Executive Summary - Three Key Findings
Default rates are rising
SBA default rates rose from 6.1% (2019) to 7.2% (2023), driven by post-COVID unit economics pressure in QSR and retail. The overall trajectory is upward despite a modest pullback from the 2022 peak of 7.6%.
Transparency is winning
Item 19 disclosure rates improved from 58% (2020) to 71% (2023) - investors are demanding transparency, and franchisors that refuse to share financial performance data are increasingly at a competitive disadvantage.
Home services and real estate dominate
Home services and real estate categories outperformed all others on risk-adjusted returns for the 4th consecutive year. Lower capital requirements, recession resilience, and essential-service demand drivers continue to favor these sectors.
Default Rate Trends by Category
SBA 7(a) loan charge-off rates by franchise category, 2020–2023. Minimum 50 active loans required for inclusion.
| Category | 2020 | 2021 | 2022 | 2023 | Trend |
|---|---|---|---|---|---|
| QSR / Fast Food | 8.1% | 9.2% | 9.8% | 9.4% | ↑ Elevated |
| Fitness | 5.2% | 4.1% | 3.9% | 3.8% | ↓ Improving |
| Home Services | 4.8% | 4.3% | 5.1% | 4.9% | → Stable |
| Real Estate | 1.9% | 1.7% | 1.8% | 1.8% | ✓ Best-in-class |
| Retail | 9.3% | 8.7% | 7.9% | 8.1% | → Stable |
| Senior Care | 3.8% | 3.4% | 3.1% | 3.2% | ↓ Improving |
| Education & Tutoring | 5.1% | 4.8% | 4.2% | 4.1% | ↓ Improving |
| All Franchises | 6.8% | 7.1% | 7.6% | 7.2% | ↑ Rising |
Source: SBA 7(a) FOIA disclosures, FranchiseIQ analysis. Charge-off or SBA guarantee claim = default.
Item 19 Disclosure Analysis
The single most predictive variable for franchise success is whether the franchisor is willing to show you their numbers.
31%
Lower SBA default rates for brands that disclose Item 19 (5.1% vs 7.4%)
71%
Of franchises in our database now disclose Item 19, up from 58% in 2020
Item 19 Disclosure Rate Over Time
The Investment Paradox
One of the most persistent myths in franchise investing is that higher-cost franchises are safer investments. The data says otherwise.
“Higher total investment does NOT predict lower default rates. The correlation coefficient is essentially flat (R² = 0.03). A $1.5M QSR franchise defaults at nearly the same rate as a $150K home services franchise.”
- FranchiseIQ Research, correlation analysis of 5,767 franchise systems
What actually predicts default:
- ●Category - Real estate and senior care consistently outperform QSR and retail
- ●Item 19 disclosure - Franchisors willing to share unit economics run better systems
- ●Unit growth trajectory - Steady growth beats hyper-expansion; rapid unit growth often precedes rising defaults
The SBA Lens - Why This Data Matters
SBA loan data is the most unbiased measure of franchise performance available to investors. Franchisors cannot game it.
Public record, not franchisor marketing
Unlike Item 19 (which franchisors choose whether to disclose), SBA charge-off data is public record. Every dollar lent and every default is tracked by the federal government.
Built-in lag - plan accordingly
SBA data lags FDD data by 18–24 months due to the loan origination → charge-off timeline. Use SBA data for trend analysis, not real-time assessment.
The 15% threshold
When a franchise system's SBA default rate exceeds 15%, it becomes a red flag for lenders - and should be a red flag for buyers. Systems above this threshold face higher borrowing costs and scrutiny.
Top 10 Most Improved Systems
These franchise systems showed the largest reduction in SBA default rates between 2020 and 2023, signaling operational improvements and stronger unit economics.
| # | Brand | 2020 Rate | 2023 Rate | Improvement |
|---|---|---|---|---|
| 1 | Sport Clips | 6.8% | 2.8% | -4.0pp |
| 2 | Great Clips | 9.1% | 5.2% | -3.9pp |
| 3 | Anytime Fitness | 5.9% | 2.0% | -3.9pp |
| 4 | Snap-on Tools | 6.2% | 3.4% | -2.8pp |
| 5 | Paul Davis Restoration | 7.4% | 4.9% | -2.5pp |
| 6 | Miracle-Ear | 5.8% | 3.5% | -2.3pp |
| 7 | Budget Blinds | 4.9% | 2.8% | -2.1pp |
| 8 | Jan-Pro Cleaning | 5.5% | 3.7% | -1.8pp |
| 9 | Pinch A Penny | 5.3% | 3.6% | -1.7pp |
| 10 | BrightSpring Health | 4.8% | 3.2% | -1.6pp |
Methodology
Data sourced from SBA 7(a) FOIA disclosures (2010–2023), FDD filings submitted to state franchise regulators (all 50 states), and proprietary normalization by FranchiseIQ Research. Default rate defined as loan charge-off or SBA guarantee claim. Minimum 50 active loans required for inclusion. Data as of Q4 2023.
Category assignments follow the International Franchise Association (IFA) taxonomy with adjustments for multi-concept operators. Year-over-year trends are calculated on a rolling 3-year cohort basis to smooth for loan maturity effects.
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