QUIZNOS, COLD STONE, SUBWAY & CURVES TOP FRANCHISE LOAN DEFAULTS
February 24, 2009 by Sean Kelly
Filed under Business
According to a Wall Street Journal article by Richard Gibson, the number of SBA-backed loan defaults by franchisees increased 52% in the fiscal year ended Sept. 30, 2008, from fiscal 2007. Loan losses totaled $93.3 million, a 167% jump from $35 million just 12 months earlier.
Quiznos Sub had the highest number of loan defaults, with 108 franchisee failures. Cold Stone Creamery franchises racked up 75 defaults, followed by the Subway franchise with 42 defaults and Curves for Women with 24.
By percentage of defaults to total loans, meal prep kitchen Dream Dinners had the highest, with 18% of franchisees having defaulted thus far. Next worse were Taco del Mar and Carvel, with 15.49% and 15.38% defaults, and Cold Stone Creamery with 9.82%.
Fiscal 2008* Loan Defaults at Franchises with 50 or More SBA-backed Loans
| FRANCHISE | # Loans 2001-08 | # Defaults 2008 |
| 1. Quiznos | 1,963 | 108 |
| 2. Cold Stone Creamery | 763 | 75 |
| 3. Subway | 2,148 | 42 |
| 4. Curves for Women | 362 | 24 |
| 5. Planet Beach | 230 | 22 |
| 6. Aamco Transmission | 169 | 15 |
| 7. CiCi’s Pizza | 155 | 13 |
| 8. Carvel | 78 | 12 |
| 9. Domino’s | 242 | 11 |
| 10. Dream Dinners | 61 | 11 |
| 11. Taco Del Mar | 71 | 11 |
Source: U.S. Small Business Administration *Year Ended Sept. 30
Who are franchising’s biggest losers in terms of loan default percentages from this list?
| FRANCHISE | % 2008 Defaults to Total Loans |
| 1. Dream Dinners | 18.03% |
| 2. Taco Del Mar | 15.49% |
| 3. Carvel | 15.38% |
| 4. Cold Stone Creamery | 9.82% |
| 5. Planet Beach | 9.56% |
| 6. Aamco Transmission | 8.87% |
| 7. Cici’s | 8.38% |
| 8. Curves for Women | 6.62% |
| 9. Quiznos | 5.5% |
| 10. Domino’s | 4.54% |
| 11. Subway | 1.95% |
Curves International Inc. chief executive Gary Heavin, added a bit of levity to the dismal news by claiming “These loan problems were a result of the overpriced resales of franchises between third parties.” Franchise Pick has published many accounts of Curves resales offered for $1.00 with no takers.
FranchisePick.com and UnhappyFranchisee.com have reported candidly on many of these companies:
CURVES FOR WOMEN, QUIZNOS, COLD STONE CREAMERY
CURVES FOR WOMEN: Advice on Buying a Franchise Resale
CURVES FOR WOMEN: List Recent Club Closures Here
Quiznos Franchisee Blasts HQ’s Coupons and Discounts
Curves Franchisee Blames Economy for Closing
QUIZNOS SUB Rick Schaden Back as CEO. Reactions?
Cold Stone Creamery franchise on Unhappy Franchisee
What do you think? Share a comment or insight below.
Photo: PetroleumJelliffe License: Creative commons
Good for Richard Gibson of WSJ for getting the SBA default rate on franchises before the public.
Unfortunately, this SBA default rate is very misleading because the hidden failure rate of franchisees who appear in the Item 20 transfer columns isn’t visible either to prospective franchisees or to the investors in the franchise systems.
Those thousands and thousands of franchisees who financed the purchase of a franchise with a home equity loan or a 401K loan and failed don’t show up on the SBA default list.
Perhaps Mr. Gibson will write about this in another article because ALL failures of franchisees should somehow be transparent in the interests of prospective franchisees and the investors in the paper empires of the franchisors.
Don’t think that “third party” stuff is going to cut it when push comes to shove and someone takes a good look at managed “churning” in franchise systems.
Doesn’t Curves International APPROVE the sales price of a club when they agree to a transfer of club ownership?
When a resale takes place, the prospective buyer has to fill out paperwork stating how many members in total are at the location they are buying. If the seller is providing fraudulant numbers by somehow altering things in igofigure, Curves Internationally is privy to that information. This reason being because every month when you submit a projection sheet, the number of current active members is listed at the bottom of the sheet. Therefore, they are aware of whether the number being given by the prospective buyer is the true number or not! That is what happened to us! We thought we had 275 members. we listed that on our resale sheet. When we actually got into teh gym, there were only 235 members! The bank based the loan we had on teh income from 275 members!
