
Super 8 456 415.2M $910,476 4%
Days Inn 390 $399.2M $1,023,690 6%
Curves 371 $36.4M $98,094 16%
Matco Tools 321 $28.9M $90,131 36%

The winners include Super 8 and Days Inn motel franchises with 4% and 6% respectively, Subway with a 7% default rate and Dairy Queen & Dunkin’ Donuts franchises with 8% default rates.

Franchises with the Highest Failure Rates:

Here are comments from the CNN writer, from worst to best:

Matco Tools franchise – 36%: “Tool manufacturer and distributor Matco is the riskiest investment on the top-10 “most popular” list, with more than one third of its SBA-backed loans going bad.”

Cold Stone Creamery franchise – 31%: “The product is sweet, but the financials can be bitter. In the last 10 years almost one in three SBA-backed franchisees defaulted on their loan.”

Quiznos franchise – 25%: “One in four franchise owners was unable to make good on their SBA-backed loan. Quiznos recently settled four class-action suits brought by its franchisees, agreeing to pay as much as $100 million to end years of wrangling over its pricing, royalties and fees.”

Curves franchise – 16%: “The overhead costs are pretty low, but the investment can be risky. Curves’ fast expansion goes hand in hand with a relatively high churn rate, and almost 16% of its SBA-backed franchise loans this decade failed.”

The UPS Store franchise – 12%: “Seven years ago, they [MBE franchisees who converted] filed suit against UPS, and will finally take their case to trial later this month in Los Angeles. Meanwhile, UPS rolls on, adding new franchisees to its network for an initial fee just shy of $30,000.”

Franchises with the Lowest Failure Rates:

Super 8 franchise – 4%: “Getting into the motel industry is pricey… but it’s also a pretty safe bet. Among the handful of franchise brands… a notable number are hotels and motels. Super 8 has the lowest default rate on this top-10 list, hovering just under 4%.”

Days Inn franchise – 6%: “Days Inn is another member of the Wyndham Hotel Group’s franchise family. Launched in 1970, the chain currently boasts 1,900 hotels throughout 15 countries.”

Subway franchise – 7%: “With fewer than 8% of SBA-backed borrowers defaulting on their loans, Subway has a better track record than similar brands — rival sub shop Blimpie has a 46% loan failure rate, and Quiznos is also well into the double digits.”

Dairy Queen franchise – 8%: “Today, it boasts 5,700 locations around the globe and a single-digit failure rate for its SBA-backed franchise loans, making it one of the safer investments in the food franchise market.”

Dunkin’ Donuts franchise – 8%: “Dunkin’ Donuts’ modest default rate is matched by its corporate sibling, Baskin-Robbins, which had a 10% failure rate for its SBA-backed loans.”

ARE YOU FAMILIAR WITH THESE FRANCHISE OPPORTUNITIES?  WHAT DO YOU THINK?  SHARE A COMMENT BELOW.

Source: CNNMoney.com

Comments

37 Responses to “Failure Rates of the 10 Most Popular Franchises”

  1. Unhappy says:

    It’s no wonder that Curves is the fourth worst and with all the closings this year it is sure to get a lost worse. Owners can’t even give them away at this time and it is world wide,

  2. jd says:

    Sean, this is a horrible way to look at this story and you are obviously trying to spin it to your readers (which is obvious when Unhappy is now saying that CNNMoney is calling it the fourth worst).

    It’s talking about most popular franchises in terms of SBA loans. Curves has 371 sba loans with a 16% failure rate. Okay, so 371 loans out of estimates of 4,000 locations, so 10% of the locations have sba loans (not very many then). What would be of more interest, is how many of those failed sba loans were from people that bought resales at prices higher than the initial investment costs, which is where I am guessing most of the failures are at.

  3. Unhappy says:

    jd,
    It does have the fourth worst failure rate at 16 %. What is your point that curves is a good investment ? Come on now we all know that isn’t the case. They are closing all over the world faster than they opened. They are mismanaged by a crook that has no integrity, honesty, ethics, or moral fiber at all…. By all accounts he is just a plain crook. PERIOD

  4. Chris Cross says:

    Unhappy –

    Did you not read JD’s posting? Did you suspend reality?

    He points out the irrational interpretation of the SBA loan failure numbers and that they are incomplete.

    Cassius Del Giorno

  5. Chris Cross says:

    Apologies on incorrect signature, should have been pseudonym Chris Cross instead of alter-ego Cassius Del Giorno.

