Franchise Concepts in SBA Feasibility Studies

The one-in-five problem

Roughly one in every five dollars the Small Business Administration guarantees flows to a franchise (1). That is a remarkable concentration for a single business form, and it explains why the franchise question sits close to the center of small-business credit. It also sets up a contradiction that most loan files never resolve.

Franchising is large and, by its own accounting, healthy. Heading into 2026 the sector is on track to produce about $921 billion in output across roughly 845,000 establishments employing close to 8.9 million people (2). The pitch writes itself: a proven system, a recognized brand, a playbook that takes the guesswork out of going into business. Lenders have internalized that pitch. So has the SBA, which keeps a public list of the brands its loans may be used to finance.

And yet the SBA's own Franchise Directory carries a sentence that should stop every credit officer who reads it. Placement on the directory, the agency states plainly, is not an endorsement or approval of the brand and does not ensure the success of the business (3). The directory is an eligibility screen. Nothing more.

The distance between those two ideas is the subject of this paper. A directory listing answers a legal question: does this brand meet the federal definition of a franchise, and has the SBA cleared it. It says nothing about the question a credit committee is actually paid to answer: will this unit, on this corner, run by this borrower, under this lease and this loan, generate enough cash to cover the debt. Eligibility is a gate. Viability is a forecast. The directory opens the gate. It does not write the forecast.

The cost of confusing the two is not theoretical. In fiscal 2024 the 7(a) program recorded its first negative cash flow in thirteen years, a shortfall of roughly $397 million, as defaults climbed and the agency bought back a wave of soured loans (4). Much of that damage traces to a single, avoidable failure: lending into franchise units whose projected first-year revenue bore little relationship to what the unit actually earned. Federal reviewers found cases where first-year projections ran at more than twice actual revenue (17). The brand was eligible. The unit was not viable. The file never told the difference.

A directory that disappeared, then came back

To understand why this matters now, it helps to follow the directory's unusual recent history, because the ground moved twice in two years.

The SBA Franchise Directory was created at the start of 2018 (5). Before it, lenders waded through franchise agreements themselves to judge eligibility, a slow and inconsistent process. The directory centralized that judgment: if a brand was listed, the franchise side of eligibility was largely settled.

Then, on August 1, 2023, it vanished. The elimination was not really a franchise decision; it was a byproduct of a broader affiliation rule the SBA finalized in April 2023, which removed control as a basis for affiliation between businesses (6). Once control no longer drove affiliation, the agency reasoned, the mere fact that an applicant was a franchisee no longer threatened eligibility, and the directory lost its rationale. For nearly two years lenders were back to reading franchise documents on their own. Industry participants called the period what it was: a return to the Wild West.

On June 1, 2025, the directory returned under SOP 50 10 8, the most significant overhaul of SBA credit policy in five years (7). The reinstated version came with a new mechanic: a one-time Franchisor Certification. Brands carried over from the old list have until June 30, 2026 to execute it (8). Miss the deadline and the brand drops off the directory, and its franchisees lose access to SBA financing until it is restored. That cliff is now roughly a year away, which means every franchise brand in a lender's pipeline should be checked not only for listing but for certification status.

The practical upshot is straightforward and easy to miss. For the first time since 2023, the directory is authoritative again. A listed, certified brand clears franchise eligibility cleanly, and the lender no longer needs to retain or parse the franchise disclosure document for that purpose (9). That is genuine friction removed. It is also precisely the moment when a listing is most likely to be mistaken for something it is not.

What a listing confirms, and the four things it cannot

So what does a listing actually confirm? Three narrow things. That the SBA has determined the brand meets the Federal Trade Commission's definition of a franchise. That the brand has been assigned a franchise identifier code. And that the agency has flagged any additional items a lender must still review, most commonly a management agreement that sits outside the franchise disclosure document (10).

That last carve-out matters more than it appears. A directory listing does not clear a separate management agreement. If a borrower intends to hand day-to-day operations to a third party, the lender, not the SBA, must confirm the borrower retains what the SOP calls meaningful oversight: approval of the annual budget, approval of major expenditures above a set threshold, control of the bank accounts, and authority over the people running the business (10). Fail that test and the applicant is a passive investor, which is ineligible. And if the management company is the franchisor or an affiliate of it, the deal is dead on arrival, because the borrower is no longer operating an independent small business. That is one of the few true bright-line disqualifiers in franchise lending, and it is the kind of thing a feasibility analyst should surface in the first read, not the last.

