Somewhere in America this morning, two people signed franchise agreements.
They had roughly the same money. They used the same kind of broker. They financed the same way, through an SBA loan with the house pledged against it. Both brands appeared on the government’s approved list. Both had glossy decks with the same confident language about proven systems and protected territories.
Five years from now, one of them will own four units and a business worth a real multiple of what went in. The other will have handed back the keys and will spend the next decade paying off a guarantee on a business that no longer exists.
Nothing either of them read beforehand would have told them which one they were about to become. That is not because the information does not exist. It exists, it is public, and almost nobody assembles it. This page is about where it lives and how to read it.
What investment grade means when you apply it to a franchise
In credit markets the phrase has a precise meaning. BBB‑ from S&P, Baa3 from Moody’s, and below that line entire categories of institutional buyer are contractually forbidden from owning the paper. The rating is not flattery. It is a gate that determines who is allowed in the room.
Franchising has no rating agency. What it has is something closer to that gate than most people realize, and a set of disclosures that almost nobody reads. Put together, they give you three conditions that are externally verifiable and have nothing to do with anyone’s opinion:
A lender will finance it. The franchisor is willing to tell you what its units actually earn. And the units that open tend to stay open.
Every one of those is recorded in a public filing or a federal database. That is the whole basis of the standard on this page, and it is why we can publish it without asking you to trust our judgment about anything.
The short version. The SBA Franchise Directory is the closest thing franchising has to the BBB‑ line. If a brand is not on it, buyers cannot get an SBA loan, which removes the primary capital source in the category and shrinks the buyer pool to people paying cash. That binary, plus what the franchisor voluntarily discloses about unit economics, separates the brands worth underwriting from the ones worth walking away from.
Franchising is sold on averages and lived on dispersion
Open any franchise comparison site and you will find category averages. Average unit volume. Average investment. Average time to break even. The numbers are presented as though they describe what will happen to you.
They do not. They describe the midpoint of a range so wide that the midpoint is meaningless.
Here is how we know. The federal government publishes loan level data on every 7(a) and 504 loan it has guaranteed since 1991. It is refreshed quarterly, it is free, and it carries the franchise brand on the record. When analysts run charge off rates brand by brand against that file, the spread is not a matter of a few percentage points. Some brands have charged off in the low single digits across hundreds of loans. Others have charged off on roughly a third of everything they touched. Those brands sit in the same directory. They get sold by the same brokers. They appear on the same comparison charts with the same reassuring category average printed underneath.
There is a second finding in that data the industry does not put on its billboards. Analyses of the franchise flagged cohort have found it charging off at a higher rate than non franchise borrowers, not a lower one. The brand system is supposed to reduce risk. Measured across the whole cohort on the government’s own file, it is not obvious that it does.
Both things are true at once, and holding them together is the entire discipline. Franchising contains some of the most reliably financeable small businesses in America and some of the most reliably destructive, and the category average tells you nothing whatsoever about which one is sitting in front of you.
We have made this argument before in a different asset class. In net lease real estate, average cap rates mislead investors for exactly the same reason: the average is a blend of assets that should never have been blended. The fix is the same in both places. Stop asking what the category does. Start asking what this specific thing discloses.
Investment grade is not a description of franchising. It is a line drawn through it.
The category is bigger than most people assume
It is worth pausing on scale, because the instinct to treat franchising as a small business sideshow is badly out of date. This is a sector roughly the size of the entire economy of Switzerland, operating inside the United States, mostly invisible because it is distributed across hundreds of thousands of storefronts nobody thinks of as a single asset class.
| Measure | 2025 | 2026 projected |
|---|---|---|
| Franchise establishments | 832,521 | ~845,000 |
| Economic output | $907.3 billion | $921.4 billion |
| Franchise GDP contribution | $549.9 billion | $558.4 billion |
| Direct employment | ~8.8 million | ~8.9 million |
| New units added | 12,000+ |
Source: International Franchise Association 2026 Franchising Economic Outlook, prepared with FRANdata, February 2026. Franchising represents close to three percent of US GDP. Fastest growing segments named for 2026 are child services and commercial and residential services, led by Texas, Florida, Georgia, Arizona and North Carolina.
