Franchise
By David Jones, MAI, CCIM · Published 2026 · 8 min read
Franchise businesses represent roughly 40% of all SBA-financed transactions, and the feasibility study for a franchise looks materially different from one for an independent business. The franchise system provides data, brand infrastructure, and operational playbooks that reduce some risks while introducing others (territory constraints, mandatory fee structures, franchisor-dictated build-out costs) that do not exist for independents. A feasibility study that treats a franchise the same way it treats an independent startup is missing both the advantages and the risks unique to the franchise model.
This guide covers the franchise-specific elements that an SBA feasibility study must address, from the threshold eligibility question (is the franchise on the SBA Franchise Directory?) to the financial modeling nuances (how Item 19 data shapes projections) to the competitive dynamics (how territory protection affects the demand analysis).
Before any analytical work begins, the feasibility study must confirm that the franchise is listed on the SBA Franchise Directory. This is a non-negotiable eligibility requirement. If the franchise is not listed, the SBA will not guarantee the loan regardless of how strong the feasibility analysis is.
The SBA Franchise Directory exists because the SBA must verify that the franchise agreement does not give the franchisor so much control over the business that the borrower is effectively an employee rather than an independent business owner. Franchise agreements that include provisions such as the franchisor retaining unilateral power to set prices, the franchisor owning the customer relationships, or the franchisor having the right to terminate the agreement without cause may fail this test.
| Directory Status | What It Means | Feasibility Study Implication |
|---|---|---|
| Listed (no conditions) | Franchise agreement has been reviewed and approved by the SBA | Proceed with feasibility analysis. No eligibility risk. |
| Listed with conditions | Approved but specific addenda or modifications to the franchise agreement are required | Proceed, but confirm the borrower's franchise agreement includes the required modifications. If not, the loan cannot close until the agreement is amended. |
| Not listed | Franchise has not been reviewed or has been reviewed and denied | Stop. The franchise must apply for listing before SBA financing is possible. This process takes 2 to 6 months. The feasibility study should not proceed until listing is confirmed or highly probable. |
| Previously listed, now removed | Franchise was approved but later removed due to agreement changes or compliance issues | High risk. Investigate why it was removed. The franchise must reapply and resolve the issue before SBA financing is viable. |
Most major franchise systems (McDonald's, Subway, Planet Fitness, Hampton Inn, Jiffy Lube, Great Clips, etc.) are listed. Newer or smaller franchise systems may not be. The feasibility study should document the directory status as a threshold finding before proceeding to the market analysis.
Item 19 of the Franchise Disclosure Document (FDD) is the Financial Performance Representation. When disclosed (it is voluntary under FTC rules), Item 19 provides actual financial performance data for existing franchise units: revenue, cost of goods, and in some cases, unit-level profitability. This data is the single most valuable input in a franchise feasibility study because it provides a real-world performance distribution against which the subject location can be benchmarked.
We do not take Item 19 averages at face value. The system-wide average includes top performers in prime locations and struggling units in weak markets. The feasibility study positions the subject location within the distribution based on its specific trade area characteristics.
| Item 19 Data Point | How We Apply It | What to Watch For |
|---|---|---|
| Median unit revenue | Starting point for revenue projection, adjusted up or down based on trade area demographics, traffic, and competition | Median is more reliable than mean (averages are skewed by outliers). If only the mean is disclosed, note the limitation. |
| Revenue by quartile (25th, 50th, 75th percentile) | Position the subject location within the distribution based on market quality | A projection above the 75th percentile requires strong justification. Below the 25th percentile may indicate the market cannot support the franchise. |
| Revenue by geography or market type | Match the subject's market type (urban, suburban, rural) to the disclosed segment | Not all franchisors segment by geography. If they do, use the segment that matches your location, not the national figure. |
| Cost of goods / food cost percentage | Validate the expense model against the system's actual performance | Item 19 COGS data is gold for expense modeling. If not disclosed, use NACS, NRA, or ICA industry benchmarks instead. |
| Unit-level EBITDA or operating profit | Cross-reference the feasibility study's projected NOI against disclosed profitability | Only ~60% of franchisors disclose this level of detail. When available, it provides the strongest validation of the financial model. |
Approximately 35% to 40% of franchise systems do not disclose Item 19. When it is absent, the feasibility study must build revenue projections entirely from market data: trade area demographics, competitive benchmarking, traffic analysis, and industry surveys. This is the same approach used for independent businesses, and it produces credible projections, but it requires more analytical effort and introduces more uncertainty than an Item-19-informed projection. The study should note the absence of Item 19 data and explain the alternative methodology used.
