Franchise Failure Rate by Industry: 19 Categories

Franchise failure rates vary dramatically by industry. Based on FranchiseLens' analysis of 94,000+ SBA 7(a) loans, retail franchises have the highest charge-off rate at 16.1%, while healthcare franchises have the lowest at 3.8%. The overall franchise charge-off rate is 16.0%, but choosing the right industry can cut your risk by more than half — or significantly increase it.

Complete category breakdown

The following table shows SBA 7(a) charge-off rates for all 18 major franchise categories in our database, sorted from highest to lowest failure rate. The charge-off rate represents the percentage of franchise loans in each category that defaulted.

The spread between the worst and best categories is significant: retail at 16.1% versus healthcare at 3.8%. Category selection alone can cut your risk of franchise failure by more than half.

Why some categories fail more

The categories at the top of the failure list share several structural characteristics:

Retail (16.1%)

Retail franchises carry the highest charge-off rate, reflecting the structural pressures of brick-and-mortar retail: high lease costs, inventory risk, and intense competition from e-commerce. When foot traffic declines even modestly, the fixed-cost base amplifies losses quickly.

Recreation and entertainment (11.3%)

Recreation franchises require large spaces, expensive equipment, and significant upfront capital. Revenue is highly seasonal and sensitive to economic conditions — discretionary entertainment spending is one of the first line items consumers cut during downturns.

Full-service restaurants (16.7%)

Full-service restaurants carry high fixed costs: large real estate footprints, extensive build-outs, high labor requirements (servers, cooks, managers), and significant food waste. The category has also faced sustained pressure from fast casual competitors and delivery-first models.

Why some categories succeed more

The categories at the bottom of the failure list also share common traits:

Healthcare (3.8%)

Healthcare franchises have the lowest charge-off rate of any category. An aging population creates growing demand. Healthcare services often have recurring revenue models (ongoing care, not one-time transactions) and benefit from referral relationships with medical providers. Labor is the primary cost, but the absence of expensive real estate needs keeps overhead manageable for many models.

Lodging (6.6%)

Lodging franchises post the second-lowest charge-off rate, largely because hotel investments are typically made by experienced commercial real estate operators and institutional investors with strong financial profiles. Lenders apply rigorous underwriting, and the operators themselves bring significant industry expertise.

Education (9.0%)

Demand for childcare and education services is inelastic — working parents need it regardless of economic conditions. Regulatory requirements create barriers to entry that protect established operators. Revenue is recurring and predictable (monthly tuition), and customer switching costs are high.

How to use this data when choosing a franchise

Category-level data is a starting point, not an endpoint. Here is how to incorporate it into your franchise research:

1. Start with categories that match your risk tolerance. If you are financing a significant portion of the investment, categories with charge-off rates below 20% give you better odds of being able to repay the loan. Use the browse page to filter by category.
2. Then drill into specific brands. A great brand in a risky category can outperform a mediocre brand in a safe category. Check each brand's individual SBA charge-off rate on its FranchiseVerdict profile.
3. Compare within the category. Use the comparison tool to stack brands side-by-side on investment, revenue, fees, and SBA performance. A brand with a 15% charge-off rate in a category that averages 25% is outperforming its peers.
4. Validate with franchisee conversations. SBA data tells you about loan performance; talking to actual franchisees tells you about the day-to-day reality. Use Item 20 contacts or our contacts product to reach current and former owners.

If I were investing: an editorial perspective

If I had $500K to invest in a franchise today, the category data would immediately eliminate retail from my consideration set. A 16.1% charge-off rate is well above the national average. I would start with the three lowest-risk categories: healthcare (3.8%), lodging (6.6%), and senior care (5.2%).

Within those categories, I would look for brands with at least 50 SBA loans on file and individual charge-off rates below 5%. A brand that beats its category average by half or more has demonstrated something systematically better about its model — better franchisee selection, better unit economics, or better operational support. The category gives you the baseline. The brand gives you the edge.

The one exception where I would consider a higher-risk category: QSR, specifically brands with 0% SBA defaults and strong revenue disclosure. A well-run QSR brand can overcome the category average because the category is dragged down by hundreds of small or poorly managed systems. The data shows that category selection gets you to the 20-yard line. Brand selection gets you to the end zone.

Methodology

Charge-off rates in this article are calculated from SBA 7(a) loan data obtained through FOIA requests. The dataset includes 94,000+ loans across all franchise brands, categorized by FranchiseLens into 18 industry groups based on the primary business activity of each franchise system. A loan is classified as "charged off" when the lender wrote off the outstanding balance after borrower default. Category assignments are based on the franchise brand's primary business model and may differ from NAICS codes or SBA industry classifications. For our complete methodology, see the methodology page.

Related franchise research

Continue your research with our overall franchise failure rate analysis, how much franchise owners make, and best franchises under $50K.