COHORT STUDIES · 565 SYSTEMS · 220,712 FRANCHISED UNITS
What 565 franchise disclosure documents actually reveal
Four questions every franchise buyer asks, answered from the public record instead of a survey: every number below is computed from FDD Item 20 outlet tables filed with state regulators, joined where noted with the SBA's public 7(a) loan file. Definitions match our industry benchmarks exactly, and thin samples are flagged, never hidden.
Does the FDD predict loan defaults? Yes.
For every system in our corpus with at least 20 resolved SBA 7(a) loans, we compared the exit rate its own FDD discloses with the share of its franchisees' SBA loans that ended in charge-off. The two public records agree: Pearson correlation r = 0.4. Systems in the highest-exit third charge off at a median 15.5% — versus 8.2% for the lowest-exit third. The FDD's Item 20 tables are not paperwork; they are a working default predictor.
| FDD exit-rate tercile | Systems | Median exit rate | Median SBA charge-off | Mean SBA charge-off |
|---|---|---|---|---|
| Lowest-exit third | 60 | 1.2% | 8.2% | 10.0% |
| Middle third | 60 | 4.5% | 15.1% | 15.6% |
| Highest-exit third | 61 | 10.1% | 15.5% | 19.8% |
Highest-volume examples in the join: I LOVE KICKBOXING (exit 32.9%, SBA charge-off 27.8%, n=151) · LINE-X (exit 27.2%, SBA charge-off 13.3%, n=143) · MONSTER TREE SERVICE (exit 24.4%, SBA charge-off 10.5%, n=57) · Cartridge World (exit 20.0%, SBA charge-off 22.7%, n=172) · GOLD'S GYM (exit 19.5%, SBA charge-off 14.7%, n=191). Only systems whose franchisees borrow through SBA clear the 20-resolved-loan floor, so the join skews toward loan-financed concepts — treat the correlation as strong evidence, not proof. The join grows as the corpus does.
Franchises that won't show you earnings exit more than twice as fast.
Item 19 of the FDD is where a franchisor may disclose what units actually earn. It is optional — and the choice turns out to be a signal. Systems that publish no financial performance representation at all run an aggregate exit rate of 10.3%, versus 4.3% for systems disclosing a full average-unit-volume spread. If a franchisor won't tell you what stores make, the outlet tables suggest a reason.
| Item 19 disclosure | Systems | Aggregate exit rate | Median exit rate | Opening rate | Median disclosed AUV |
|---|---|---|---|---|---|
| No Item 19 FPR | 140 | 10.3% | 6.3% | 9.6% | — |
| Item 19, no usable AUV spread | 92 | 4.6% | 4.7% | 10.1% | $90K |
| Item 19 with full AUV spread | 203 | 4.3% | 4.3% | 9.5% | $728K |
Disclosure completeness is only judged for filings extracted under our current schema; 130 earlier extractions are excluded rather than miscounted as non-disclosers. See the no-Item-19 list for the systems themselves.
High royalties don't slow growth — they mark a different kind of system.
The intuition “expensive systems grow slower” doesn't survive contact with the filings: royalty rate and unit growth are essentially uncorrelated (r = 0.05). What the bands do show: 7%-and-up systems both open faster and shed franchisees at more than double the aggregate exit rate of cheaper systems — high-royalty franchising skews toward young, high-churn concepts, not stagnant ones.
| Royalty band | Systems | Median royalty | Median unit growth | Aggregate exit rate | Opening rate |
|---|---|---|---|---|---|
| Under 5% | 62 | 4.0% | 1.9% | 4.5% | 6.3% |
| 5–6.9% | 261 | 6.0% | 3.7% | 3.9% | 8.0% |
| 7% and up | 177 | 8.0% | 6.3% | 8.9% | 8.0% |
Bigger systems lose fewer franchisees — small systems churn and grow at the same time.
Exit rates fall monotonically with system size. Sub-50-unit systems both open the most units relative to their base and lose the most — buying into a small system is a bet on which of those two rates wins.
| System size (franchised units) | Systems | Units at year start | Exits | Exit rate | Opening rate |
|---|---|---|---|---|---|
| 10–49 units | 177 | 4,904 | 432 | 8.8% | 40.9% |
| 50–249 units | 252 | 31,326 | 2,445 | 7.8% | 13.9% |
| 250–999 units | 93 | 43,230 | 2,772 | 6.4% | 9.8% |
| 1,000+ units | 43 | 137,755 | 8,834 | 6.4% | 6.2% |
When franchise loans fail: most defaults land in years 3–7.