Notice what is absent from that list. A listing says nothing about the four variables that determine whether a specific loan gets repaid. It says nothing about the site, whether this trade area can support another unit of this concept. It says nothing about the sponsor, whether this borrower has the capital, the operating experience, and the staying power to survive a slow ramp. It says nothing about the capital stack, whether the loan is sized to a cash flow the unit can actually produce. And it says nothing about the market, whether the surrounding competition has already absorbed the demand the brand is counting on. Exhibit 1 sets the two side by side.

Exhibit 1.  The eligibility gate versus the viability test

What a Directory listing confirms	What a feasibility study tests
The brand meets the federal definition of a franchise	Whether this trade area can absorb another unit of the concept
The brand is cleared for SBA eligibility	Whether the site captures enough demand once competitors are netted out
A franchise identifier code is assigned	Whether the full cost load leaves positive cash flow at the unit
Any non-FDD management agreement is flagged for review	Whether the unit covers its debt at 1.15x, and holds up under stress
Eligibility documents need not be re-reviewed once listed	Whether the borrower is capitalized to survive a slow first-year ramp
A legal gate is open.	A repayment forecast still has to be built.

Source: MMCG analysis of SOP 50 10 8 franchise provisions.

A directory listing, in other words, is a passport, not a forecast. It tells a lender the brand is allowed into the room. Everything that determines repayment happens after that.

The Item 19 problem

If the directory is the wrong place to look for viability, where do lenders look instead? Usually at Item 19 of the franchise disclosure document, the one section where a franchisor may present financial performance. And here the analysis runs into a structural problem that no amount of brand prestige can fix.

Start with the rule itself. Under the FTC Franchise Rule, a franchisor may state earnings figures in exactly one place, Item 19, and nowhere else (11). No salesperson may quote a number across a desk, no brochure may imply one, no webinar may hint at one, unless it appears in Item 19 with a reasonable basis behind it. That exclusivity has a consequence lenders underestimate: when a franchisor's disclosure document contains no Item 19, the brand is legally barred from telling a prospect what its units earn. None of it. The silence is the disclosure.

The second feature is more consequential still. Item 19 is optional. A franchisor is free to make no financial representation at all. Across the broad universe of active brands, only about three in five include any Item 19 figure (12); the share runs higher among large, sales-driven systems that use the number as a recruiting tool and lower among younger brands, which is its own quiet signal. When a mature, large-unit brand declines to publish a number, that absence is information.

But the deeper problem is that even a complete, fully compliant Item 19 is the wrong instrument for sizing a single loan. Consider what the typical figure actually is. It is usually an average across the system, and an average is exactly the statistic most distorted by a handful of high performers. A brand with forty-five units doing $300,000 and five flagship units doing $1.5 million reports an average near $420,000, a number that describes none of the forty-five and misleads about all of them. Securities regulators now require a median alongside any average for exactly this reason (16). It is frequently a revenue figure with no expense load attached, which means it offers no path to the only number that services debt, which is net cash flow. It typically excludes units that have closed, the very outcomes a prospective borrower would most want to know about. And it reflects the trade areas of units that already exist, most of them older, many of them company-owned, none of them on the borrower's corner.

There is an old line in franchise circles that in Item 19, truth and marketing tend to share a very small apartment. It is funny because it is fair. The figures are not fraudulent; they are selected, and selection is the whole point. The franchisor chooses which units, which metric, and which time period, and the choices are made by people who want the deal to close.

When a franchisor crosses from selection into invention, the consequences can be severe, though they arrive rarely. The clearest recent example is Burgerim, a burger franchisor that sold more than 1,500 franchises while making oral earnings claims that were illegal precisely because the brand published no Item 19. In January 2024 a federal court entered a default judgment of roughly $48.5 million in consumer redress plus $7.75 million in civil penalties (13). Burgerim is the cautionary extreme. The everyday problem is quieter and far more common: a perfectly legal average that simply does not describe the unit being financed.

