A U.S. senator is looking into federally guaranteed loans made to operators in four franchise systems, including restaurant chains Subway and Dickey’s Barbecue Pit, after large numbers of franchisees in those systems closed their doors or were forced out of the systems.
In a letter sent to Chris Pilkerton, acting administrator for the U.S. Small Business Administration (SBA), and obtained by Restaurant Business, U.S. Sen. Catherine Cortez Masto, D-Nev., is asking for information on loans the agency guaranteed to four systems: Dickey’s, Subway, Complete Nutrition, and Experimac.
Complete Nutrition is a retail nutritional supplement chain, and Experimac is an Apple product resale retailer.
Masto’s letter is requesting a broad range of information on what the SBA is doing to work with operators in struggling franchises, as well as information regarding loans made to operators in these systems and their default rate.
Masto’s letter cites a September Restaurant Business story about a high rate of closures and terminations at Dickey’s. U.S. system sales at the barbecue chain declined 7.4% as operators in many markets closed their doors following two years of sales challenges.
In her letter, Masto noted that there was a higher rate of SBA loan failures for Dickey’s franchisees than normal, and she said that the franchisor might have overpromised revenue the chain’s franchisees could make.
“It appears that some of the loan failures may be due to Dickey’s Barbecue providing misleading and inaccurate information to potential franchisees, resulting in failed businesses and bankrupt owners,” she wrote.
Masto also noted that Subway franchisees “are struggling to survive with expensive promotional offers and corporate decisions that undermine the franchisees’ survival.”
As Restaurant Business reported in January, the chain shrunk by more than 1,100 locations last year as operators closed their doors in bunches. In her letter, Masto noted that a higher-than-average 3% of the chain’s loans have failed.
She also cited a New York Post article that said Subway was trying to put franchisees out of business over minor infractions. The chain’s franchise disclosure document indicated that the chain filed more than 700 actions against its own operators last year.
In a statement, Subway said it was enforcing standards.
“Subway guests expect, and deserve, to have their favorite menu items served in a clean, comfortable environment when they visit their local and independently owned Subway restaurant,” the company said in an emailed statement. “When staff members from the local Business Development office inspect restaurants monthly, they are ensuring the high standards required by us and expected by guests are met. If a restaurant is not meeting the requirements, the company and its local Business Development offices first take the time to work with the Franchise Owner to fix the issues.”
Representatives for Dickey’s did not respond to requests for comment.
The SBA will guarantee loans made to small businesses, including numerous franchise systems, as part of a strategy to support those companies. The federal government guarantees the loans to encourage more financing to such small businesses.
When those loans fail, however, the agency can go after the borrower’s home, meaning the operators in these cases take an enormous personal risk.
In her letter, Masto said she wants to inform people in Nevada about “the resources SBA can provide to help them avoid default.”
But she is also taking systems to task over “unfair and deceptive practices.”
“I would also like to ensure other franchisees do not receive government-guaranteed loans for franchises with a history of complaints about unfair and deceptive practices,” she wrote.
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