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Buying A Franchise With A Well-Known Brand Doesn’t Guarantee Success

Posted By Joel Libava On July 12, 2010 @ 10:23 am In Franchise | 12 Comments

Buying A Franchise With A Well-Known Brand Doesn't Guarantee SuccessI know that lots of people go into franchise ownership because they feel that they can piggyback on an established brand, thereby increasing their chances of success. That’s certainly logical thinking. But sometimes, business defies logic.

For instance, take a look at the SBA’s loan default rates for 2 of the 10 most popular franchises, as reported by CNN.com [1]. (It’s taken from the SBA’s own data)

  • Subway Reported SBA Default Rate: 7%
    Reported Number of SBA Loans: 2,292
    Reported Total Amount Dispersed: $391.8 million
    Reported Average Loan Size: $170,928
  • Quiznos Reported SBA Default Rate: 25%
    Reported Number of SBA Loans: 2,019
    Reported Total Amount Dispersed: $291.7 million
    Reported Average Loan Size: $144,458

Let’s examine these two franchise chains:

Between them, there are thousands of franchises populating the globe. Interestingly enough, they’re both in the business of selling submarine sandwiches. (I have no idea why subs are so popular, but maybe we’ll explore that in the not so distant future.)

Investment wise, they’re both also under $200k. The roles of the franchise owners are the same, too. So, why do they have loan default percentages like this?

In the case of Quiznos, accusations of price gouging, locations being opened up too close to each other, and unreasonably long franchise location approval times, have been the topic of discussion in the past. Read this BNET [2] story from 2005.

In a March, 2009 article published over at Franchise Times [3], it was reported that “the company is close to reaching a settlement on a class action lawsuit filed in 2007 on behalf of over 3,000 people who had paid $25,000 franchise fees and never opened a store.”  37 other lawsuits had been settled by the end of 2008, and according to the article, it seems that a lot of the problems are at least being acknowledged.

Quiznos has approximately 5,000 franchises, worldwide. According to the numbers in the CNN.com article referenced, over 500 of the 2,019 SBA loans that were doled out, were never repaid.

Subway, a 32,000+ unit [4] global franchise brand that will probably surpass McDonald’s in franchise units, has had its share of franchisee discontent, also. In fairness, extremely successful billionaire entrepreneurs like Subway founder, Fred DeLuca [5], will always have detractors.

Subway has also had its share of lawsuits. Here’s one that involved a soldier who was deployed over in Afghanistan, who lost both of his Subway franchises [6]. In Chicago, 78 people purportedly got sick in February and March of this year, after eating at a local area Subway [7], and had to be hospitalized. Lawyers are busy filing lawsuits against the owner.

Did you know that $600 million passes through the Subway Franchisee Advertising Fund Trust (SFAFT) annually? (In the US) Franchisees of Subway pay 4.5% of their gross sales into that fund. Not only do the franchisees pay into that fund, but they control it, too. Well, they did.

DeLuca had given up his control of the fund in 1990, and signed a new franchisee trust agreement. However, in April of 2006, he presented franchisees a new franchise agreement.  The franchisees rejected the agreement, and the last four years have been pretty ugly, with lawsuits filed from both sides. Interestingly enough, the franchisees happen have their own board of directors for this huge advertising fund, (who are volunteers) and they try to best decide how the money should be spent. Subway sued them.

On May 4th, a settlement was reached, and Subway now controls the fund. No one really knows what this will mean for the 14,500 US franchises that rely on advertising to meet their revenue goals. They really don’t seem to have much a say, all of a sudden.

Quiznos and Subway are both great examples of solid branding. Customers flock to both chains, while lots of prospective franchisees have them on their radar screens when they start “thinking” about franchising as an option.

When I consult with folks that are considering franchise ownership, there’s one constant; Almost all of them want to escape the sometimes dysfunctional environment that large corporations can have. Whether it’s chain of command issues, management infighting, or “the direction” of the company, folks that want to get into a business of their own really want to avoid all of that. But, is it realistic?

The world of franchising isn’t perfect. There’s bound to be problems. Humans are involved. Buying into a well-known brand doesn’t guarantee success.

If you decide that becoming a franchisee of Quiznos or Subway is right for you, then by all means, go for it. Just make sure that your choice of a franchise business to go into is more about you, than it is about the brand. You can do that by matching your skills to the opportunity.  If you have the necessary skills needed to run a fast food restaurant, then you may want to look into these two powerhouses. Just make sure that you do really solid due diligence. The information you need to make a fact-based decision is a lot easier to find now, than it was five, or even ten years ago.


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URL to article: http://smallbiztrends.com/2010/07/buying-franchise-well-known-brand-success.html

URLs in this post:

[1] CNN.com: http://money.cnn.com/galleries/2010/smallbusiness/1004/gallery.Franchise_failure_rates/index.html

[2] BNET: http://findarticles.com/p/articles/mi_m3190/is_25_39/ai_n14839923/

[3] Franchise Times: http://www.franchisetimes.com/content/story.php?article=01264

[4] 32,000+ unit: http://www.associatedcontent.com/article/2516477/top_10_franchises_in_2010.html

[5] Fred DeLuca: http://www.forbes.com/lists/2009/10/billionaires-2009-richest-people_Fred-DeLuca_BNPG.html

[6] Subway franchises: http://blogs.findlaw.com/law_and_life/2010/01/subway-lawsuit-over-servicemembers-civil-relief-act-settled.html

[7] local area Subway: http://www.aboutlawsuits.com/subway-food-poisoning-outbreak-shigella-lawsuits-9107/