TROPICAL SMOOTHIE CAFÉ Franchise Loan Defaults Overstated, Says Report

Tropical Smoothie Café franchise loans guaranteed by the Small Business Administration have a 23.58% failure rate, according to an SBA report released September 30, 2011.

UnhappyFranchisee.Com included those initial results in two posts:  WORST FRANCHISES IN AMERICA (by SBA loan defaults), and TROPICAL SMOOTHIE CAFE Franchise Complaints.

However, a report compiled by franchise research firm FranData for Tropical Smoothie Café  concludes that the SBA report overstated TSC loan failures, with the actual rate being 15.54%.

In an email to,  Tropical Smoothie VP Franchise Development Charles L. Watson wrote:

“FranData’s SBA Default report calculates a more realistic default rate for our brand.  It is still high, but we are working hard to bring it down through continued focus on franchisee profitability and business practices…

“This report shows we are far from perfect, but not as bad as the SBA data is saying we are.  Our SBA default rate is in reality lower than comparable franchise companies in our sector.”

Tropical Smoothie Café SBA Franchise Loan Default Rate Dropping

TSC SBA default rate.2According to the Enhanced SBA Loan Loss Analysis for the years 2000 – 2011 on the Tropical Smoothie Franchise Brand prepared by FranData Lead Research Analyst Ritwik Donde:

Between 2000 and 2011, there was a significant increase of 600% in Tropical Smoothie’s SBA loan disbursements, from 3 to 193. The total disbursed was $33.2 million or an average disbursed amount per loan of $172,257.

Out of the 193 loans approved between July 2000 and November 2011.

57 were paid in full 23 were fully cancelled 6 loans were undisbursed 1 loan was closed 68 are open and under regular service 8 loans are open and under liquidation 30 loans failed

During these 11 years, 30 of the 193 loans (15.5%) failed; 68 or 35% are open and performing normally; 8 are open and being resolved. The rest were either paid in full or cancelled before any money was disbursed.

While Tropical Smoothie’s failure rate increased each year until 2007, it has since then declined every year, from 19.73% to 15.54%

According to FranData, the discrepency between the TSC failure rate in the FranData report (15.4%) and the TSC failure rate released by the SBA (23.58%) is the result of internal flaws and inconsistencies in SBA data collection procedures.

FranData claims that these widespread inconsistencies can affect the granting of SBA-guaranteed franchise loans, as “the lending community does rely on [the SBA-supplied] information to a considerable extent, sometimes deciding whether to lend at all to a brand and at other times incorporating it into loan policy decisions about specific brand and industry concentrations.”

Increasing Capitalization Requirements Lowered Failure Rate, Report States

According to the FranData analysis, Tropical Smoothie Café was able to reduce its SBA loan failure rate by increasing the capitalization requirements for prospective franchise owners.

Prior to 2008, Tropical Smoothie required prospective franchisees to have a minimum cash liquidity of $50,000. The franchisor increased this requirement in 2009 to range between $100,000 and $150,000.

Prior to 2008, many new franchisees were undercapitalized.

According to FranData:

… Tropical Smoothie’s number of real business failures steadily increased after 2000 peaking in 2007. The real business failures started declining from 2008 onwards. Tropical Smoothie’s franchised café real business failure rate peaked at 8% in 2007 and declined to 4% in 2010. Based on management provided information, between 2000 and 2011, a total of 105 cafés left the system. The closures peaked at 21 in 2007 and then declined to nine in 2011.

Similarly, the number of failed SBA loans also peaked in 2007, after which no more loans failed. Undercapitalization of franchisees for the period between 2000 and 2007 could be one of the reasons for such high loan failure rate. Management realized issues with franchisee performance and took counter measures.

FranData concluded:  “Undercapitalization of franchisees led to high business failures for Tropical Smoothie franchisees, which in turn was one of the reasons for failure of SBA loans distributed to such franchisees.”

READ THE FULL REPORT (PDF):  Tropical Smoothie Cafe SBA Loan Loss Analysis

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