Across every resolved SBA 7(a)/504 franchise loan since 1991, 14.1% ended in charge-off within ten years of approval — and the failures cluster: almost nothing fails in year one (loans are still drawing down), the curve steepens through years three to seven, then flattens. A franchise that survives its first seven years has, statistically, already passed its hardest test. Sector matters as much as timing — the spread below is the difference between a 17.5% and a 7.3% ten-year failure rate on the same loan program.
| Cumulative charge-off by… | Year 2 | Year 3 | Year 5 | Year 7 | Year 10 | Resolved loans |
|---|---|---|---|---|---|---|
| All franchise loans | 0.8% | 2.9% | 7.8% | 11.2% | 14.1% | 108,901 |
| retail | 0.6% | 3.5% | 9.9% | 14.3% | 17.5% | 3,838 |
| food dining | 0.6% | 2.6% | 7.9% | 11.7% | 15.0% | 23,494 |
| automotive | 1.0% | 3.5% | 8.6% | 12.2% | 15.0% | 6,496 |
| cleaning | 1.1% | 3.7% | 9.2% | 11.9% | 13.8% | 1,707 |
| beauty | 0.5% | 2.0% | 6.6% | 10.0% | 13.5% | 3,150 |
| real estate | 1.1% | 2.8% | 7.2% | 10.4% | 13.4% | 539 |
| home services | 1.1% | 3.5% | 7.7% | 10.4% | 13.2% | 2,435 |
| recreation | 0.5% | 1.5% | 4.8% | 8.5% | 13.1% | 413 |
| fitness | 0.5% | 2.3% | 6.8% | 9.9% | 12.4% | 3,777 |
| business services | 0.7% | 2.7% | 6.6% | 9.0% | 10.6% | 2,839 |
| health | 0.7% | 1.6% | 5.1% | 7.6% | 10.1% | 1,349 |
| education | 0.5% | 1.3% | 4.5% | 7.0% | 9.1% | 2,905 |
| hospitality | 0.0% | 0.5% | 2.8% | 5.8% | 8.9% | 11,097 |
| pets | 0.9% | 2.1% | 4.8% | 6.6% | 8.7% | 438 |
| senior care | 1.6% | 3.8% | 5.9% | 6.7% | 7.3% | 579 |
Brand extremes (≥100 resolved loans) — highest ten-year failure: Golf Etc. (52.3%) · Planet Beach (47.3%) · Golf U.S.a. (Retail Golf Equip.) (46.2%) · All Tune and Lube (40.9%). Zero recorded charge-offs in the same window: Christian Brothers Automotive · Planet Fitness · PRIMROSE SCHOOLS · Nothing Bundt Cakes. This is cumulative incidence among resolved loans (charged-off ÷ charged-off + paid-in-full), not a full survival model — open loans are excluded because their story hasn't ended.
Method & honesty notes
- ▸ Exit rate = terminations + non-renewals + “ceased operations — other” ÷ franchised units at year start, from each system's latest real FDD Item 20 filing — identical to the sector benchmarks. Systems under 10 franchised units are excluded from per-brand rates (one exit swings a tiny denominator) but their totals stay in aggregates elsewhere on the site.
- ▸ SBA charge-off rate = charged-off ÷ resolved (charged-off + paid-in-full) loans per brand from the public SBA 7(a) FOIA file; current loans are excluded because their outcome is unknown. Brands need ≥20 resolved loans to enter Study A.
- ▸ Correlations are Pearson r over per-brand rates; a study reports r only when n ≥ 8. Small joins are labeled with their n in the panel header — nothing here is survey data, and nothing is imputed.
- ▸ Corpus at computation time: 776 systems with real filings (565 rated), roughly 25.9% of the ~3,000 systems visible in US registration states, sourced mostly from Minnesota's CARDS registry. That skew is disclosed, not hidden — full derivations on the methodology page.
Weekly: which franchise systems are showing bankruptcy, litigation, and closure signals — sourced, no spin.
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