In 1995, Timothy Bates pulled U.S. Census Bureau data on more than 20,500 small businesses and tested the franchise industry's favorite claim: that franchises succeed 90 to 95 percent of the time. Bates, a professor at Wayne State University, published his findings in the Journal of Small Business Management. Franchises survived at 65.3 percent over four years. Independent businesses survived at 72 percent. The stat the industry had been selling for a decade did not just weaken. It flipped.
You have heard some version of the pitch. "Franchises succeed 90 to 95 percent of the time." It shows up in broker calls, in sales rooms, in the glossy folder you get after the lunch meeting. The number came from a 1987 survey the International Franchise Association ran on its own members. It sounds right. It is not.
How the Number Was Made
The research on this is worth reading. In 1987, the IFA surveyed franchisors about how many of their units were still open. Not franchisees. Not former owners. The people running the system were asked to count the units still in the system. Every unit that had already failed and left was not in the count. The method has a name: survivorship bias. You measure the ones still standing and call it a success rate. That is like polling marathon finishers and calling the race easy.
Bates ran a different kind of study. He used Census Bureau records covering franchised and independent businesses alike. Retail franchises did worse than the average, surviving at 61.3 percent. Independent retail held above 73 percent. The franchised businesses also showed lower average profit than their independent peers. The number the industry quoted was not just wrong. It pointed in the wrong direction.
In 2005, the IFA mailed a letter to its own members. The message was plain: stop citing that number. The agency that ran the original studies had stopped in 1987. The old data was "no longer valid." That should have been the end of it. Twenty years later, the number is still in the pitch deck.
Why It Still Works
The problem is not bad data from 1987. The problem is that the data got replaced by a practice called franchise churning. When a unit fails, the franchisor finds a new buyer to take over the site. The failed owner walks away with nothing. The unit gets logged as a "transfer," not a closure. The store stays open. The line on the chart stays flat. The stat stays clean.
Dickey's Barbecue Pit is the named case. Of 29 SBA 7(a) loans, the type backed by the Small Business Administration, tied to Dickey's units between 2010 and 2019, 19 were charged off. Gone. In a 2019 survey run by the Pit Owners Association, 84 percent of Dickey's franchisees said their return on the investment did not meet what they were told to expect. More than half said their stores lost money in 2018. But the locations kept turning over to new buyers. The count of "open units" barely moved.
The pattern is not old news. FRANdata, a firm that tracks franchise lending, reported in early 2025 that early default rates on franchise loans hit 1.4 percent. The long-run average sat between 0.6 and 0.8 percent. Nearly double. Across all franchise brands that took SBA loans from fiscal year 2020 through 2023, the average default rate was 17.28 percent. Not 5 percent. Not 10. Seventeen.
Most people treat this as a bad-owner problem. It is a system problem.
What to Do Instead
A better principle: do not trust any stat you did not pull from the franchise's own disclosure document. Every franchisor in the United States must file a Franchise Disclosure Document, called an FDD. Item 20 of that document lists how many units opened, closed, and were transferred each year for the past three years.
Once that is clear, three moves follow from it.
Move 1: Run the Closure-to-Opening Ratio
Take the number of units that closed in the past year. Divide it by the number that opened. If that ratio lands above 0.3, meaning 30 closures for every 100 openings, the system is leaking owners faster than it can fill the gaps. A shrinking system masks its losses in transfer counts. This single ratio will tell you more about the health of a franchise than any pitch deck ever printed. It asks you to trust math, not the person selling you the seat.
Move 2: Check the Annual Closure Rate
Under 3 percent is a sign of a stable operation. Above 7 percent means the risk is high. Pull three years of Item 20 data and lay them side by side. If closures climb year over year, the brand is under stress, no matter what the sales team says about "growing markets" or "new regions."
Move 3: Find the Owner Benefit Number
If the median unit cannot put at least 60 to 80 thousand dollars a year into the owner's pocket after all costs, the math does not work. Royalties, ad fund fees, and loan payments take their share first. A unit that grosses well but nets thin is a job you paid six figures to get.
What the Audit Shows
Running these three checks before you sign does something the 90 percent stat never did:
It shows whether the system is growing or bleeding owners. It shows how many people left in the past three years and whether anyone took their place at the same terms. It shows whether the franchisor makes its money from running good units or from selling new ones to new buyers. And it puts a real number on the one thing the pitch deck will never print: what the median owner actually takes home.
The Feedback Loop
At the end of your FDD review, ask three things.
→ What does the closure-to-opening ratio say about the next three years?
→ What part of the sales pitch has no match in the Item 20 data?
→ What cost showed up in the document that no one mentioned in the call?
That is the difference between a stat that sounds right and a system that proves itself.
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Where You Stand
The 90 percent number was never a measure of franchise success. It was a measure of how the count was run. Timothy Bates showed that in 1995. The IFA admitted it in 2005. The number stayed anyway, because the system that profits from it never needed the number to be true. It just needed you not to check.
