Franchise Failures Are More Common Than You Think

Franchising is often positioned as a safer way to own a business—brand recognition, a proven model, training, and support all bundled into one package. Compared to starting from scratch, it feels like the odds are in your favor.

But here’s what rarely makes it into the sales pitch: franchise failures happen more often than most people think. And the reason you don’t hear much about them isn’t because they’re rare—it’s because the system makes failure data difficult to see.

Survivorship Bias in Franchising

When evaluating a franchise, you’ll almost always be shown success stories: top performers, multi-unit operators, and happy testimonials. What you don’t see are the units that shut down, the owners who sold out at a loss, or those who are just scraping by.

That’s survivorship bias. It creates the impression that success is the norm, when in reality, you’re only looking at the survivors. Unless you deliberately seek out the full picture, you risk overestimating your odds.

Why Failure Data Is Hard to Find

Even if you want to understand the risks, the information isn’t straightforward:

• FDD closures (Item 20) show how many units opened or closed each year, but not why. A unit could have closed due to poor performance, a lease issue, or an owner walking away—but you won’t see those details.

• Litigation (Item 3) only lists certain cases. Many disputes are settled or never make it into court records.

• SBA loan data exists but is aggregated. It’s hard to link defaults to a specific brand.

• Court records could reveal bankruptcies or disputes, but searching across multiple states and jurisdictions is costly and time-consuming for an individual investor.

So, while the data is technically “out there,” it’s not easily accessible or practical for most prospective franchisees to compile.

What You Can Do Instead

Here’s the good news: you don’t need perfect data to spot trouble. There are practical clues in the FDD and through validation that can reveal whether a system is quietly struggling.

1. Look Beyond Item 19

Some franchisors provide limited financial disclosures, but you can often back into systemwide averages by analyzing royalties, required fees, and overall revenue. If too many units are underwater financially, closures—or forced resales—will follow.

2. Examine Transfer Activity (and Item 7 Clues)

Not every troubled franchise shows up as a closure. Many get resold.

One way to detect this is in Item 7 (Initial Investment Range). If you see a wide spread—for example, $100K to $900K—you should question how a new franchise could possibly open for $100K. The reality is: it can’t. That low number usually represents a resale of a distressed unit, often sold for the value of its used equipment.

This is an overlooked red flag. A high number of low-dollar resales indicates multiple owners couldn’t make the business work, even if the system isn’t reporting many closures.

3. Ask Better Validation Questions

When talking to current franchisees, don’t just ask if they’re “happy.” Go deeper:

• How many owners they know who have left the system in the past few years

• Whether they are aware of peers who are struggling financially

• If they would invest in the same brand again, knowing what they know now

4. Look for Patterns, Not Perfection

You don’t need every data point. Instead, focus on patterns: high turnover, frequent resales, and inconsistent franchisee experiences. These signals can tell you as much as any formal statistic.

The Bottom Line

Franchise failures don’t show up in the glossy brochures, but they’re real—and more common than you think. While it’s nearly impossible to tally every failed unit across the country, you don’t need perfect data to protect yourself. By combining smart analysis of the FDD with sharper validation questions, you can see past survivorship bias and make a more informed decision.

👉 If you want help interpreting what’s hidden in the FDD—like using Item 7 and Item 19 to uncover the true financial picture—I can help. Schedule a free intro call and let’s walk through your franchise opportunity with eyes wide open.