Franchise in Russia

The recession has hit franchise owners particularly hard, with the Small
Business Administration (SBA) reporting record loan default rates for 2008-2009.
According to the SBA, individuals who took on SBA loans to finance a franchise
had a 43% higher failure rate than in 2007.

In total, those franchise losses cost the SBA $93.3 million last year -
nearly 170% higher than the year before.

Since 2004, franchise loan defaults have increased by nearly 10% (from 3.1% to
13.4%), highlighting that franchise owners have had an increasingly difficult
time making a successful go of their new ventures.

As international franchising consultants, we at IFG approach this issue with a
“Learn from the mistakes of others” point of view.  While it is undoubtedly
disturbing to see these statistics; and while it may seem that these numbers
indicate franchising to be a risky endeavor, it is imperative to remember a few
key factors:

Our focus is solely international in scope, meaning franchise expansions in
which we are involved do not rely on any sort of lending, credit or debt. 
It is simply not a viable or economical practice for the international
franchising markets we serve.  

    
1. Noble Roman's Pizza

Billing itself as "The Better Pizza People," this Indianapolis-based
franchiser has had a tough time selling that proposition to customers. While
the company reported a 30% net income increase in Q1 of 2009, Q2 total
revenues were down
more than $500,000 from the comparable period in 2008. Maybe that's why 53%
of all owners with SBA loans defaulted in 2008.

     
2. PJ's Coffee and Tea Café

     
3. 
Super Suppers

4. Figaro's Italian Pizza

Figaro's has been in business for 28 years, but most of its franchise owners
aren't likely to reach that same anniversary. One-third defaulted on their
loans, unable to grab enough of the industry's $32 billion in annual revenues.

5. New York NY Fresh Deli

Perhaps it was the low single-site franchise fee ($17,500) that attracted new
business owners, but it was low revenues that led to closed doors. Thirty-one
per cent defaulted on SBA loans in '08

6. Amazon Cafe

This franchiser offers smoothies, wraps, salads, soups, juices and more, but
apparently not enough more to keep all operators in business. Thirty per cent
failed in 2008, and more than 52% have defaulted on their SBA loans since 2000.

7. Simple Simon's Pizza

Simple Simon's grew from one store in Tulsa to a network of 220 restaurants
nationwide since 1982. However, nearly 30% of store owners who took on an SBA
loan to finance the start-up have defaulted. Perhaps selling pizza isn't quite
so simple after all.

8. Snip-Its

The Snip-Its children's hair salons ranked 30th on the Franchise Times' 2007
list of 55 fastest growing franchises, but two years later that growth has
stalled. Thirty per cent of store owners with SBA financing failed to repay
their loans in 2008.

9. U Build It

Seeking to grab a share of the market that made Lowe's and Home Depot household
names the U Build It franchise offers owners an opportunity to serve as
"construction consultants" for DIYers interested in building or renovating their
own homes. But when the housing market collapsed, it shouldn't come as a shock
that 27% of their franchisees reneged on their SBA loans.

10. Bellacino's Pizza

If you're a Facebook user, you can become a Bellacino's Pizza "fan."
Unfortunately 26% of Bellacino's owners that took on SBA financing couldn't get
enough regular fans to stay current on their debt payments. That number closes
in on 30% dating back to 2000.

11. Blockbuster Video

While Blockbuster was able to fend off brick and mortar competitors, it has
struggled to maintain market share since Netflix and Redbox changed the rules of
the game. In 2008, one in four store owners with SBA loans failed to repay their
debt; that number jumps to a sobering 38% since 2000.

12. Pizza Factory

If this list proves anything, it should be that entrepreneurs might do well to
avoid pizza franchises. Twenty-four per cent of Pizza Factory owners took a pass
on repaying their SBA loans in 2008, and that number jumps to 43% if you look
back to 2000.

13. Pro Golf

14. Conoco Service Station

While ConocoPhillips Company is a Fortune 500 company, its service center
franchise owners (more than 3,100 operate under the Conoco, Phillips 66 and
Union 76 brands) are struggling. More than one in five (22%) have defaulted on
their SBA financing commitment.

15. Keva Juice

Keva's product isn't a "blendsation" everywhere. Twenty-two percent of these
smoothie store owners didn't raise enough revenue to repay their SBA loans last
year; more than one in four (26%) have defaulted on their loans since 2000.

There you have it. So what is the moral
of this story? Most foreign master franchisees do not use debt AT ALL. Glean a
lesson from the experiences of other entrepreneurs and pursue expansion avenues
abroad while the domestic U.S. market recovers.