Every franchise agreement defines a territory: the geographic area within which the franchisor will not place another franchisee operating the same brand. Territory protection directly affects the demand analysis because it constrains the competitive landscape in the subject brand's favor while also limiting the subject franchisee's addressable market.
| Territory Type | How It Works | Feasibility Implication |
|---|---|---|
| Exclusive radius (most common) | No other franchisee of the same brand within a defined radius (typically 1.5 to 5 miles) | The subject unit is protected from same-brand cannibalization within the radius. But other brands can and will compete freely. |
| Exclusive population-based | Territory defined by population count (e.g., one unit per 30,000 people) rather than distance | Market saturation is measured differently. The feasibility study must calculate whether the population supports the existing units plus the subject. |
| Non-exclusive / right of first refusal | Franchisor can place another unit nearby but must offer the territory to the existing franchisee first | Weaker protection. The feasibility study should model the scenario where a second unit opens within the trade area. |
| No territory protection | Franchisor can place units anywhere without restriction | Highest risk. The feasibility study must assess the probability of same-brand competition based on the franchisor's expansion history and market density. |
The feasibility study maps the subject territory, identifies all existing franchise units of the same brand within and adjacent to the territory, and assesses whether the territory is large enough to support the projected revenue. A 3-mile exclusive radius in a dense suburb may contain 100,000 people, which is ample for most franchise concepts. The same 3-mile radius in a rural area may contain 8,000 people, which may be insufficient. Territory adequacy is a function of population density and the franchise concept's unit economics, not the radius alone.
Franchise fees represent a permanent operating cost that independent businesses do not bear. The feasibility study must model all franchise-related expenses to produce an accurate DSCR.
| Fee Type | Typical Range | Paid To | DSCR Impact |
|---|---|---|---|
| Initial franchise fee | $20,000 to $75,000 (one-time) | Franchisor at signing | Capitalized into project cost; affects total debt service through loan amortization |
| Ongoing royalty | 4% to 8% of gross revenue | Franchisor monthly | Directly reduces NOI. A 6% royalty on $1.5M revenue = $90,000/year reduction in cash flow available for debt service. |
| Marketing / advertising fund | 1% to 4% of gross revenue | Franchisor or co-op fund | Further reduces NOI. Combined with royalty, total franchisor fees can reach 10-12% of gross revenue. |
| Technology / POS fees | $500 to $3,000/month | Franchisor or approved vendor | Often overlooked in pro formas. $2,000/month = $24,000/year. |
| Required renovation / PIP | $5,000 to $25,000 per unit on a 5-7 year cycle | Approved contractors | Not an annual expense but must be reserved for. 2-4% of gross revenue recommended as a reserve. |
| Transfer fee (if acquiring existing franchise) | $5,000 to $25,000 | Franchisor at transfer | One-time cost capitalized into acquisition; may also require new franchise agreement execution. |
The math matters. A restaurant generating $1.5 million in gross revenue with a 6% royalty, 3% marketing fund, and $2,000/month technology fee pays $159,000 annually in franchise fees alone. That is $159,000 that does not exist for an independent operator. The franchise must generate enough additional revenue through brand recognition, customer acquisition, and operational efficiency to offset these fees and still produce an adequate DSCR. The feasibility study models both the fee burden and the brand-driven revenue premium to determine whether the franchise model produces a stronger DSCR than an independent alternative at the same location.
The feasibility study validates the franchise's unit economics for the specific trade area, not just the system average. This involves testing whether the local market conditions support the franchise's standard operating model.
Revenue adequacy. Does the trade area's population density, income level, and competitive landscape support the revenue level needed for the franchise model to work? A franchise concept that requires $1.2 million in annual revenue to break even may be viable in a suburban trade area with 40,000 residents and 2 direct competitors but not in a rural area with 12,000 residents and 4 competitors.
Labor market fit. Can the local labor market supply the staffing the franchise requires at a cost consistent with the operating model? A fast-casual franchise that budgets 28% labor cost may face 32% in a high-minimum-wage state, which reduces NOI by 4 percentage points and can move the DSCR from adequate to marginal.
Build-out cost alignment. Franchise-mandated build-out specifications (specific finishes, branded signage, required equipment packages) produce a fixed build-out cost that may or may not align with the local construction market. A franchise that specifies a $350,000 build-out nationally may cost $420,000 in a high-cost market. The feasibility study uses the actual local build-out cost, not the franchisor's national estimate, in the total project cost and DSCR calculation.
Ramp-up reality. Franchisors often project aggressive ramp-up timelines in their marketing materials ("profitability within 6 months"). The feasibility study benchmarks the actual ramp-up against Item 19 data (if available) and comparable franchise openings in similar markets. Most franchise locations take 6 to 18 months to reach stabilized revenue. The study models the working capital needed to survive the ramp period and includes it in the total project cost.
| Dimension | Franchise Advantage | Franchise Disadvantage |
|---|---|---|
| Revenue projection confidence | Item 19 data provides real-world performance distribution | System averages may not apply to specific trade area |
| Competitive positioning | Brand recognition reduces customer acquisition risk | Territory may be too small or franchisor may allow encroachment |
| Operating model | Proven system, training, supply chain | Rigid; cannot adapt to local conditions without franchisor approval |
| Cost structure | Supplier volume discounts, group purchasing | Franchise fees (7-12% of gross) are a permanent cost burden |
| Lender confidence | Known brand reduces perceived risk | Franchisee-level economics may differ from system marketing |
| Exit value | Brand provides floor for resale value | Transfer fee and franchisor approval required; limits buyer pool |
The feasibility study must evaluate both sides of this ledger. A franchise is not automatically safer than an independent, and an independent is not automatically more profitable than a franchise. The analysis determines which model produces a better DSCR in the specific market context. For some trade areas, the brand premium justifies the fee structure. For others, the fees erode too much margin and an independent concept with lower overhead would produce a stronger financial result.
For property-type-specific franchise analysis, see our industry guides for restaurants, the fitness franchise feasibility study, hotels, and auto repair.
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