Should You Buy a Franchise? We Analyzed $30 Billion in SBA Loans to Find Out

Buying a franchise is one of the biggest financial decisions you'll ever make—often $500K or more. But most of the information out there is marketing, not data. Franchise brokers get paid when you buy. Franchisors want to sell you a territory. Nobody has an incentive to show you the full picture.

So we built one.

We analyzed 545,000 SBA 7(a) loans totaling over $200 billion from 2010-2019. These are real business loans with real outcomes—paid in full or charged off (defaulted). Then we cross-referenced the results with our database of 1,900+ Franchise Disclosure Documents to find patterns.

The Headline Numbers

Franchise loan default rate: 7.47%
Non-franchise loan default rate: 5.94%

Wait—franchises actually have a higher default rate?

Yes. But that's not the whole story.

A Small Number of Bad Actors Skew the Data

Here's where it gets interesting. When we analyzed individual franchise brands, we found that a small number of poorly-performing franchises are dragging down the entire industry's numbers.

Exclusion Threshold	Brands Removed	New Franchise Default Rate	vs Non-Franchise (5.94%)
None (all franchises)	0	7.47%	+1.53% worse
Remove >20% default	47 brands	6.56%	+0.62% worse
Remove >15% default	84 brands	6.16%	+0.22% worse
Remove >10% default	134 brands	5.83%	0.11% BETTER

Just 47 franchise brands (out of hundreds) with default rates above 20% are responsible for most of the gap. Remove them, and franchises perform nearly identically to independent businesses.

Remove the bottom 134 brands, and franchises actually outperform independents.

What Makes a Bad Franchise? The Red Flags in the Data

We cross-referenced the high-default franchises with our FDD database to find patterns. The results were striking.

High-Default vs. Low-Default Franchises: A Comparison

Metric	High Default (>15%)	Low Default (<5%)	What This Tells You
Item 19 Disclosure	72%	83%	Bad franchises hide their numbers
Average Revenue	$626K	$1.2M	48% lower revenue
System Size	194 locations	457 locations	57% smaller systems
Avg Terminations	15 per year	8 per year	2x more failures
Bankruptcy History	14%	7%	2x more likely
Litigation History	46%	39%	Slightly more legal issues
Initial Investment	$222K-$530K	$690K-$1.4M	Cheaper doesn't mean safer

The Red Flags to Watch For

1. They don't disclose financial performance (Item 19)

Franchisors aren't required to share revenue data, but 83% of successful franchises do anyway. When a franchisor refuses to tell you what their franchisees actually earn, ask yourself: what are they hiding?

2. Small system size with high terminations

A franchise with only 200 locations but 15+ terminations per year is a warning sign. That's a 7.5% annual churn rate. Compare that to larger systems averaging 8 terminations across 450+ locations (under 2% churn).

3. Bankruptcy in the franchisor's history

14% of high-default franchises have bankruptcy history vs. only 7% of low-default ones. Past financial distress often predicts future instability.

4. Lower-than-average revenue for the industry

High-default franchises generate about half the revenue of low-default ones. If a franchise's Item 19 shows revenue significantly below competitors, that's a red flag.

5. The "cheap" franchise trap

Counter-intuitively, cheaper franchises ($200K-$500K investment) had higher default rates than pricier ones ($700K-$1.4M). The low upfront cost often means less infrastructure, weaker brand recognition, and fewer resources for franchisee support.

The Real Question: Why Pay a Franchise Fee?

"But wait," you might say, "even if the numbers are close, why would I pay a franchise fee and ongoing royalties for similar odds?"

Here's what the raw default rate doesn't capture:

1. You Know What You're Getting Into

When you start an independent business, you're guessing. Maybe you'll do $500K in revenue. Maybe you'll lose everything.

With franchises, most disclose actual financial performance data in their legally-required Franchise Disclosure Document (FDD)—and as we showed above, the best-performing franchises disclose at even higher rates. That includes:

Average revenue across the system
Revenue ranges from top to bottom performers
Net profit margins (in some cases)

That's not marketing fluff—it's data they're legally required to provide. Try getting that level of transparency from a "how to start a business" blog post.

2. The System is Proven at Scale

Our database tracks 463,329 franchise locations across 1,700+ brands. When you buy a franchise, you're not the guinea pig. Someone else already figured out:

What equipment you need
How to price your services
Where to source supplies
How to hire and train staff
What marketing actually works

You're paying for their years of mistakes so you don't have to make them yourself.

3. The Variance Between Brands is Enormous

The average obscures the reality. Some franchises have 0% loan default rates across hundreds of loans. Others have default rates above 50%.

The question isn't "should I buy a franchise?" It's "how do I find the franchises in the top tier and avoid the bottom?"

Who Should Buy a Franchise vs. Start Independent?

Franchising isn't for everyone. Here's how to know which path fits you:

Buy a Franchise If You:

Value predictability over unlimited upside. Franchises have a ceiling (royalties, territory limits), but also a floor (proven model, support system).
Are operationally strong but not a visionary. You can execute a playbook flawlessly, but don't want to write one from scratch.
Have capital but limited time for trial-and-error. The franchise fee and royalties buy you speed-to-profitability.
Want to own a business, not invent one. You're not trying to "disrupt" anything—you want to build wealth through a proven vehicle.
Need accountability and structure. Franchisors check in. They enforce standards. For some people, that's exactly what they need.

Start Independent If You:

Have deep industry expertise. If you've managed crews in your industry for 15 years, you might not need a franchisor's playbook.
Want full creative control. Franchises require conformity. Same menu, same uniforms, same systems. No room for "I have a better way."
Are comfortable with uncertainty. You're okay not knowing your year-one revenue. You'll figure it out.
Have a truly local business. Some industries depend on local reputation and relationships that a national brand doesn't help with.
Have more time than money. The franchise fee and royalties are expensive. If you can afford to learn through mistakes instead, you keep 100% of the upside.

The Bottom Line

Should you buy a franchise?

If you pick the right category and the right brand: The data says yes. Franchises in hospitality, childcare, quick-service restaurants, and mail/shipping services significantly outperform independents.

If you pick the wrong one: You're paying a premium to fail faster. Some franchise categories and brands have default rates 2-3x worse than going independent.

The difference between a top-performing franchise and a struggling one isn't luck—it's research.

How to Research Before You Buy

Every franchise is legally required to give you a Franchise Disclosure Document (FDD) with:

Item 19: Financial performance (revenue, profits)
Item 20: Franchisee turnover, terminations, closures
Item 3: Litigation history
Items 5-7: All fees (franchise fee, royalties, marketing fund)

The problem? FDDs are 200+ page legal documents. Comparing even 5 franchises means reading 1,000 pages of legalese.

That's why we built FranDB.

We've analyzed 1,900+ FDDs and extracted the data that actually matters:

Side-by-side fee comparisons
Revenue data from Item 19
Termination and failure rates
Litigation red flags
Investment ranges

Stop guessing. Start researching.

Data sources: SBA 7(a) FOIA loan data (FY2010-2019), FDD filings from state regulatory agencies. Analysis performed December 2025.