Despite Churn, Franchises Continue to Sell
Written by Keith R. Miller
Once again, I am reporting on the very high churn rate for Dickey’s BBQ, yet the brand continues to sell a high number of franchises. Why? Do prospective franchisees not understand the numbers in the Franchise Disclosure Document? And, why is the government continuing to guarantee loans to a brand with high charge-off rates and a large percentage of loans not current?
Last year, my article, “Is Dickey’s BBQ Franchising’s Next Quizno’s” and Restaurant Business Magazine’s Jonathan Maze’s “Dickey’s Barbeque Pit Closes 113 Units”, started this discussion. I followed this with a second article, “Can Dickey’s Franchise Owners Survive”.
Now the 2019 Franchise Disclosure Document (FDD) dated September 3, 2019[i], for the fiscal year ended May 31, 2019, has been released. Has there been any improvement over the previous years? In my opinion, the answer is no. The churn rate, or disorderly attrition, continues to be over 27%, meaning over one in four franchisees leave the system every year, which is an alarming rate (even 10% would be a high turnover rate, in my opinion).Despite these numbers, Dickey’s franchisees continue to be able to access Small Business Administration guaranteed loans. In a letter and attachments from the SBA to Senators Cortez Masto (NV) and Baldwin (WI)[ii], loans to Dickeys franchisees over the 10-year period ending March 31, 2019, showed 41 loans out of 246, or 16.7% of all Dickey’s franchisee loans, had been charged off.[iii] Total Dickey’s franchisee loan approvals during that ten-year period totaled $69,682,800. Total charge offs were $10,901,745, or 15.64% of the dollar value of all such loans. The SBA share of the charge offs was $8,264,897, or 11.86%. In addition, of the 132 active loans, 37, or 28%, were defined as “not current” by the SBA. Yet, the SBA still approved 20 more loans in 2018, and 10 more loans in just the first quarter of 2019.
Knowing the data on Dickey’s BBQ, would banks approve loans to Dickey’s franchisees without the SBA guarantee? And since the SBA 7(a) program is self-funding, how many other SBA borrowers are paying higher fees on their loans to cover these millions of dollars in losses? Finally, when the losses do occur, the hardest hit is the franchisee owner that took out the loan. For a loan default to reach the point where the SBA has to step in and cover the losses on the loan, the franchisee borrower (often a married couple) has reached the point where they cannot pay, meaning the franchisee has likely lost all their assets, including their home.
Situations like this are why Senator Cortez Masto (NV) has introduced S.2383, The Small Business Administration Franchise Loan Transparency Act of 2019.[iv] This bill would require franchise brands to disclose first year revenue numbers, and first year numbers for “ceased operations” and transfers. It would forbid third parties from providing revenue numbers to franchisees. And, if a loan was obtained using false numbers received from the franchisor, the franchisor could be held liable for the loan. Better transparency should allow for better underwriting, lowering charge off rates, and making more money available to more viable brands at reduced costs. If you believe it is good to require better transparency for franchise brands to qualify for government guaranteed loans, call or write your Senators and ask them to cosponsor S.2383.
[i] Dickey’s 2019 Franchisee Disclosure Document from the State of Minnesota website at https://www.cards.commerce.state.mn.us/CARDS/security/search.do?documentId=%7b90B3496D-0000-CD3D-A01B-49AEF83E96C0%7d
[ii] Small Business Administration Letter to Senators Cortez Masto (NV) and Baldwin (WI) dated September 19, 2019, from Dianna L. Seaborn, Director, Office of Financial Assistance.
[iii] SBA Charge Off Procedures Summary & Suggested Wrap-up Report, at https://www.sba.gov/sites/default/files/bank_wrapup_report.pdf
[iv] S.2383, The Small Business Administration Franchise Loan Transparency Act of 2019, text at https://www.govtrack.us/congress/bills/116/s2383/text