By Michael H. Seid, CFE, Managing Director, MSA Worldwide

In the first article in this series, I asked a question that will recur throughout these discussions: If we were designing the franchise system today, what would we do differently? I also suggested that every franchise system is perfectly designed to produce the results it is currently producing.

Franchise growth is a useful place to test this idea because growth is one of the results franchising has learned to recognize, measure, and celebrate exceptionally well. New agreements are visible. New locations are visible. New states and countries make good headlines. A large development commitment gives management something concrete to announce, a development team something to celebrate, and a publication something easy to rank.

None of that is wrong, because growth matters. A franchise system that does not grow may lose relevance, purchasing power, management depth, market presence, and the economics needed to support its franchisees. The problem begins when franchise growth stops being one measure of franchise system health and quietly becomes the definition of success.

Unit growth is evidence of expansion. It is not necessarily evidence of health.

The distinction sounds obvious. In practice, I am not certain we behave as though it is.

What Do We Celebrate?

There is a familiar rhythm at franchise conferences and in article after article in franchise publications. Development executives talk about lead generation and closing rates; brokers and franchise sales organizations explain how they can accelerate sales; franchisors announce development agreements. Publications recognize fast-growing systems — and conference audiences understandably want to hear from the people whose brands are adding locations.

Those are legitimate conversations. Franchise development is an important discipline, and a system that does not know how to recruit qualified franchisees has a serious problem. My concern is not that we talk about growth, but whether the balance of our attention has taught us to admire what is easiest to count while giving less attention to the measures that determine whether that growth can last.

The rankings themselves make this distinction. Entrepreneur’s Franchise 500 uses a much broader set of measures than unit growth alone, including support, closures and financial strength. Its separate fastest-growing list is deliberately based on net unit growth and explicitly says it is not a recommendation of any particular company. The methodology is not the problem — the larger question is what the franchise community chooses to celebrate most visibly.

• A new unit produces a ribbon cutting, but a franchisee whose margins improve by two points does not.
• Signing ten new franchisees makes a press release, but deciding not to sell a franchise because the candidate is wrong for the system rarely earns applause — and even sometimes earns litigation.
• A franchisee who builds a strong management team and decides to invest in ten additional units may create more durable value than ten unrelated franchise sales, but both produce the same headline unit count.

The number of franchises a system sells tells us something about demand. The number of successful franchisee organizations that want to invest again may tell us considerably more about franchisee profitability, confidence and sustainable franchise growth.

Three Different Generations of the Same Question

Franchising has seen enough cycles that we do not need to speculate about whether growth can conceal weakness. The better approach is to look at very different systems from very different periods and ask what their growth numbers told us — and what they did not.

There was a time when “Don’t cook tonight, call Chicken Delight” was part of the language of American consumer culture. Chicken Delight’s own history describes a system that grew to more than 1,000 outlets and became the largest fast-food company of its kind in North America. It was an early franchise phenomenon.

Its history is useful not because Chicken Delight disappeared — it did not — but because scale did not immunize the system from structural problems. Its franchise economics depended heavily on required purchases of equipment, mixes, and packaging rather than conventional royalties. That structure eventually became the subject of the landmark Siegel v. Chicken Delight antitrust litigation. The legal issues mattered, but the larger business lesson is broader: the economics and practices that helped finance rapid expansion became part of a system that later had to be reconsidered. At the same time, competition intensified and consistency across locations became increasingly important.

Chicken Delight was not poorly conceived, because it grew. It was successful enough to become culturally recognizable and that is precisely why it is interesting. A system can be very good at producing yesterday’s success while the market, law, competitors, and customer expectations are moving somewhere else.

Several decades later, Quiznos offered a different lesson. At its peak the chain had more than 5,000 restaurants and was one of the most celebrated franchise growth stories of its period. Quiznos executives sat on the IFA board, and Quiznos was able to redefine its system economics through a securitization. It also became the subject of extensive franchisee litigation involving, among other issues, supply-chain costs, advertising, unopened locations, and the economics of the relationship. The brand later entered bankruptcy and contracted dramatically. It remains in business today and is pursuing revitalization, which is important because contraction is not the same thing as disappearance.

The mistake would be to reduce Quiznos to one cause. Competition mattered, real estate mattered, consumer preferences mattered, and franchisee economics and the supply chain relationship were heavily disputed. Management decisions and the culture of management mattered. But the more important observation for this series is simpler:

Growth did not tell us they had problems.

A system can add locations while unit-level weakness is accumulating underneath the headline. Subway has shown us that for decades. New openings can temporarily mask closures, transfers, dissatisfied franchisees, weak capitalization, churning, or support costs that the franchisor has not yet learned how to absorb. By the time those signals become visible in net unit counts, the structural issue may have existed for years.