The scale of the mismatch becomes obvious the moment you compare brands inside the same category. Across quick-service restaurants, the system that operates the most recognizable golden arches in the country averages roughly $4.0 million per unit, while one of the largest sandwich franchises averages closer to $490,000 (14, 19). Same federal definition of a franchise. Same directory. Same Item 19 section. An eightfold difference in revenue per unit. A lender who treats quick service as a single risk because both brands are eligible is not assessing risk at all.

Turning a brand average into a site forecast

This is where a feasibility study earns its place in the file. Its job is not to repeat the franchisor's average. Its job is to convert that average into a defensible projection for one location and one borrower, and then to test whether that projection can carry the proposed debt. The conversion has four moving parts.

It begins with the trade area. A credible study does not draw a lazy three-mile circle and call it a market. It defines the area the way customers actually behave, using drive-time contours rather than radial distance, because nobody decides where to eat lunch by measuring miles, and it validates those contours against observed movement data where available. Inside that boundary it counts the people who matter, distinguishing residents from the daytime working population that drives a downtown coffee unit, and it matches that population against the brand's real customer profile rather than the general census (22, 23).

The second part is the revenue estimate itself, and the discipline here is triangulation. A serious forecast is built three ways and reconciled: against the performance of genuinely comparable units in similar markets, against the share of trade-area demand the site can realistically capture once existing competitors are subtracted, and against category spending per household. Where the three methods converge, the number is defensible. Where they diverge, the divergence is itself the finding, and it gets explained rather than buried. The capture rate, the share of available demand the unit is assumed to win, is the single most scrutinized input in any SBA or USDA feasibility review, because a capture rate set above the site's fair share without a concrete reason is the most common way an optimistic projection gets manufactured.

The third part is the expense load, and this is where franchise economics quietly punish the unprepared. A revenue line means nothing until the full cost stack is subtracted: the royalty, typically four to eight percent of sales; the advertising or brand-fund contribution, usually another one to four percent; occupancy; labor; cost of goods; and, critically, a market-rate salary for the owner, because a projection that pays the owner in unpaid labor is not a projection, it is a wish (24). A new unit also does not open at full speed. A proven concept on a good corner reaches perhaps 70 to 80 percent of its stabilized revenue in year one and approaches full volume only in year three, and a model that assumes day-one maturity is the fastest way to lose a credit committee's confidence.

The fourth part is the test. Revenue, minus the full expense load, produces net operating cash flow. Divide that by annual debt service and you have the debt-service-coverage ratio, the number the entire exercise exists to produce. SOP 50 10 8 sets the floor at 1.15 to 1 for most loans, with a lower 1.10 threshold for small loans, and most lenders layer their own benchmark on top, commonly 1.25 (7). A feasibility study worth its fee does not stop at the base case. It runs the coverage under stress, dropping capture by a quarter and then by forty percent, slowing the ramp, and reporting what survives. Exhibit 4 walks a single quick-service unit through that arithmetic.

Exhibit 4.  Illustrative debt-service coverage, single quick-service unit

Line item	% of sales	Year 1 (75% ramp)	Year 3 (stabilized)
Net sales	100%	$900,000	$1,200,000
Food cost	30%	$270,000	$360,000
Labor	30%	$270,000	$360,000
Occupancy	9%	$81,000	$108,000
Royalty	5%	$45,000	$60,000
Advertising / brand fund	3%	$27,000	$36,000
Other operating	10%	$90,000	$120,000
Net operating cash flow	~13%	$117,000	$156,000
Annual debt service (~$900K, 10 yr)		$148,800	$148,800
Debt-service-coverage ratio		0.79x	1.05x

Illustrative figures, MMCG analysis. A unit forecast to $1.2 million in stabilized sales still fails to cover its debt in year one and clears the SBA floor only barely at maturity, the kind of finding that should reshape a loan before approval, not after default.