    Chris Cross

  6. jd says:

    Hey unhappy, you could also look at it as being the 6th best franchise too, based on a sample of ten, which is as stupid as saying that it’s the fourth worst franchise.

    The average size of the loan is $98k, whereas the initial investment (per the FDD) is around $50k. So to me that says that most of these loans were for resales. The resales were probably sold at an inflated price to someone that didn’t understand due diligence process (and subsequently comes on here to complain that they were screwed over).

  7. ADMIN says:

    Not sure what I’m supposedly spinning. The numbers is the numbers. I don’t have a copy of this year’s entire report… I’m just relaying what CNNMoney & SBA reported, as stated. Draw your own conclusions.

    Curves was also listed in last year’s report as having one of the highest default rates. http://www.everyjoe.com/articles/quiznos-cold-stone-subway-curves-top-franchise-loan-defaults/

    Gary Heavin explained that “These loan problems were a result of the overpriced resales of franchises between third parties.” jd makes the same point.

    While some complain about being misled by the seller, many, many franchisees are complain of plummeting membership and renewal numbers… whether through member boredom, budget constraints or just not seeing results.

  8. Unhappy says:

    jd,

    You need to read the post before you make such outlandish statements about the owners. they didn’t fail because of lack of due diligence but because of Howie and the way he has mismanaged the corporate offices If you had any balls at all instead of a big mouth you would buy a franchise and prove us wrong, but that won’t happen will it jd . You would rather argue and stick up for a cheating lier like Howie.. Put your money where your mouth is jd What was that jd? you would rather wait tell hell freeze over. Just what we all thought. All mouth no action, no compassion,. just here to argue and stir things up. What a guy!@!!!!!!!!!!!!

  9. jd says:

    poor unhappy, can’t really take the criticism, because he can’t open his eyes to a possible different scenario. Who knows maybe the jury will see that in August (oops, I mean December).

    Please tell me where I said it was a good franchisee. Actually I think I’ve said it wasn’t (at this point).

    One reason for a possible failure that has been mentioned in previous posts, paying too much for a resale (which you blame on Howie, because you can’t seem to think that anyone or anything else could be to blame).

  10. Unhappy says:

    jd,
    Once again you did’ not check the facts before you opened your mouth and put your foot in it. When a club is resold the previous owner has to send in records of the purchase price, buy sell agreement and the total number of active members. While it is true a few owners lied and inflated the actual members to get an inflated purchase price Howie knew it was happening and has admitted as much but never once tried to stop the sale. If you had the slightest knowledge of Curves you would have known that every owner has to submit last months projection sheet at the beginning of each month. It shows the not only the total income from the last moth generated by the club it also shows the total active members. Howie knew that some unscrupulous owners were falsifying records in order to inflated the sales price. As stated above Howie knew this was going on but because he is unscrupulous, unethical, with no moral or integrity he allowed owners to do this. So jd I would say they are both at fault but of course you will say and contend that it was the owners. Take the blinders off jd, open your eyes, and shut up as every time you post it only shows all of us here what a complete moron you really are further more jd I doubt you even know how to value the net worth of a club so how would you know if they were over priced? You wouldn’t.

  11. guest says:

    “The resales were probably sold at an inflated price to someone that didn’t understand due diligence process…”

    I’m not sure I get the point jd is trying to make. Are you saying this failure rate is skewed upward because they were overpriced resales?

    I would think that this failure rate is actually skewed lower because 1) these were well-financed buyers with SBA backed capital, 2) they were buying established clubs (if your right about resales).

    Do you really think that the bootstrapping enterpreneurs who opened in a new, unknown and probably D market (or one where Curves closed in the past) have a better survival rate than financed purchasers of existing clubs?

  12. jd says:

    Oh, unhappy, there you go with the name calling again. When you can’t argue a point, you decide to go with the name calling. Shows the maturity level that you have.

    I find it interesting that it seems like you believe that the club is valued on the total active members and the total income, which is just plain wrong. What you are saying is that a club that does (in my example) that does $500k with a net income of $10k, is more valuable than a club that does $250k with a net income of $75k. Are people truly valuing a club and the resale amount on the total number of members? If so, it’s the wrong way to value it. People need to look at a bottom line, comparing fixed and variable expenses (which it doesn’t seem like people do or understand). Most businesses are resold based on an EBITDA multiplier. Then on top of that, you as the buyer, put a portion of the purchase price into an escrow account (paid by you), to cover any ‘inflation’ of member numbers caused after the fact. If they don’t agree to that, don’t you think it’d be a ‘red flag’?? But to the point of the sales prices, the buyer sets the market price. They determine what they feel is a fair number as to what they will pay, if they feel it’s inflated, they walk away.

