Deciding to buy a business should be done carefully – although many franchise opportunities bear great potential, there’s always a chance for failure when mismanagement, plus other factors, becomes an issue.
On the other hand, there are businesses that are flat-out risky, and are statistically marked to fail. There are various franchises which fall under this category, but the two types which can be considered the riskiest of all are fast food restaurants and ice cream shops.
With data acquired from the US Small Business Administration (SBA), researchers were able to determine the two commercial establishments listed above have the highest rates of failure of their federally guaranteed loans utilized to acquire franchises.
Analysts were able to come up with this conclusion by using this simple formula to determine a business’s failure rate: number of loans charged-off plus number of liquidations divided by number of loans disbursed throughout the franchise system.
Based on this formula, the top five franchise systems with more than half of their SBA loans failed are: Golf Etc. at 71. %; Mr. Goodcents Sub and Pasta at 65%; Dream Dinners at 60%; Planet Beach at 58%; and Carvel Ice Cream 56%.
Keeping this list in mind, anyone looking to buy a business from similar franchise opportunities should definitely consider the risks involved first. Although there still a good chance to succeed with the purchase of any of the establishments above, financial failure remains the more probable outcome for investors.
Also, keep in mind that the formula includes loans guaranteed under SBA financing programs only. Regardless, strong conclusions can still be derived with the use of SBA-approved loans, mainly because the government tends to be unbiased when gathering data pertaining to its borrowers, and when presenting it to the public.
In addition, a large percentage of franchisees acquired their finances from SBA financing programs, thereby fortifying the reliability of all assumptions made based on the gathered data.
This presentation of franchises which are most likely to fail may not gain favorable responses from other franchisors, especially the ones belonging to the list. Moreover, they likely have their own slightly modified formulas for determining the worst franchise opportunities.
Nevertheless, ample research and planning should be done before ultimately choosing to buy a business. Statistics should always be included in the basis for selection to ensure a successful commercial operation is acquired.