Xponential Fitness gives us a contemporary and quite different example. It should not be described as a failed or vanished system. The company continues to operate a large portfolio of boutique fitness brands and, according to the Federal Trade Commission, had approximately 2,500 studios operating in the United States when the agency announced a settlement in March 2026.

The FTC alleged that Xponential had misrepresented or failed to disclose material information involving opening timelines, costs, executive litigation and bankruptcy history, franchisee turnover information, and the timing and completeness of franchise disclosure documents. The settlement included $17 million for franchisee redress. Xponential resolved the matter without the need for us to decide the merits ourselves. The relevance here is not to equate Xponential with Chicken Delight or Quiznos. Their facts and eras are entirely different.

The relevance is that a large and visibly expanding system can still be judged on questions that unit growth cannot answer: What were franchisees told? How many sold locations actually opened? How long did openings take? What happened to operators who left? Were the economics and risks sufficiently transparent for a candidate to make an informed investment decision? These are system-health questions. Unit count alone cannot answer them.

Growth Can Hide Different Problems — and Contraction Can Hide Improvement

This is why I resist using unit count as a shorthand for quality in either direction. A growing system can be weakening, while a shrinking system can be getting healthier.

Subway grew to more than 27,000 U.S. restaurants at its peak and ended 2025 with roughly 18,773 after a decade of net domestic contraction. Going back to the Coble and LaFalce hearings in the late 1990s, the problem of churning at Subway was well known — and still the system grew. That history raises important questions about market density, unit economics, franchisee relationships, and whether the system had expanded beyond the level its markets could sustainably support. It also puts into question its recurring reliance on discounting as a response to unit performance challenges instead of improving unit performance — something we will discuss later in this series. But it would be equally simplistic to say that every closure is evidence of continuing failure. A mature system may need to rationalize locations, improve market spacing, modernize weaker units, or allow marginal operators to exit before returning to healthier growth. Neighborhoods change, and what was a perfect location ten years ago may be irrelevant in that same spot today. Just consider the dry-cleaning industry for more examples.

Steak ‘n Shake illustrates the other side of that point. After sustained losses, the company converted a substantial part of its company-operated base to its franchise model. By year-end 2025 its footprint remained far below earlier levels, but the company reported sharply improved same-store sales. Whether every element of that model belongs somewhere else is not the question. The lesson is that contraction, restructuring, and a change in operating architecture can sometimes be part of recovery — rather than evidence that management should simply chase the lost unit count.

Healthy growth is not the maximum number of units a system can sell. It is the amount of growth the system can support without weakening the economics, brand or relationship that make further growth possible.

The Harder Measure: Unit Economics

If franchise unit count is easy to count, unit economics and franchisee profitability are harder — and less comfortable.

Average unit volume is useful, but it is not the same thing as profitability. Revenue does not tell us what remains after royalties, advertising contributions, occupancy, labor, cost of goods, debt service, local marketing, technology fees, required purchases, and the capital needed for remodels or equipment replacement. A system can report rising average sales while the franchisee’s return on invested capital is deteriorating.

This is why the most important growth question may not be “How many franchises can we sell next year?” It may instead be, “How many of our existing franchisees can earn enough, retain enough capital and build enough management capability to want — and be able — to invest again?”

The answer will differ by market. A unit that is sustainable in suburban Ohio may require a different revenue level in coastal California. Labor, occupancy, logistics, taxes, and local competition change the economic equation. This is another reason I prefer contextual practices to best practices. There is no universal gross-sales number that makes a franchise healthy.

And the analysis should include the franchisor’s economics as well. How much does it cost to recruit a new franchisee? How much initial training and opening support do they require? How many units can the field organization support effectively? What does turnover cost? What is the cost of replacing a failed franchisee with another first-time owner? How much infrastructure must the franchisor add to support the next fifty units?

A franchisor can produce impressive development revenue while creating continuing support obligations that make each additional unit less attractive economically. It can also accept somewhat lower revenue from a sophisticated franchisee organization and receive contracted development, lower incremental acquisition cost, stronger management, and a more predictable continuing royalty stream. This is why we should challenge the assumption that rapid growth — or reliance on third-party recruitment — necessarily improves the prospects for sustainability. We will examine that more closely when we turn to the changing franchisee organization.

What Items 19 and 20 Tell Us — and What They Do Not

If we are going to take franchise system health seriously, we also need to challenge how much weight we place on the two parts of the Franchise Disclosure Document (FDD) most often used as shorthand for economic performance and system movement: FDD Item 19 and FDD Item 20.

