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Marketplace Morning Report
Fallout: The Financial Crisis

Business franchises defaulting big time

Mitchell Hartman Feb 24, 2009
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Kai Ryssdal: There are all kinds of ways to set yourself up in business, if that’s what you’ve got a mind to do. You can go the classic entrepreneur route and come up with an idea or a better mousetrap all by yourself. Or you can go to the other extreme and buy your way in with a franchise. You get a ready-made brand image and a marketing model to help drive traffic to your door. But this recession is turning out to be distinctly franchise-unfriendly. Franchisees are defaulting on loans backed by the Small Business Administration in increasing numbers.

From the Entrepreneurship Desk at Oregon Public Broadcasting, Marketplace’s Mitchell Hartman reports.


MITCHELL HARTMAN: Analyst Bob Coleman tracks SBA lending in his trade journal, the Coleman Report. His take on the default stats that he just released?

BOB COLEMAN: It’s brutal. The numbers are ugly.

Defaults rose more than 50 percent last year on SBA-guaranteed loans to franchisees. Roughly 1 in 10 closed their doors. The failure rate is worst for franchises selling subs, ice cream, pizza, and auto maintenance — with brands like Quiznos, Cold Stone Creamery, Subway and AAMCO high on the list.

Les Forman owns a successful shipping franchise called Pak Mail in Tampa, Fla. He thinks any franchise that relies on discretionary spending by consumers is in for trouble in this economy.

LES FORMAN: You can put off repairs on your vehicle. You don’t have to go out to eat. You do have to send things places.

Franchise owner Chris Schmitz knows some of his peers are struggling. Schmitz has three Meineke auto repair shops in Northern Virginia, and is president of the Meineke Dealers Association.

CHRIS SCHMITZ: I think a lot of people thought: If they built it, they will come, and they took on debt loads with property that the business model couldn’t sustain.

Overpriced real estate isn’t the only problem for franchise owners. Analyst Bob Coleman says some also bought their franchises at inflated prices using SBA-backed loans. Now that the bubble has burst, he predicts banks will be hesitant to make new loans, and all franchise owners who need additional financing will likely pay the price.

I’m Mitchell Hartman for Marketplace.

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