Wiped: why would they have to approve the sales price? It doesn’t effect them, because they are getting an established transfer fee for the sale (paid by the seller). It’s not the franchisor’s responsibility to tell the prospective buyer whether it’s a good deal or not.
Now for NJCO, I’m just curious, what kind of due diligence did you actually do before you purchased your store? It sounds to me like you did absolutely nothing and relied on everything the sellers told you.
I’m curious, how did you verify their membership totals? Did you look at their financial statements and tax returns and calculate out what their average membership totals were? Did you independently ask the franchisor to verify membership and sales numbers?
From my time, I had a store trying to sell to a prospective buyer. The prospective buyer called me asking for what the past three years sales numbers were. I wasn’t releasing that information without approval from the seller. The seller wouldn’t give me approval (RED FLAG). person still bought the store. I think they closed a couple of years later.
It’s not Curves or any franchisor’s responsibility to do your homework. To me it sounds like you didn’t do enough work on your end, and didn’t have any type of contigency set up in your purchase agreement to account for any errors in the information the seller gave you.
If we had the money to stay in business, we would have. I see no advertising and promotions to keep up with the declined economy. Where is the support – the christian organization with WHO in mind. Greedy, think again The territorys are saturated and cannot survive
New Jersey Curves Owner describes the misrepresentation of member numbers with her resale here:
http://www.unhappyfranchisee.com/2009/02/curves-gary-heavin-blames-greedy-3rd-party-resellers-for-franchise-failures/
JD,
No, we didn’t do any DD because we hired a small business consultant to that for us. We wanted no stone unturn and since this was our first business venture, we paid a professional. Turns out he stuck it to us too! he gave uis member lists. The member list said 275 members. In his contract, he put “All DD has been completed.” The small business consultant advised us to go along with it. We had no money to sue either of them for fraud. We got taken for being novices. There was a ton of red flags but we kept being advised “not too worry about it” because wew ere getting a good deal. Now that we are in the process of filing bankruptcy, our attorney has suggested a possible civil matter. They played on our inexperience. It was a HUGE mistake not listening to our gut and believing our so called “team”
Of course, the franchisee cannot sell-transfer the franchise in an asset sale UNLESS the franchisor approves the sale and gets the “release” from any liability for the sale signed by both the transferor and the transferee.
Franchisors, who are the sellers of franchises and who really OWN the gross sales of the franchisees under contract want to pretend that they are just innocent sellers of franchises and innocent bystanders in re-sales who have no proprietory statistics on the units within their possession that should be disclosed to buyers of their franchise. They want to pretend that they don’t abet these asset sales to third parties, when it suits them, by squeezing the failing franchisees with threats of liquidated damages, etc…
Just as they escape liability in pre-sale disclosure by making sure they don’t disclose anything concerning success or failure at all —or anything that they can’t prove within the written FDD and the non-negotiable contract —they give you the Artifice of Item 20 upon which to do your due diligence —they are doing the same thing here in the resale process.
JD knows, of course, that the law has been arranged to accommodate the franchisors and he thinks this is as it should be. He worked for a franchisor and has great contempt for franchisees who are prejudged as “dumb” under his philosophy. ALL franchisees deserve what they get because they didn’t do their due diligence on the red herring of the FTC Rule.
Those who are complicit and who help franchisors to legalize fraud, like the attorneys and the CPA’s, rely on the Caveat Emptor and due diligence stuff to put franchisees down. This, no doubt, helps them live with themselves.
Okay, NJCO has her anger at the wrong people. Curves isn’t as responsible as their own due diligence and the business consultant that they hired. I guess under Carol and NJCO’s system, the prospective franchisee is never at fault. However, these two owners/relatives didn’t do s*** when it came to their own due diligence. Now they get on websites and ‘cry’ that they were wronged.
I’m curious NJCO, how many members are out money from you closing up shop?
I always knew Dream Dinners was a chart topper!
I’m sure the experts will just brush this off as a “shakeout” or “pause” in the industry.
Yes! The Industry itself with the hybrid legal relationship of the franchisor and the franchisee (neither partner nor employee nor consumer) permits exploitation of franchisees who really believe that the franchisor can’t succeed unless they succeed, and that they are kind of a partner with the franchisor.
