For entrepreneurs looking to enter the business world with reduced risk, franchises have long represented an attractive option. They offer the independence of business ownership with the support structure and proven systems of an established brand. However, not all franchise opportunities are created equal, especially when it comes to securing SBA financing. This is particularly true when considering emerging franchise brands versus established powerhouses.
What Makes a Franchise Brand SBA-Worthy?
When evaluating franchise brands for SBA lending potential, several critical factors come into play. Understanding these elements can help both lenders and prospective franchisees make more informed decisions.
The Magic Number: How Many Units Make a Franchise Viable?
One of the most revealing metrics when assessing franchise viability is the number of operating units. Industry experts have different thresholds they consider acceptable, but a common benchmark is seeing at least 50 operating locations sustained over a two-year period.
Why is this number significant? It demonstrates that:
- The franchise model has proven replicable across multiple markets
- The systems and processes can be taught to various operators
- The concept has survived initial market testing
- The franchisor has developed support structures to manage multiple units
As one experienced SBA lender puts it: “For two years straight they have to have 50 doors open and operational… it gives consistency. The reason why buyers go and utilize a franchise is because they’ve got a process, they’ve got a proven track record, and they’ve got consistent financials.”
However, some professionals believe a franchise with 25 operational units might also be viable: “25 locations is no joke…if you have 25 locations and they’re actually successful and cash flowing, in my mind you’ve proven your business model.”
The critical expansion phase seems to occur between 25 and 50 units. This range represents when a franchisor must develop robust systems beyond the founder’s direct control: “From 25 to 50, that’s where you prove if this franchise is really scalable or not. When you double from 25 to 50, you have proven that you’ve put a system in place, you put people in place, and you’ve got a headquarters and you’ve got an army ready to support 50 doors.”
The Franchise Disclosure Document: Item 19 Tells the Real Story
Beyond unit count, the Franchise Disclosure Document (FDD)—particularly Item 19—offers critical insights into franchise performance. Item 19 typically shows:
- The highest performing store’s financial metrics
- The lowest performing store’s financial metrics
- Average unit performance across the system
A healthy franchise system will show a relatively narrow gap between its highest and lowest performers. This indicates consistency in the business model and suggests that following the system leads to predictable results.
Lenders and would-be franchisees should scrutinize this section carefully. Some entrepreneurs make the mistake of projecting performance well above even the highest-performing units, which raises immediate red flags for experienced lenders.
The Rise and Fall of Boutique Franchises
The franchise landscape underwent significant changes around 2013-2014 with the emergence of “boutique” franchises. These were often concepts with just one or a few successful locations that began franchising prematurely.
This trend was partially driven by a shift in the franchising model itself: “Franchisors moved away from their ‘build it and they will come’ model to strictly a marketing model… you started getting all these marketing companies coming in and selling franchisors on ‘hey, we will bring you the clientele, let us take over your PR, your public relations, and we will bring you the clientele and let you just start stacking paper on franchise fees.'”
This led to a proliferation of franchise concepts that lacked the operational experience and support systems necessary for franchisee success. Many of these concepts struggled during normal economic conditions and then failed rapidly when faced with the challenges of the COVID-19 pandemic.
The boutique franchise boom serves as a cautionary tale about the importance of substantial operational experience before a concept begins franchising. True franchise value comes from systems, training, and support—not just a clever concept or brand.
Industry Trends: Which Franchise Sectors Show Promise?
Certain industries have historically performed better in the franchise model than others. Understanding these patterns can help identify promising investment opportunities.
Quick Service Restaurants (QSRs): The Gold Standard
Quick Service Restaurants remain the archetype of successful franchising. Brands like Jimmy John’s have demonstrated exceptional consistency, with some reporting failure rates below 1%. This consistency makes QSR concepts particularly attractive to lenders.
“Jimmy John’s was the best, and I probably did about 12 one year back in I think it was 2012-2013, and they had a less than 1% failure rate…I never had one of those franchises go bad. Matter of fact, I had more Jimmy John’s franchisees come back to me after one year saying, ‘Hey, I have to open up another.'”
The predictable operations, standardized training, and consistent customer experience make QSRs well-suited to the franchise model. However, even within this space, brands can rise and fall based on their ability to maintain quality and adapt to market changes. Subway, for instance, was once considered a premier franchise opportunity but has faced challenges due to market saturation and changing consumer preferences.
Fitness Concepts: A Tale of Two Models
Fitness franchises have shown strong potential, particularly those with membership-based revenue models. Planet Fitness exemplifies this success: “Planet Fitness does really well actually… they prey on laziness, and this isn’t going to be a joke… their recurring revenue model, the membership price point of $9.99 is low enough where you just put it off till next month, but it’s high enough that it accumulates into real money when you look at how many members they really have.”
The subscription model creates predictable cash flow even when a significant percentage of members don’t regularly use the facilities. This business model has proven resilient, with some operators successfully building portfolios of dozens of locations.
