Franchise Development and Economic Uncertainty

Posted on October 17, 2025 in Blog

The franchise sector has outpaced the broader US economy in 2025 despite considerable economic uncertainty due to volatile trade policy, rising operating costs, and labor shortages in some sectors. There are signs of trouble in economic data, though, making the economics of franchising intriguing to prospective entrepreneurs. We looked at the recent performance of franchises, the persistent concept of “recession-proof” franchises, and what franchise organizations can expect in the year ahead.

The State of the Franchise Sector

The franchise model remains an important component of the US economic engine, operating in a wide range of industries. High-visibility franchise verticals, such as quick service and fast food restaurants or coffee chains, are just the tip of the iceberg. Some of the most valuable, not to mention fastest growing, franchise systems are in home services, legal, and other fields. And they’re doing quite well; according to forecasts from the International Franchise Association, franchise companies are experiencing healthy growth by two of the industry’s most-watched metrics:

Franchise operations are expected to add 210,000 jobs by the end of 2025 to reach a total of 9 million, a 2.4% employment growth rate.
Unit sales increased by more than 20,000 units (2.5% YoY) to 851,000. Many of those jobs will support the additional 15,000 new franchise units opened during the year.

Total franchise output is expected to exceed $936 billion in 2025, a 4.4% increase over 2024, outpacing the total US economy.

The Post-Pandemic Normal

By nearly every measure, franchising has largely recovered from the earliest days of the COVID-19 pandemic. State-mandated closures and shrinking demand in some sectors caused thousands of franchise locations to close in 2022, reducing the total number of franchise units by 2.6%.

Several markets were more severely impacted during that time, with restaurants (-6.6%), personal care (-7.4%), and business services (-4.9%) experiencing the most closures. It may be no surprise that personal care and retail food, products, and services are among the fastest-growing franchise sectors, largely thanks to the market share opened up by pandemic-era closures.

Areas with the Fastest Franchise Business Growth

The pandemic caused historic population shifts, which are mirrored by regional growth in franchising. Three of the top ten states with the most inbound migration are represented in the top ten fastest-growing parts of the US for franchise development:

Georgia
North Carolina
Virginia
Arizona
South Carolina
Pennsylvania
Tennessee
Florida
Colorado
Maryland

Are Franchises Really Recession-Proof?

Franchise economics tend to insulate individual owners during times of economic uncertainty and contraction. Pricing power from suppliers, regional and national brand recognition, and a strong consumer base all contribute to franchising’s recession-proof pedigree.

To be clear, no system is recession-proof, a point franchise development companies tend to point out in the fine print. The top recession-proof franchise opportunities leverage franchise economics and operate in industries with relatively inelastic demand.

Essential residential services: Essential plumbing, HVAC, and other home service brands have steady demand during recessions. While elective services, such as smart home upgrades and new lighting installations, may decline, emergency services and repairs offer recession resilience in any part of the country.
Essential business services: Franchises that support other businesses, such as IT, accounting, or legal consultation, are equally valuable during downturns.

Economic Headwinds Facing Franchisors and Owners

Despite strong, consistent franchise growth, there are several immediate and future challenges facing franchise systems, many caused by policy uncertainty.

The T-Word

There is no doubt that tariffs negatively impacted many franchise systems in 2025. While felt unevenly across industries, many franchise systems faced increased operational costs on important equipment, materials, and finished products. The result? Pinched profit margins throughout the supply chain, despite considerable consumer inflation. Tariffs also forced many franchise suppliers to find new import partners, impacting supply chain operations and causing shortages in some industries.

Labor Shortages

Most pronounced in specialty fields like HVAC and plumbing, immigration policy and a half-decade of record-low unemployment have resulted in a labor shortage in some franchise verticals. This has increased labor costs, exacerbating price rises on materials, and affecting customers and staff in several ways, including:

Reduced hours and fewer service offerings
Slower response times
Higher employee turnover
Lower profitability

How Have Commercial Lending Rates Affected Franchise Funding?

Franchise funding is heavily reliant on commercial lending in the form of small business loans. Funding facilitates buying and opening a new franchise and provides liquidity to support capital investments in equipment, software or other assets.