Franchisees don’t understand that under the law they are merely a resource for the franchisor. It is the franchisor who is the “entrepreneur” and encouraged by regulation and public policy and franchisees are merely sub-entrepreneurs who bear the risk of testing the concept in the market.
The meal assembly business never lived up to its promise but it was the franchisees who provided the cheap labor and cheap capital to test the concept in the market place, and who, no doubt, lost the most. Did the franchisors have to post personal guarantees to borrow money to start the concepts in the meal assembly business?
Under law, when a franchiSOR goes bankrupt, the franchise agreement remains in effect and royalties must still be paid by the franchisees until the bankruptcy either reorganizes the franchisor’s business or liquidates the business.
Franchisees don’t understand that the franchisors are not in business to make money for the franchisees and that franchisees are memerly a resource for franchisors to make money for themselves, and for their stockholders or their investors, if they are big franchisors. They so often have to exploit their franchisees to satisfy their stockholders and investors.
Franchisors minimize their risk, maximize their profits, and split when they have wrung the concept dry. They always get profits from the first day the business is open until the day it closes down. What a sweet deal for franchisors who can for some time beat the hard failure statistics of small businesses and grow into magnificent paper empires.
Franchisors would prefer their franchisees to be profitable and to make money but not to the point where it will interfer with their profits, etc… They are unhappy when the concept fails but do they pay as big a price for failure as their franchisees? Not usually! but sometimes!
Hopefully, Tuckerbox, there will be “change” in the industry if enough prospective franchisees understand the nature of the business model and the risk inherent in the exploitive model that encourages an exploitive relationship.
jd:
You can’t be seriously defending Curves.
From what has been posted, some of these franchisees have never had a visit from a store rep – ever.
When they request assistance, they get offered a “mentor” which they have to pay for.
They aren’t allowed to sell their own equipment – must donate it to a women’s prison (?!).
Once they fail, they are required to pay a $10,000 “failure fee”
Franchises are sold in markets too small to support a club and when they fail are resold without any scrutiny whatsoever as to whether the market’s viable.
The franchisor seems remarkably aloof and indifferent to the vast numbers of these franchisees who are failing.
I think that Curves has spawned a cottage industry of these brokers and advisers – like the one NJCO hired and trusted – who are helping to perpetuate this cycle. Just like the resellers of the Madoff scam… some of them should be held accountable for misrepresentations made.
As an owner I see and hear all kinds of opions. So I will give you mine.Curves is a business that requires alot of work,Attrition is part of any gym. You have to be caring and personable so attrition rate stays low and build from there. as with all business. Dont depend on franchisor to get your results.Exercise and health will never be a fad. With all new evidence on staying active and fit for a healthier life. I remind members everyday why it is they are doing this. 30 is a minimal effort to stay healthy. When you buy a business no matter what the numbers are in the begining its up to you to sustain them, as they change monthly.I have found this experience with women and exercise to be positive and yes we feel the economic crunch as do ALL business today, But mine will survive the long haul as I woundnt have any other way. Not everyone is cut out for curves, Just because you have money to invest doesnt make for a good owner. I have seen this time and again. So many owners leave their business to employees that could care less about numbers. Mine is a small private club where women care about each other and themselves they want to grow old gracfully and be healthy and strong. My curves offers them that.Too much emphasis on franchisor. He guareentees nothing, just offers you a name, no that going in and all would be better off. So with all the closures going on, the strong clubs will survive, maybe there wont be many of us, but that could only be good for us. If you cry about failing in business that one thing but to trash a concept that works well for so many women owners and members thats another. You know what they say about opions everyone has one. LOVE my curves
Curves Owner wrote:
As an owner I see and hear all kinds of opions. So I will give you mine.Curves is a business that requires alot of work,Attrition is part of any gym. You have to be caring and personable so attrition rate stays low and build from there. as with all business. Dont depend on franchisor to get your results.Exercise and health will never be a fad. With all new evidence on staying active and fit for a healthier life. I remind members everyday why it is they are doing this. 30 is a minimal effort to stay healthy. When you buy a business no matter what the numbers are in the begining its up to you to sustain them, as they change monthly.I have found this experience with women and exercise to be positive and yes we feel the economic crunch as do ALL business today, But mine will survive the long haul as I woundnt have any other way. Not everyone is cut out for curves, Just because you have money to invest doesnt make for a good owner. I have seen this time and again. So many owners leave their business to employees that could care less about numbers. Mine is a small private club where women care about each other and themselves they want to grow old gracfully and be healthy and strong. My curves offers them that.Too much emphasis on franchisor. He guareentees nothing, just offers you a name, no that going in and all would be better off. So with all the closures going on, the strong clubs will survive, maybe there wont be many of us, but that could only be good for us. If you cry about failing in business that one thing but to trash a concept that works well for so many women owners and members thats another. You know what they say about opions everyone has one. LOVE my curves
Curves owner, others:
Given the high default rate, should the SBA still guarantee loans to franchisees opening Curve for Women and Planet Beach franchises?