Service-Based Franchises on the Rise
Service-based franchises in sectors like restoration (SERVPRO), HVAC, and plumbing have demonstrated strong performance. These “blue-collar franchises” often require greater owner-operator involvement but can generate substantial returns: “SERVPRO…basically you know that’s a restoration…if you had a flood, if you have a fire, anything like that inside of a building structure, SERVPRO comes in and they basically do the demo work, they get everything cleaned up so you can do the rebuild. I’ve always heard that those do extremely well.”
Healthcare: The Emerging Frontier
With an aging population, healthcare-related franchises are positioned for growth. Home healthcare services, in particular, represent “easy pickings for franchise owners” due to demographic trends. Physical therapy franchises are also expected to make a “massive resurgence,” along with concepts like mobile labs and medical weight loss centers.
The healthcare sector benefits from both growing demand and higher barriers to entry, potentially insulating franchisees from competition.
The Passive Income Myth in Franchising
One common misconception about franchise ownership is that it provides passive income. This expectation often leads to disappointment and business failure.
“There is no such thing as passive income… take it from an entrepreneur,” warns one franchise owner. “When owning a business, there’s no such thing as passive income.”
Most successful franchise operations require substantial owner involvement, especially in the early years. The most profitable units typically have an owner who is actively engaged in day-to-day operations: “You really need to be willing to work in your business or have somebody who’s a partner ideally work in your business if you really want to be successful… if you really want to be a top-performing franchise that’s in that highest percentile of performing stores, somebody who’s in ownership needs to be working there.”
This reality should inform both lending decisions and franchisee expectations. While a franchise may eventually scale to support a more hands-off approach, this typically requires multiple units and substantial scale—often around 10 locations or more.
Economic Factors Affecting Franchise Performance
Current economic conditions create both challenges and opportunities in the franchise landscape. Rising costs due to inflation have squeezed consumer discretionary spending, affecting certain franchise segments more than others.
Concepts dependent on mall traffic face particular challenges as shopping habits continue to evolve. Franchises located predominantly in malls, such as pretzel shops, specialized food vendors, and certain beauty services, may struggle as these retail environments transform.
Conversely, franchises addressing essential services or focusing on health and wellness appear better positioned to weather economic fluctuations. The “vanity sector”—including tanning salons, med spas, and weight loss centers—continues to show resilience, particularly concepts with higher barriers to entry and those requiring specialized equipment or expertise.
Best Practices for Evaluating Emerging Franchise Opportunities
For both lenders and potential franchisees, the following best practices can help evaluate emerging franchise brands:
- Look beyond unit count: While the 50-unit benchmark provides a useful guideline, the quality of those units matters more than the raw number. Twenty-five highly successful units may indicate a stronger model than 50 struggling ones.
- Scrutinize Item 19: The financial performance representations in the FDD offer critical insights into actual unit economics. Pay special attention to the consistency between top and bottom performers.
- Evaluate franchisor support: Successful franchisors invest in support systems that help franchisees succeed. This includes training, marketing assistance, operational guidance, and vendor relationships.
- Consider industry trends: Some sectors naturally lend themselves better to the franchise model than others. QSRs, service-based businesses, and certain healthcare concepts have demonstrated strong franchising potential.
- Assess personal fit: The franchise model requires following a system. Entrepreneurs who value creativity and innovation over systematic execution may struggle in this environment.
- Understand the true investment: Beyond the initial franchise fee and startup costs, consider ongoing royalties, marketing fees, and potential additional investments required by the franchisor.
- Speak with current franchisees: Existing owners can provide invaluable insights into the reality of operating within a particular system. Ask specifically about franchisor support and the accuracy of financial projections.
Conclusion
Emerging franchise brands can represent excellent opportunities for both entrepreneurs and lenders, but they require careful evaluation. The ideal candidate will have demonstrated consistent performance across at least 25-50 units, transparent financial reporting, strong unit economics, and robust support systems.
For entrepreneurs, franchise ownership offers a blend of independence and guidance, but not passive income. Success typically requires active involvement, particularly in the early stages and with newer concepts. The most successful franchisees combine the systems and support of the franchise with their own work ethic and operational excellence.
For lenders, understanding franchise fundamentals allows for more informed risk assessment. By looking beyond brand recognition to evaluate unit economics, franchisor support, and industry positioning, lenders can identify promising opportunities even among emerging concepts.
As consumer preferences and economic conditions evolve, so too will the franchise landscape. Quick service restaurants will likely remain franchise stalwarts, while healthcare services and specialized personal services represent growing opportunities. By applying rigorous evaluation standards and understanding industry-specific factors, both entrepreneurs and lenders can navigate this dynamic environment successfully.
This article is based on the insights and experiences of successful SBA lenders and franchise owners. Before investing in any franchise concept, consult with financial and legal professionals to evaluate the specific opportunity against your personal and business objectives.