    It’s not Howie’s responsibilty to stop a sale. If someone is willing to pay for it, then you let the market drive the price.

    By the way, I thought Howie and corporate didn’t do anything in the transfer process, which made the transfer fee illegal.

    Guest…Look at the average loan, $98k, the high end of the initial investment was around $50k (per the FDD). Based on this, I would say that a majority of the loans were for resales. Odds are the prices were inflated and people still paid the amount.

    Your theory that you have to be well-financed to get back by the SBA is flawed. Look at the Cuppy’s debacle. Those were SBA loans, and I don’t think many of those people were ‘well-financed’.

    As to the survival rate, I believe that there were some that bought a resale that had no chance of survival based on the sales price (they got took). I think this company was a fad, and gyms are a dime a dozen now in all parts of the country. I wouldn’t touch a fitness franchise at this time.

  13. Unhappy says:

    jd,
    Just as we all thought, you have no idea of what you are talking about. You have no conception of how to value a curves gym or for that matter any business. You have absolutely no experience with curves and Howie and refuse to look at the facts as they were presented. Since you don’t have a dog in this fight it is obvious you just want to argue a worthless point and must have plenty of time on your hands to waste your time trying to justify a position which can’t be logically, morally or ethically justified. I for one will not read nor respond to any of your posts from now on and I would suggest all other curves past and present owners do the same. Over time I’m sure you will act like a fart and blow in the wind or better yet act like a cow pie and hit the trail.

  14. jd says:

    Your right unhappy, I don’t know how to value a business, yet i was involved in other business deals and it seemed that people were quite interested in EBITDA and trying to do future projections. Top line was fine, but if the bottom line didn’t get the buyer their money back then it was pointless to buy.

    I’m pretty sure that you don’t care to look at the facts and only look at it from one perspective, that’s why I come in and ‘debunk’ your myths, which I figure is why you like to call me a ‘moron’ and such.

    Great, ignore me. It just means that I’ve won the fight. I don’t care. You can hang out with your Eastern European friends that have migrated to the website, since it seems like most others have left. Even ‘Closed’ with his post last week is showing frustration with the lawsuit and settlements that are taking place. Oh well, I guess you’ll see in December what happens (I’m assuming that you saw that it got pushed back again).

  15. Unhappy says:

    To admin

    Do you know where we can find the new disclosure statement or FDD document for last year? Anyone who is contemplating buying a Curves franchise should become familiar with all the owners who have filed law suits against Curves international and the fact that it is nearly impossible to get financing for a Curves franchise and I’m sure the above mentioned post about the failure rate of the SBA loans explains all of that. thanks for the info and giving the owners of these franchise a place to vent.

  16. franchisee77 says:

    I would not boycott Arizona businesses except for Kahala/Cold Stone who are fraudulently ripping off their franchisees. They should be boycotted nationwide! Hundreds of us franchisees have lost our businesses, our retirements, and our inheritances and almost our home because they have lied to us. They tell us they are profitable and profit by making people happy. They are thieves. They do not support new franchisees. They made their money and that’s all they cared about. The co-brand they promised us was with Cereality. It never happened. We were told after we bought our store we needed to be in for 2 years and show profit before we could co-brand with Cereality.
    We never hit the 1/2 mark they promised. The promise was $500K our first year.

  17. SCAMWATCHfastway says:

    I have on good accord that the franchise with biggest failure rate would have to be a company called Fastway Couriers. Although it is not operating in the United States at present, it has put it feelers out asking that it would be interested in aquiring a master franchise there. Although i have no figures to back this up at present all you need to do is check out forums on many others sites in Australia, New Zealand, UK. the did operate in many other countries like Portugal, Netherlands, France, Spain, Canada, Luxemburg, Singapore, Belgium and recently Scotland, which all went into liquidation and taking all of the Courier Franchisees money with it.

    You will see from the forums etc that there are many disgruntled franchisees out there which have been sent broke by this company and have been setup to fail.

    Yet people want to take legal action against this company, but have no money to fight them. If any one can suggest anything, it would be most welcome.
    Please take your time and look at this:
    http://www.esnips.com/web/scamwatchfastwaysStuff/

  18. BB says:

    Wow…So glad I came upon this blog…Was considering buying a resale…Not so sure now….Thanks for all the info and opinions…

  19. Ralph says:

    I purchased a The UPS Franchise in 2006, worked it for 4 years and never made a dime. Refinanced my house,cashed in my 401k and sold $30,000 worth of stock to try and keep the store going. No luck! I walked door to door trying to get some accounts by discounting my shipping charges.