Under the new stimulus plan, taxpayers repay the banks up to 90% for defaulted loans guaranteed by the SBA. Last year, 46 loans were defaulted on by these 2 companies and taxpayers footed the bill.
Is that right? Will banks & lenders be more careful in lending if they won’t be repaid for backing doomed concepts?
Yes! Banks and lenders will be more careful. But, again, we have to remember that the SBA default rate is NOT a true indication of the failure rate of first-owner or subsequent-owner franchisees within a franchise system.
Many home equity loans and even 403 loans have been negotiated to buy franchises that later fail, but these failures don’t show up anywhere when the franchisee borrowers continue to pay on the loans and don’t file for bankruptcy after the unit is trasnsferred in a fire sale to an approved franchisee who gets to try to bring the unit to break even at much less expense and risk.
The 90% guarantee of the SBA will make Veterans and their families, who are recipients of the SBA Patriot Express Loan initiative, targets of franchisors and banks and lenders who will want these 90% guarantees from the government. The guaranteed portion of the loans can be sold as securities in the secondary markets and are profitable for the banks and the lenders.
But, under law, the borrower franchisee will still have to surrender collateral posted for the loan to the SBA after the SBA pays the 90% guarantee to the banks and lenders. Sure looks like another subsidy of the banks and the franchisors that may mean that franchisees will continue to be calculated sacrifices to what is rationalized as the “public good.”
There are high default rates on every business Sean, as you know not fair to single out one.There is default rates on homes as well. We live in uncertain times but must go on. Many will be hurt but many will still prosper. SBA did not finance me.My own money, so I had high investment failing not an option. Learned everything I could along with smart business practises learn from the best.Banks are being very careful about lending as a matter of fact they no longer are lending, so one must think out of the box. I did contact SBA about my business and they said was a great concept but would not lend moneybecause of no collateral that was 3 years ago.The American dream still exists, so you have to go with your gut and knowledge and have to have a realing to help people and really believe in yourself, as a transference of feeling shows through. Going into your own business is always a little scary, but the challenge far outways that. people that fail almost always want to blame someone else instead of themselves. only natural. There are all sort of business out there pick one that suits your strong points and be prepared to work hard. curves has been a wonderful experience for me I have to ask why Sean you seem to want to trash this company Have you owned one? The concept of curves is great, fitness will never be a fad, Is only getting more and more publised but again not for everyone.Would like to hear from people doing well for a change not just ones that failed. There is just as many that still love it. Location location in everything you do or invest to thanks for listening happy curvesowner
Carol. Most business owner do use equity to get into all kinds of business, as much as 50% do. This has been going on for years, that a risk people take to get to being in business.Business is risky,some are smarter in business than others. Some invest very little and hit it big while other invest alot and fail. But if you dont try or have the nerve to try you will never know. There are workerbees and thats all they will ever be or those that will try and try to they getit right Business to me is exiting I am not afraid it is a challenge thats my personality, can never work for someone else. I need that challenge and have alot of energy. So much in life to experience, just because you fall you get up and try again. Thats true for everything in life. We were all meant to prosper, dont walk in fear. I am very postitve and the women feel that. They like coming to my store for reassuance and a good workout. I dont care about woe is me I think its a pathic way to be.Take the bull by the horns and do wwhat it takes to succseed
I understand your comments! However, franchises are sold to new prospects who are not getting the MATERIAL risk factors that are known to the franchisor, and that concern the risks and the rewards of their investment, BEFORE they put their signature to the binding, long-term, unilateral contract. How can you defend this?
As a successful franchisee, you feel that it is unfair that failed and failing franchisees are “knocking” Curves. This, of course, is a predictble situation that always protects exploitive franchisors whose successful and standing franchisees don’t like to see their asset, their business, attacked in a public forum.
All the evidence indicates that franchising was regulated to PROTECT franchisors and THEIR successful franchisees from those franchisees who would fail and would believe that the franchisor fraudulently induced them to contract by false promises.