One number you should treat with suspicion is the brand count. You will see three thousand and four thousand quoted constantly in franchise media, usually with no source attached. FRANdata builds the IFA outlook from a tracked universe closer to nine thousand. Our own reconciliation of two major franchise directories produced 4,825 distinct brands, and only about a quarter of them appeared on both lists.
Sit with that for a second. Two companies whose entire business is cataloguing franchise brands agree with each other about a quarter of the time. There is no census. Anyone who tells you exactly how many franchise brands exist is quoting someone who was guessing.
Follow the money, because it already moved
While retail buyers have been reading brochures, institutional capital has been quietly taking both sides of the franchise agreement. The two strategies are worth separating, because what each one is buying tells you something different about where the value actually sits.
Buying the franchisor means buying a royalty stream. A franchisor collects a percentage of system wide sales, forever, with very little capital at risk and no operating exposure to any individual unit. If a location fails, someone else’s guarantee absorbs it. Several of the largest quick service and consumer service brands in America now sit inside a small number of sponsor portfolios for precisely this reason. What is being purchased is an annuity with a logo attached.
Buying the franchisees is the opposite trade. Large operator platforms have consolidated hundreds and in some cases thousands of units under single ownership, several of them generating more revenue than the franchisors whose brands they run. The bet is that a portfolio of units trades at a meaningfully higher multiple than any single unit, because scale makes the cash flow legible to the next buyer.
Notice what both trades have in common. Neither one involves standing behind a counter. The sophisticated money in franchising has systematically bought the position that collects without operating. That is not a criticism of operators. It is a signal about where the risk adjusted returns have been, and it is worth knowing before you decide which seat you want.
The two hundred page document almost nobody reads
Every franchisor selling in the United States has to hand you a Franchise Disclosure Document before you can sign anything. It is required by the FTC, it runs to roughly two hundred pages across twenty three numbered items, and it is written the way a securities filing is written, which is to say accurately and without enthusiasm.
Most buyers skim it, or hand it to a lawyer who checks it for legal landmines and hands it back. That is a mistake, because four of those items carry nearly all of the information you are actually looking for.
| Item | What it contains | What it tells you |
|---|---|---|
| Item 19 | Financial performance representation | Optional. A franchisor may legally publish nothing at all. Silence is itself information, and depth matters more than presence: revenue with no expense data is a far weaker disclosure than a full picture. |
| Item 20 | Outlet and franchisee information | Units opened, closed, terminated, not renewed, reacquired and transferred, by year. The gap between agreements signed and locations actually operating is the single best stress indicator in the document. |
| Item 7 | Estimated initial investment | The headline range, and buried inside it the required working capital reserve. Undercapitalization, not brand failure, is what ends most units. |
| Items 3 and 4 | Litigation and bankruptcy | Count matters less than direction. Franchisees suing the franchisor reads very differently from the franchisor enforcing against franchisees. |
Item 19 deserves special attention because of what its absence means. A franchisor who has good numbers has every commercial incentive to publish them. When a brand declines to say what its units earn, that is a choice, made with full knowledge of how it will be read, and made anyway.
The line that decides who can buy
There is a fifth thing, and it is not in the disclosure document at all.
Whether a brand appears in the SBA Franchise Directory determines whether your buyer can use the financing that most franchise purchases depend on. The SBA removed the directory in 2023, brought it back in June 2025 under revised standard operating procedures, and then required franchisors to execute a new certification. Brands that failed to certify by the final June 2026 deadline came off the list. Their buyers lost 7(a) eligibility along with them.
That is not a soft signal. It is a switch. A brand that was financeable in May was not financeable in July, and the only thing that changed was a piece of paperwork the franchisor chose not to file.
For anyone arriving here from the bond or net lease side, the logic will feel familiar from our investment grade guide. A rating below BBB‑ does not make a bond bad. It makes it unbuyable by a large class of institution, which changes the price. Directory status does the same thing to a franchise brand. The gate is the point.