There are several dedicated franchise lending companies, a subsector of the rapidly growing private credit market and often viewed as an extension of private equity operations. PE loves franchise systems for many reasons, but even these private funding sources are dealing with rising interest rates and a changing investment ecosystem.

Fewer Attractive Franchise Financing Options

After more than a decade of low interest rates, many lenders have tightened standards and increased interest rates. Today’s financial institutions are better capitalized than their 2008 predecessors and predisposed to limit exposure when the economic climate gets murky – which is exactly what has happened.

Commercial Lending Gets Strict

Private bank loans remain the most competitive, in terms of interest rates, though conventional loan rates have climbed steadily since January 2025. The 2025 average conventional business loan rate is between 6.7% and 11.5% APR, up 2%-6% from 2023.

Most lenders have tightened lending in the past months: Consistent themes are increased credit standards, higher capital requirements, and prerequisites for extended business history. For franchises, this has raised barriers for first-time franchise investors, especially those without several years of books to use during the application process.

SBA Loans (7A and CDC/504)

The Small Business Administration’s (SBA) loan program is provided by qualifying private lenders. In most cases, SBA loans have higher interest rates but longer repayment terms.

SBA 7A – 7A loans can be used for any business expense, including buying a franchise license and starting a business. As a result, 7A interest rates and applications are the most helpful indicators of fran-dev activity.

Since 2021, SBA 7A interest rates have nearly tripled, from a 2.69% 25-year-term rate in January 2021 to 6.03% in May 2023. Over the life of the loan, that’s a 153.01% increase in interest paid.

SBA CDC/504 – CDC or 504 loans can only fund capital investments in real estate, equipment, or machinery. Many 504 loans are joint-funded; a private lender and the SBA each contribute 50% of the loan amount.

Both types of SBA loans are typically for 25-year terms.

How Are SBA Loans Affecting Franchises?

Live Oak Bank is a franchise-focused lender that releases industry data on SBA loans quarterly. In Q3 2025, the highest volume of SBA loans was focused entirely on restaurant and quick restaurant franchises (e.g., coffee shops and drive-thru locations), reflecting a wider consumer trend of shying away from big-ticket purchases and leaning toward food and lifestyle spending.

Is It a Good Idea to Buy a Franchise Right Now?

The outlook is mildly optimistic. Franchise developers and investors may look forward to anticipated growth in most franchise markets. With total franchise units expected to grow 2.5% in 2025, a few markets should exceed the mean.

These franchise sectors have the highest projected growth:

Personal services: 4.3%
Quick-service restaurants and food services: 3.5%
Commercial and residential services: 2.4%

These franchise sectors have the slowest growth or the most projected decline:

Real estate: 0.7%
Lodging: 1%
Business services: 1.1%

The Macroeconomic Picture

Certain industries face increased exposure to broader economic risks. The federal funds rate is expected to drop under 4% in 2026. However, the uncertain stance of the Federal Reserve and the volatile current administration make additional household or commercial stimulus unlikely, and SBA loan amounts are expected to decrease from 2024 levels.

The Labor Debate

A strong labor market has increased labor costs across the economy in recent years, but this market appears to be cooling. In 2023, 85% of surveyed franchisors increased wages to attract or retain workers. However, wage growth has slowed some, with wages and salaries rising by only 3.9% in Q3 2024 compared to 4.5% in Q3 2023.

Franchise Growth: A Prediction

Franchisors should evaluate their in-house capitalization to provide short-term loans to prospective franchisees with excellent credit and a solid financial history. If the economy does enter a recession in 2026, franchises can capture market share by doubling down on marketing efforts in key regional markets. We anticipate total franchise output to exceed the IFA’s 2025 projection of $936 billion but fall short of its unit and employment growth.

We Love Talkin’ Franchising

Oneupweb is a leading franchise marketing agency with more than two decades of institutional expertise. With an integrated team of designers, writers, developers, and strategists, we’ve helped franchisors access new markets and provide value for their franchisees. See what we can do! Contact us here or call 231-922-9977 to get started.