Those who are in NEED of a job and an income do risk more than they can afford to risk and yet the risk of the investment is obscured by the red herring of ineffective regulation that was intended to subsidize franchisors and protect them from charges of fraud by failed or failing franchisees. Franchising has always grown during recessions because of the desperation of those who need jobs and income and are willing to invest in themselves, and can be sold The American Dream by those who want the commissions on the sale of the franchise.
The ineffective regulation together with the subsidy of the franchisors and the banks of SBA loans does render franchisees merely as expendable resources for franchisors who then can beat the KNOWN ugly odds of the failure of all small businesses.
There is cooperation within the status quo to obscure these odds from the view of prospective buyers of franchises who sign malicious long-term franchise contracts with the franchisors, who know that a certain percentage of franchisees will perhaps have little chance of ever making any real profits, and that a certain percentage will actually fail.
Shouldn’t franchisees know upfront what the odds are up front and should government be subsidizing banks and lenders and franchisors under the guise that this serves the “public good” when this subsidy produces so many victims?
Are you indicating that if a franchisor has 50% of units that fail and 50% that thrive, that the 50% who fail should be sacrificed on behalf of producing the 50% who succeed. And, if you are. Shouldn’t the odds be disclosed up frant?
There are high default rates on every business Sean, as you know not fair to single out one.
Actually, the SBA singled out 10, above, as the worst. Curves was the 4th worst out of every franchise that got SBA funding.
…people that fail almost always want to blame someone else instead of themselves…
True. That’s why I urge people to do proper due diligence and think it through before taking the plunge. SBA default rates are one resource to look at in seeing which concepts are failing.
Have you owned one?
Sort of. My taxes paid for the debt on some that failed.
Would like to hear from people doing well for a change not just ones that failed.
Me too.
I Do understand what you both are saying, But remember all business have a failure rate. We all pay for this in our tax.Just becaise you invest doesnot guarentee anything. I think every smart investor should no this upfront on his or her own. There are risks with every single business out there. A franchise is a proven modle. Does not guarentee you will be good at it.So many are not for all different reasons.Women found it easy to go to sba because they were considred minoritys, so they qualified easier.Nobody goes into business with a feeling of failure. Its a risk we all take upfront. Economy hasnt helped either. But the plain truth is some shouldnot have gone into this business in the first place. Guideline should have been stricter. not that you have money to invest. Just my opion.
But, when you invest in a “proven model” and the franchisor doesn’t disclose to you how many other investors have failed with the so called “proven” model, or failed to make any profits, etc.. with the proven model, you see what you end up with.
You are right that all businesses have a failure rate but when you are investing in a franchise, shouldn’t the franchisor have the obligation under the law to disclose the “failure rate” of units in the system that is KNOWN to the franchisor. Instead of doing this, in bad times, when business is slow, franchisors try to sell more franchises for the purposes of maintaining their gross EBITDA upon which they make their profits. As long as they can sell new units out the front door and failed units out of the back door, they can survive recessions, even as many franchisees fail and lose their entire investments.
Apparently, the Rule that governs disclosure in franchising permits franchisors to NOT disclose this material risk factor to new buyers of franchises. If prospective franchisees did know how many franchisees had failed with the “proven” plan or were not making any actual profits, not as many would invest to begin with. This, apparently, is why the government doesn’t make the franchisors disclose the failure rate or profitability possibilities —-because this would inhibit the investment in franchises and slow the economy even more.
Catch 22! http://w.w.w.unhappyfranchise.com/2009/02/carolcross/
To curves owner,
I have owned a curves since 1997 and you are right in one since. The members love it and the results are truly amazing but the owner howie is a crook and there is no way you or anyone else can defend him. Many of the closing are a direct result of the way he runs his franchises. Most of us on this site are not out to distroy Curves but we are standing up to the business tactics that Howie is using to distroy this company. As an owner you know exactly what we are saying don’t you?!!!!! Howie will surly burn in hell for what he has done in the name of being a christian.
To all curves owners who have had problems with curves International and Gary Howie Havein please send your complaints to the BBB of your city and Waco TX. As well as the attorney general of your state and TX. And the federal trade commission. Below are web links where you can file the complaints on line.
http://www.bbb.org/
http://waco.bbb.org/WWWRoot/SitePage.aspx?site=40&id=ab5100aa-4c5a-4314-8e1b-f5996973f10c
http://www.oag.state.tx.us/consumer/index.shtml
http://www.ftc.gov/bcp/index.shtml