It is worth drawing one distinction sharply, because lenders sometimes assume an appraisal does this work. It does not. An appraisal answers a collateral question, what the property is worth. A feasibility study answers a cash-flow question, whether the business can service its debt. A project can be comfortably over-collateralized and still unable to make its payments. A small hotel can appraise at a value that supports the loan on paper and still produce coverage below 1.0 in its first year if rooms fill more slowly than the sponsor hoped. The appraisal would never reveal it. The feasibility study is built to.

Concept is not destiny, but it comes close

If a brand's average tells a lender little, its category tells them a great deal, because risk in franchising clusters hard by concept. The pattern is visible in loan performance. Analyzed across three decades of SBA 7(a) lending, charge-off rates by sector spread across a wide band: lodging and child care sit near the bottom, around 2 percent, followed by car washes and convenience-anchored fuel stations in the low-to-mid threes and general automotive repair just under four; fitness centers run above five, full-service restaurants near six, beauty around six, and limited-service restaurants and snack-and-beverage concepts past six and seven (20). Those gaps are not noise. They track structural features a feasibility analyst can read in advance: whether demand is discretionary or essential, whether margins are thin or protected, whether the concept faces a low barrier to entry, and how much capital sits at risk in the buildout.

Brand-level dispersion is wider still, and it is the most direct evidence that eligibility carries no viability content. Within the population of eligible, SBA-financed brands, the best-performing names default in the high single digits while the worst clear seventy, eighty, even ninety percent (20, 21). Every one of those brands was eligible. Every one was, at some point, on the directory. The directory could not have told them apart. Only the unit economics could. Exhibit 2 lays out the spread; Exhibit 3 distills the concept-level picture into the variables that drive a feasibility conclusion.

Exhibit 2.  Same directory, opposite outcomes: SBA loan default rates by brand

Lower-default brands	Rate	Higher-default brands	Rate
Comfort Keepers	8%	Noble Roman's Pizza	90%
Christian Brothers Automotive	9%	24-hour vending concepts	78%
Home Instead	10%	Wireless retail franchises	73%
Buffalo Wild Wings	14%	Tanning studios	70%
Sport Clips	15%	Sidewalk cafe concept	67%
Five Guys	16%	Pita sandwich concept	62%
Great Clips	17%	Bread cafe concept	60%
Jimmy John's	20%	Scoop ice cream concept	54%

MMCG analysis of SBA 7(a) loan-level data, ten-year window. Rates rounded; brand performance varies by period and is directional, not permanent.

Exhibit 3.  Concept risk at a glance

Concept	Typical investment	Royalty / ad fund	SBA real-estate class	Indicative charge-off	Dominant risk
Quick service	$0.3M-$4.7M	4-8% / 1-4%	General-purpose (10%)	6-7%	Thin margins, saturation, labor
Full-service dining	High (full kitchen)	~5% / 1-3%	General-purpose (10%)	~6%	Labor, prime-cost discipline, traffic
Fitness / gyms	$0.5M-$5.2M	flat-8% / 2-3%	General-purpose	5%+	Discretionary spend, churn, competition
Car wash	$0.4M-$4M	varies	Special-purpose (15%)	~3%	Leverage, fuel-demand decline
Gas / c-store	Multi-$M	varies	Special-purpose (15%)	~3.5%	Sub-2% fuel margin, EV shift, tanks
Childcare	$1.1M-$8.6M	5-10% / 1-2%	General-purpose (10%)	~2%	Wages, occupancy cost, slow ramp
Automotive service	$0.16M-$1.9M	6.5-7.5% + local	10% or 15% (pits/lifts)	~4%	Lower risk, needs-based demand
Personal care	$50K-$3.2M	6-7% / 1-2%	General-purpose (10%)	~6%	Discretionary, staff turnover
Hotels (select)	$0.8M-$14.4M	~5% / ~3.5%	Special-purpose (15%)	~2%	Cyclicality, renovation obligations

MMCG analysis; charge-off figures indicative of long-run SBA 7(a) sector performance. Equity percentages reflect SBA 504 minimums; startups carry higher injections.

