WHEN FINANCIAL NUMBERS LEAD AND WHEN THEY LIE
Current Financial Positions The Journal’s analysis shows that the last fiscal year only $705 million was charged
off, (defaulted loans) down from nearly $2 billion charged off in 2010. Thus, most recently, charge offs on SBA 7(a) loans have declined by 35.2%.
What’s the Franchisor’s financial position now? Franchisees beware of the results you find. Scrutinize with an eye for detail and with the due diligence of Magnum PI; does anyone remember him? How about with the due diligence of Sherlock Holmes or Scooby Doo? That should cover the Baby Boomers and the X Generation out there.
There are several Franchisors, who I will refrain to name, that literally went down with the ship. During the “tough times” especially from 2008 to 2010, franchise systems spent additional funds on marketing and advertising budgets to edge out their competition on the uprise of the economy. Yet they furrowed and forgave the collection of royalty and/or marketing fees from their franchisees in an attempt to lighten the financial burdens in the “downturned economy” as it was being called. Unfortunately, for too many Franchisors they were overly generous and ended up having to file for bankruptcy protection over the last couple of years, suring up the slogan, “nice guys finish last.”
Normally, during our national and regional education series, “What to Ask Before You Buy A Franchise” as well in our coauthored book on “How to buy a Franchise from Your IRA Funds,” we caution about getting involved in a system that has either been on the SBA default list, or who has filed bankruptcy. However, I feel the need to go on the record here and say that this year could be an out of place exception to the normal rules. These numbers should not give prospective franchisees much more than a pause and inkling to dig deeper. The truth is that these facts haven’t given the SBA reason to pause either. In fact, $18 billion was loaned to franchise systems in fiscal 2013 which was the second highest loan year in total amount approved in the past decade, according to the SBA.
Remember, high failure rates aren’t necessarily a problem for Franchisors as they can still consistently generate millions of dollars in revenue every year from ongoing royalties, products and services, and rebates from purchases of approved suppliers, successful franchisees, not counting the ongoing sales of new franchise units.
In conclusion, if the franchise system that you are interested in is on the list, find out why and use it to your advantage as an extra evaluation tool. This is just one more tip Shelton & Power uses to teach you a way that you can interview the Franchisor while they are deciding whether to award a franchise location to you.
In the face of fairness, among the best performers in The Journals ranking were Jimmy John’s, Little Caesar’s Pizza and Days Inn, which all had SBA default rates of 2% or less.
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Industry Evaluations, Franchise Disclosure Document Review, Fairness Factors, Opinion Letters and Negotiations.
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ii Overall Federal Reserve Loan Charge offs. Last confirmed October 20, 2014 http://www.federalreserve.gov/releases/chargeoff/chgallsa.htm
iii Discussions with Al Wells. Retired GE Aviation employee. March 10, 2012.
iv Sarah E. Needleman and Coulter Jones. Franchise Brands With Higher-Than-Average Default Rates. Last confirmed October 20, 2014. Found online at: http://www.wsj.com/articles/some-franchise-brands-have-higher-than-average-default-rates-1410392545
Ms. Shelton in a previous life was a franchisor of a large franchise system, and is currently a Senior Partner at
Shelton & Power franchise law firm. Shelton & Power Attorneys have 25+ years’ of business consulting, franchise and trademark experience. Our knowledge facilitates an understanding of a large variety of businesses, services and technologies. We help businesses protect their brands through Trademark, Copyright, and Business contractual transactions. These services allow us to “Expand their Brand” through Franchising. For existing Franchisors, we provide full outsourced in house counsel.