    I did get a few accounts only to have them taken away by UPS by undercutting my discount. The UPS Store uses I-ship software which charges one price and UPS uses World Ship software that charges 1/2 the price of I-ship. UPS undercuts The UPS Store from 20 to 50%. When I complained to the franchise they said push your copy profit center. I would have to copy day and night for a week just to make the profit a few good shipments would bring in. I am closing my store and claiming bankrupcy. Do not buy a UPS Store you will go broke.

    I would like to join a class action lawsuit against UPS and MBE for selling worthless franchises. Anybody know how I can join.

  20. bg says:

    Matco Tools has become a giant “pump and dump” operation to get new franchisees (big upfront investment) in business knowing they will only last 1-3 years and when the franchisee finally figures out how bad he is getting screwed by the company he has lost everything…then to top it off Matco tools and their egregious business practices put the full blame on the dealer/franchisee. Matco and Snap On keep this viscious cycle going to artificially inflate numbers to keep them in the Top Ten list. The actual attrition rate is close to 70% during the first 5 years, the numbers here ONLY show SBA loans which is a very small percentage of the total loans and money invested.
    Stay away from the tool business no matter how good the managers make it look on paper, they get paid a huge spiff to hook unsuspecting prospects.
    How do I know all this as fact? I have been a dealer for 20 plus years and the business has changed dramatically since I bought my business…STAY AWAY FROM MATCO, YOU WILL LOSE ALL YOUR INVESTMENT

  21. Next Steop says:

    I am sure that jd does not come to this site anymore and we miss unhappy…

    When I sold my first club in 2007, I called CI and ask what should the asking price be. I was told by one of the old timers that the price should be 300 per member. I set my asking point at $120 and sold it at $95. I look back at that now and think, my net was only 2,000 a month. I sold a club that only had a net income of $24,000 for 95,000. FYI, I was only 26 then and I did not have any business experience. Now I have gotten a degree and taken business classes. I know that I should have never sold my club at such a high price, but then why did CI tell me to value it so high?

  22. Wipedout says:

    We often heard $50,000 per 100 members was a fair asking price.

  23. Next Step says:

    I had heard that too, but even the $300 per member would make it $30,000 per 100 members. No matter how you looked at it the per member is just crazy. We did not even net $30,000 a year. This whole thing is just crazy. The sad part is so many people are like you wipedout. I can say that I am, because I purchased my second club which I still own for 12x what it was worth. You live you learn, but I would have never paid that much had CI said look at the net profit. I just hope I can keep going. My husband says he is going to leave everyday, and financially cut me off a year ago. He gives me enough money to buy food and clothes for the kids.

  24. TOMMY CHEUNG says:

    STAY AWAY FROM MATCO TOOLS. THEY WILL SELL YOU A BILL OF GOODS,WHICH IS NO GOOD. RUMOR HAS IT ,MATCO MAKES MORE MONEY SIGNING NEW FRANCHISES THAN THEY DO TAKING CARE OF THEIR CURRENT ONES. DARYL PRITCHETT AND MIKE RAMEY WORK TOGETHER TO SIGN YOU UP AND THEN KICK YOU TO THE CURB. I AM WORKING ON A LAWSUIT AGAINST MATCO,HOPING TO TURN IT INTO A CLASS ACTION SUIT. YOU MAY CONTACT JERRY MARKS AT MARKS AND KLEIN LAW FIRM AT 732-450-2351,IF YOU ARE INTERESTED. I INVESTED ALOT OF MONEY IN MATCO AND AFTER 3.5 YEARS THEY SHUT ME DOWN. WHEN THE ECONOMY SLOWED IN 2008,THEY PUT ME OUT OF BUSINESS. I ALSO SPOKE TO A PREVIOUS EXECUTIVE, WHO CALLED ME, AND STATED THATS THE WAY MATCO DOES BUSINESS. STAY AWAY FROM MATCO TOOLS AND RUN LIKE HELL WHEN YOU SEE THEM. I REPEAT DO NOT BUY OR INVEST IN MATCO TOOLS. PLEASE CALL ME, TOMMY CHEUNG AT [redacted].