One of those variables deserves special attention because it changes the math of a deal directly: how the SBA classifies the real estate. The agency divides commercial property into general-purpose and special-purpose, and the line has hard-dollar consequences. A gas station, a car wash, and a hotel are special-purpose, properties whose design limits their resale to the same use, and on a 504 loan they carry a 15 percent equity requirement rather than the standard 10, rising to 20 percent when the borrower is also a startup. A restaurant, a day care, and a self-storage facility, despite their specialized fit-outs, are treated as general-purpose and qualify for the lower injection. The cleanest illustration of how fine this line is comes from automotive service: a shop built with in-ground pits and lifts is special-purpose, while a near-identical shop built without them is general-purpose. Same concept, different equity, decided by the buildout. A feasibility study that ignores this leaves the borrower's equity requirement, and sometimes the deal's viability, undefined.

The compliance layer underneath the forecast

Running beneath the financial analysis is a compliance layer that a feasibility study should flag even though it is not, strictly, a financial question, because an eligibility defect can sink an otherwise sound deal late and expensively.

The first item is the franchise definition itself. The FTC's three-part test, a trademark license, significant control or assistance, and a required payment, reaches further than the obvious franchises (11). License agreements, dealer agreements, and supply arrangements can all meet it. If any such agreement qualifies and the brand is not on the directory, the loan cannot proceed, full stop. The most frequently misread case is fuel. Gas station supply agreements are exempt from FTC disclosure requirements, which leads lenders to assume they fall outside franchise rules, but the SBA treats agreements covered by the Petroleum Marketing Practices Act as franchises anyway, which means the fuel brand must be listed before a dealer's loan can move (11). The opposite trap appears with new-car dealerships: most manufacturer agreements do not meet the FTC test, so the work there is to confirm the exception, not assume the rule.

The second item is independent operation. Because the 2023 affiliation rule stripped control out of the analysis, affiliation now turns on ownership, and the surviving operating requirement is that the borrower genuinely run the business (6). The passive-business and franchisor-affiliated-management traps discussed earlier live here. And for a borrower operating several brands under one roof, every brand that meets the franchise definition must be independently listed and eligible, because a single ineligible concept blocks the entire loan.

None of this is exotic. But it is the kind of detail that, missed at intake, surfaces at closing, and a feasibility engagement that maps it early saves everyone the worst version of that conversation.

The standard the moment demands

Put the pieces together and a clear standard emerges for how franchise deals should be assessed now that the directory is back.

The risk to guard against is subtle. With the directory authoritative again, the path of least resistance is to treat a listing as a proxy for creditworthiness, to let a checkmark stand in for a forecast. Everything in the data argues against that shortcut. The peer-reviewed evidence is blunt: in one large study of small-business loan defaults, new franchisees defaulted at 18.8 percent against 16.3 percent for independent startups, a statistically significant gap in the wrong direction (15). Franchising, on the whole, is not safer than independent ownership; it is differently risky, and the difference lives at the level of the brand, the concept, and the site, none of which a directory captures.

The policy environment is, helpfully, pushing the same way. SOP 50 10 8 did not just bring back the directory; it brought back credit discipline that the prior framework had relaxed, restoring the 1.15 coverage floor, the 10 percent equity injection for startups, tax-transcript verification, and the requirement to document that credit is not available elsewhere (7, 25). From March 1, 2026, the SBA retires the automated small-business credit score for its small loans, forcing lenders back toward full credit analysis on exactly the segment, emerging brands and sub-$500,000 deals, where franchise losses have concentrated (18). The era of scoring a franchise loan by brand name and loan size is ending by regulation.

The SOP also points, in its own language, to the instrument that closes the gap. It authorizes the SBA to require an independent feasibility study where the lender's analysis cannot establish reasonable assurance of repayment, and it lists the triggers: market saturation, an unproven concept, special-purpose property, a project too large for the community it serves, rapid growth piled on fresh debt (7). Read that list again and it is, almost line for line, a description of the typical franchise deal. The feasibility study is not an obstacle the SOP tolerates; it is the tool the SOP reaches for when projections are doing the heavy lifting, which in franchise lending they almost always are.

The transparency that would make this easier has, for now, stalled. Proposals in Congress that would have required franchisors to disclose first-year revenue and closure data, and would have had the SBA publish default rates brand by brand, have not advanced, even as the eligibility machinery was rebuilt (17). The data that would let a lender see brand risk at a glance is not coming from Washington. It has to be built deal by deal.