What we are building, and what it deliberately is not
We are assembling a scored profile for every brand we can source a filing for. It is worth being precise about what it measures, because the distinction is the reason we are able to publish it at all.
It does not grade the franchise. We are not an accredited rating organization, we do not issue credit opinions, and a letter grade stamped on a franchise brand would be an opinion wearing a rating’s clothes. The Franchise Disclosure Score measures what the franchisor chose to disclose and what external gatekeepers have already decided. Every input is a fact from a filed document or a government database.
| Component | Source | Refresh |
|---|---|---|
| SBA Franchise Directory status | SBA published directory | Monthly |
| Brand level SBA loan performance | SBA 7(a) and 504 loan level file | Quarterly |
| Item 19 presence and depth | FDD Item 19 | Annual |
| Unit survival and transfer rates | FDD Item 20 | Annual |
| Capital requirement transparency | FDD Item 7 | Annual |
| Litigation posture | FDD Items 3 and 4 | Annual |
| State registration coverage | State franchise registries | Quarterly |
Three commitments travel with it. The full methodology gets published, so anyone can reproduce the result and argue with it. Every figure carries the issue date of the filing it came from, because a franchise fee quoted without a date is worth nothing. And where we have a commercial relationship with a brand, it is disclosed on that brand’s page, in plain language, where you will actually see it.
Published by Investment Grade Research. We are not a nationally recognized statistical rating organization and nothing here is a credit rating. Figures are reported from public filings and federal data, not derived from proprietary opinion.
The question almost nobody asks themselves first
Before the deposit, before the territory conversation, before any of it, there is a fork in the road that most people walk past without noticing.
Do you want to run the business, or do you want to own the income?
These sound like the same ambition. They are completely different investments, with different risks, different tax treatment and different lives attached to them.
Buying a franchise means buying a job with equity on the end of it. You sign a ten year agreement. You personally guarantee the debt, usually against your home. You hire people, you manage them, you cover the shifts nobody else will cover, and your return depends almost entirely on how well you execute. Done well, the cash on cash returns in franchising can comfortably exceed what stabilized real estate produces. That is not a secret and it is the honest reason people do it.
But read those return figures carefully, because they are rarely presented on comparable terms. A headline cash on cash number in franchising is usually levered through an SBA loan. It is frequently calculated before the owner pays themselves anything. And it is always survivorship biased, because the units that closed are not in anybody’s average. A net lease cap rate is unlevered, passive, and backed by a corporate tenant’s credit rating. Setting those two numbers beside each other without saying so is how people end up in the wrong asset holding the wrong risk.
| Owning the franchise | Owning the real estate | |
|---|---|---|
| What you own | The operating business | The building and the lease |
| Income source | Unit profit after all costs | Contract rent |
| Your time | Owner operator or trained manager | None |
| Employees | Yours | None |
| Downside | Personal guarantee, often home secured | Vacancy and re tenanting |
| Credit behind it | Your execution | The tenant’s corporate rating |
| 1031 eligible | No | Yes |
There is a clarifying case here worth knowing about. Some of the strongest brands in the country cannot be franchised at all. Starbucks runs licensed stores in the United States rather than franchises, and those licenses generally go to established operators in host environments like airports and grocery stores. Chick‑fil‑A selects operators for a single location, keeps the real estate, and takes a far larger share of the economics than a typical franchisor does.
So you cannot buy the business. You can absolutely buy the building. Those assets trade constantly and they are among the most competitively bid properties in the net lease market. If what you actually wanted was the income rather than the operating obligation, that is the door, and it runs through our NNN properties section and the investment grade credit tenant ratings database.
How we help you buy one
We are not a franchise brand and we have no inventory to move. What we have is research, and a second discipline almost nobody in this category carries.
Every brand gets read the same way, against the same public sources, with the date of the filing attached to every number. If you are weighing three brands against each other, you get the same analysis applied to all three. Directory status, disclosure depth, unit survival, the real capital requirement including the working capital most people miss, and what the litigation record actually says.