    NOTE: We don’t allow posting of personal contact info in the comments. General contact info for businesses, law firms, etc. is permitted. If anyone wants to get in touch with Marks & Klein their contact info is on their website: http://www.marksklein.com/contact.html Thanks – ADMIN

  25. ADMIN says:

    We upgraded Tommy’s Matco Tools complaint to its own post. If anyone has insights into the Matco Tools franchise, please comment here:

    http://www.unhappyfranchisee.com/matco-tools-franchise-complaints/

  26. […] One point of contention is the high default rate reported on SBA loans.  According to CNN, even among the franchises with the greatest number of loan defaults, Matco Tools is the riskiest:  Failure Rates of the 10 Most Popular Franchises. […]

  27. […] Failure Rates of the 10 Most Popular Franchises  April 26, 2010 […]

  28. […] Failure Rates of the 10 Most Popular Franchises  April 26, 2010 […]

  29. […] Failure Rates of the 10 Most Popular Franchises  April 26, 2010 […]

  30. […] Failure Rates of the 10 Most Popular Franchises April 26, 2010 […]

  31. […] Failure Rates of the 10 Most Popular Franchises  April 26, 2010 […]

  32. […] Failure Rates of the 10 Most Popular Franchises  April 26, 2010 […]

  33. […] Failure Rates of the 10 Most Popular Franchises  April 26, 2010 […]

  34. Ronnie Balkan says:

    You whiners stop complaining. Matco is one of the great franchises of our time as long as you follow the model. If you failed you have no one to blam but yourself.

  35. Pam says:

    At Jd and unhappy:

    Jd, you need to do your research before you speak. I am a Curves owner with a SBA loan. Curves IS considered high risk and my bank would not lend the amount requested. My husband and I make over $100,000 a yr. We both have solid credit scores. (801 for the husband and 792 for me), we have banked with Chase for over 8 yrs. My husband’s direct deposit, our savings, IRA’s, credit cards are all through Chase. We have established a great relationship with Chase. Despite all this, we were only funded half of our loan. Why? Curves is on the list of top 10 franchises that should not be lent to. I saw the list for myself! Half and yes I said HALF, half of the loan was only disbursed to me. It was stated by Chase and the SBA, half the equity injection must come from me, due to over 50% of loans funded by Chase, were not paid. Those stats are very disheartening and discouraging. This was in 2010, during the summer so it is recent. Fortunately, my husband and I were able to come up with half from our savings.

    As for over-priced Curves, it is just that over-priced. Greedy owners making a quick buck and not being honest. I negotiated down the asking prices on both my Curves by 50%! I had an owner (most recent purchase) asking $120,000 on a club with about 400 members. I paid, get this, $55,000! That is how you do business.

    Some of this can be blamed on Curves’s owners not knowing how to run their clubs, some on the fall of the economy and a lot on corporate greed. I met an owner who ran four clubs into the ground and she flat out blamed herself. Why? She did not work her clubs. I have met owners who did everything and still had to close. Corporate greed has a lot to do with this. My Curves that I bought, had at one point 5 Curves within an 8 mile radius! Sounds like Gary enjoyed collection his royalties. How can owners parked so close to each other, compete with one another??

    Curves International and their employees are snakes. They are condescending, right wing Republicans, who at any cost, do what is best for them. They love to talk about the Curves Community of women. What a joke! I bought a club from an Area Director (who is still employed by Curves), who lied and cheated her members. I have owned her club for over two yrs now, and I still have members hesitant to re-join, due to the previous owner continuing to draft their accounts after they cancelled. This AD even took money from products sold and the members never got their money back or the product. These are the woman that are part of the Curves Community. Disgruntled, unhappy and cheated. Yet, Curves continues to employ this woman. Oh, did I mention she has stalked me and my employees, and when I told her boss, her only comment was that’s strange!! Strange?? No, it’s mentally unstable!

    I would not have purchased a Curves, if I knew about their corporate office and their self righteous Christian views, the kind of people they employ (fake!), and how they have screwed other owners and members that are part of the so-called Curves Community.

    I enjoy what I do and am thoroughly involved in both my club. And yes, both are profitable. I can tell you, from their stupid redundant training to the corporate staff that talks to you like you are kid, I would not recommend investing your $$ into Curves. I am a female minority and now fully know and understand, that Curves is like any America corporation….in it for themselves!

  36. The enlightened one. says:

    All franchises are scams at some point. They are designed to implement a system, at first, for investors to profit and then the franchisor squeezes every penny out of them before they dump them. The more popular the franchise is the more they sell and overload areas to maximize their profits and turn their franchisees into non-profitable Pump and Dump machines.

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