Which returns us to where we began. A franchise on the SBA Franchise Directory has cleared a gate. It has not earned a forecast. The brand may be proven and the unit may still fail, because units are financed on corners, not on logos, and the only document that prices the corner is an independent, site-specific feasibility study that converts a national average into this borrower's cash flow and tests it until it either holds or breaks. Eligibility is the beginning of the analysis. It was never the end of it.

May 31, 2026, by Michal Mohelsky, J.D. Principal of MMCG Invest, LLC, feasibility study company.

Reach out to discuss how our methodology supports your lending or development decision.

Michal Mohelsky, J.D. | Principal | mmcginvest.com 

Contact: michal@mmcginvest.com

Phone: (628) 225-1125

Disclaimer: This report is provided for informational purposes only and does not constitute investment advice. Data presented herein is derived from proprietary MMCG databases and third-party sources believed to be reliable; however, MMCG Invest makes no representation as to the accuracy or completeness of such information. Figures from third-party industry databases have been independently verified and, where appropriate, adjusted to reflect MMCG's proprietary analytical methodology. Past performance is not indicative of future results.

Sources

(1)  MMCG database; industry estimates of franchise participation in SBA lending.

(2)  International Franchise Association, Franchising Economic Outlook 2026.

(3)  U.S. Small Business Administration, SBA Franchise Directory, support page (sba.gov).

(4)  U.S. Small Business Administration, news release on revised loan-program credit standards, April 22, 2025; FY2024 7(a) program performance.

(5)  U.S. Small Business Administration, SOP 50 10 5(J), effective January 1, 2018 (Franchise Directory established).

(6)  Federal Register, Affiliation and Lending Criteria for the SBA Business Loan Programs, 88 FR 21074, April 10, 2023.

(7)  U.S. Small Business Administration, SOP 50 10 8, effective June 1, 2025.

(8)  U.S. Small Business Administration, Information Notice 5000-866746 and subsequent Franchisor Certification deadline extensions (deadline June 30, 2026).

(9)  U.S. Small Business Administration, SOP 50 10 8, franchise provisions on Directory reliance and disclosure-document retention.

(10)  U.S. Small Business Administration, SOP 50 10 8, Directory data fields and the meaningful-oversight standard for management agreements.

(11)  Federal Trade Commission, Franchise Rule, 16 C.F.R. Part 436 (including Section 436.5(s) and treatment of PMPA agreements); FTC, A Consumer's Guide to Buying a Franchise.

(12)  MMCG database; analysis of Item 19 financial-performance-representation incidence.

(13)  United States v. Burgerim Group USA, Inc., No. 2:22-cv-825 (C.D. Cal.), default judgment entered January 19, 2024; Federal Trade Commission.

(14)  MMCG database; quick-service average-unit-volume benchmarks (burger segment).

(15)  Legendre and others, Are Franchises Really More Viable? Evidence from Loan Defaults, Journal of Business Research, vol. 133 (2021).

(16)  North American Securities Administrators Association, Financial Performance Representations Commentary, adopted May 8, 2017.

(17)  U.S. Government Accountability Office, Small Business Administration: Review of 7(a) Guaranteed Loans to Select Franchisees, GAO-13-759, September 2013.

(18)  U.S. Small Business Administration, Procedural Notice on the sunset of the small-business credit score for 7(a) Small Loans, effective March 1, 2026.

(19)  MMCG database; quick-service average-unit-volume benchmarks (sandwich segment).

(20)  MMCG analysis of SBA 7(a) loan-level performance data, charge-off rates by sector and brand.

(21)  U.S. Small Business Administration, Office of Inspector General, Evaluation Report 13-17, July 2, 2013.

(22)  Appraisal Institute, The Appraisal of Real Estate.

(23)  S. F. Fanning, Market Analysis for Real Estate, 2nd edition, Appraisal Institute.

(24)  National Restaurant Association, State of the Industry Report, 2026.

(25)  Board of Governors of the Federal Reserve System, Senior Loan Officer Opinion Survey, 2025.