The second discipline is the real estate. Almost every franchise unit occupies a building. Someone signs a lease, negotiates the term, and decides whether the site will still work in year eight. We are licensed commercial real estate brokers and single tenant net lease property is our core business. So the question of which brand to buy and the question of where to put it are one conversation here, handled by the same people, instead of two conversations with two parties who never speak.
That also means we can follow the analysis wherever it leads. If the filings point you toward a different brand than the one you arrived with, we will say so. If they point you away from operating altogether and toward owning the rent instead, we can do that side too.
Weighing a franchise right now? Send us the brands on your shortlist and we will come back with what the filings say about each one, side by side on the same standard. If the real estate matters, we will cover that in the same brief.
Where this goes next
This page is the entry point. Category and brand analysis build out from here as coverage fills in, each one carrying the same disclosure standard.
Coverage builds out from here as brand data fills in. Live now:
In development, each carrying the same disclosure standard: senior care, restaurants and quick service, home and commercial services, fitness and recreation, children’s services and education, automotive services, pet services, semi absentee and manager run brands, emerging and newly franchising brands, and the brands that also trade as net lease tenants.
If you came here from the real estate side, these cover the same brands from the landlord’s chair:
- Franchisee guarantees and the hidden credit risk in QSR net lease deals
- Corporate lease versus franchisee lease in net lease real estate
- Investment grade bonds: issuers, yields and sector analysis
Frequently asked questions
What makes a franchise investment grade?
Three externally verifiable conditions. The brand is listed in the SBA Franchise Directory, so buyers can obtain the financing most franchise purchases rely on. The franchisor publishes a meaningful Item 19 financial performance representation rather than leaving it blank. And Item 20 shows that units which open tend to stay open, with a small gap between agreements signed and locations actually operating. There is no official designation for this. The term describes a standard of evidence, not a certificate anyone issues.
Is the SBA Franchise Directory the same as a credit rating?
No. It is an eligibility list, not a rating. It records whether the SBA has determined that a brand’s franchise agreement meets program requirements, which controls access to 7(a) and 504 financing. It says nothing about profitability. It functions like a credit rating in one specific way: coming off the list removes a large category of buyer, exactly as a downgrade below BBB‑ removes institutional buyers from a bond.
Why do some franchisors not publish an Item 19?
Because the FTC rule does not require it. A franchisor may make no financial performance representation at all, and if it makes one it must have a reasonable basis and disclose it in Item 19. Brands with weak or highly variable unit economics often choose silence. Depth matters as much as presence: a disclosure covering revenue alone tells a buyer far less than one covering revenue and operating expenses, and a disclosure limited to top performing units tells them something different again.
Do franchises really return more than net lease real estate?
Successful units frequently produce higher cash on cash returns than stabilized net lease property, and that gap is real. It is also compensation for genuine differences. Franchise returns are typically levered through an SBA loan with a personal guarantee, often quoted before owner compensation, illiquid, and measured only across units that survived. Net lease cap rates are unlevered, passive, backed by a corporate tenant’s credit, and the asset qualifies for a 1031 exchange. The comparison is only legitimate when both sides are stated on the same terms.
Can you buy a Starbucks or Chick-fil-A franchise?
Not in the conventional sense. Starbucks operates licensed stores in the United States rather than franchises, and those licenses generally go to established operators in host environments such as airports and grocery stores. Chick‑fil‑A selects operators for a single location, retains the real estate, and takes a substantially larger share of unit economics than a typical franchise. In both cases the underlying real estate does trade, and those buildings are among the most sought after net lease assets in the market.
Industry figures from the International Franchise Association 2026 Franchising Economic Outlook prepared with FRANdata. Loan program data from the US Small Business Administration 7(a) and 504 loan level datasets and published SBA standard operating procedures. Disclosure item descriptions reflect the FTC Franchise Rule. Brand level figures are sourced to the issue date of the filing they are drawn from. Nothing on this page is investment, tax or legal advice, and no content here constitutes an offer of a franchise or a security.