FDD Item 19 is important. When a franchisor chooses to make a financial performance representation, the Franchise Rule requires the representation to have a reasonable basis and to be included in Item 19. But an Item 19 is still a disclosure, not a complete economic diagnosis. Average unit volume is not return on invested capital. Historical sales do not necessarily tell a candidate what labor, occupancy, debt service, technology, required reinvestment, working capital, and other costs will do to the economics of a new unit in a particular market. Even a well-constructed Item 19 can be highly relevant and still leave unanswered the question a sophisticated candidate ultimately cares about: Is this a good use of my capital?

FDD Item 20 is equally important and equally easy to overread. It shows growth and owner turnover in the system, and provides contact information that allows a candidate to speak with current and former franchisees. Those are valuable signals. But the tables do not tell us why a location closed, why a franchisee transferred, whether a development agreement failed to become an open unit, whether an operator left because the economics were poor or because the franchisor properly removed a weak operator, or whether a shrinking footprint reflects deterioration or intentional rationalization. The numbers require interpretation.

That is the challenge to the practical relevance of FDD Items 19 and 20. They remain legally important and useful. The mistake is treating them as though they are sufficient measures of system health. A board, a prospective franchisee, and a sophisticated investor should want the questions behind the tables: profitability by relevant cohort, time to break even, capital required after opening, closures and transfers by cause, the percentage of signed development obligations that actually open, repeat investment by successful franchisees, and the cost to the franchisor of supporting the growth it has sold.

The disclosure document can tell us a great deal about a franchise system. It cannot relieve management or a prospective franchisee of the obligation to understand the business behind the disclosure.

The franchise community is not without ideas for improving this disclosure. The International Franchise Association has proposed a more modern FDD approach, including an executive summary, a more conversational question-and-answer format, clearer presentation of cumbersome tables, and a better use of Items 7, 19, 20 and 21 to tell the story of franchise system health. I think that direction is constructive because better disclosure should make the business easier to understand, not merely easier to document. But I would not expect the FTC’s current Franchise Rule review cycle to produce a major substantive redesign in the near term. The Commission’s current 2026 activity has focused on extending the existing information-collection approval while the Rule remains under review, not on a proposed wholesale rewrite of the disclosure architecture. That makes voluntary improvement by franchisors — and pressure from the franchise community for better disclosure — more important, not less.

The Cost of Selling What Is Not Ready to Grow

There is a point at which franchise development stops creating value and begins borrowing against the future.

Every new franchisee arrives with expectations. They expect a business model that can be operated economically, a brand that can attract customers, training that prepares them to perform, technology that works, supply arrangements that are commercially sensible, and support that is relevant when conditions change. The franchisor, in turn, expects standards to be followed, fees to be paid, and the franchisee to invest enough capital and management attention to protect the brand.

When a system sells faster than its infrastructure, unit economics or management capabilities can support, the problem does not appear immediately on the development report. It appears later — in delayed openings, transfers, defaults, franchisee dissatisfaction, lawsuits, weak remodel compliance, deteriorating locations, and eventually closures.

That lag is one reason growth can be deceptive. Franchise sales are recorded now — but the consequences of poor franchisee selection or weak economics may arrive years later, under a different development executive, a different chief executive, and sometimes a different owner.

A franchise system that sells more than it can sustainably support is not creating sustainable franchise growth. It is moving tomorrow’s problems onto today’s development report.

The Conference Hall Is Not the Wrong Room

I have criticized a lot of conference programming over the years, but I do not think franchise conferences are the wrong place for these conversations. They may be the most important place to have open discussions.

The IFA Annual Convention, Franchise Leadership and Development Conference (FLDC), Multi-Unit Franchising Conference (MUFC), and other major events convene smart people and move ideas through franchising faster than almost any other institution. That influence matters. What receives the main stage, what fills the breakout rooms, and what earns recognition signals what the franchise community believes success looks like. But as incumbent inertia can damage the future of a brand, we should also be more thoughtful about who we put on those stages. Success demonstrated once is worth hearing about. Success understood well enough to be replicated, adapted — or even abandoned when circumstances change — may be considerably more instructive.

Development sessions belong in these events, as do discussions of lead generation and franchise sales. It should not surprise anyone that the only course mandated for achieving the CFE designation is Fran-Guard™. But unit economics, franchisee profitability, support capacity, succession, transfer rates, failed openings, system rationalization, and the economics of reinvestment should be equally central.

The franchisee who turns three marginal locations into healthy businesses may have more to teach us about sustainable franchising than the executive who signs one hundred agreements.

The same is true for publications and rankings. Growth and closures are worth measuring. But the measures that are harder to obtain may be more important: franchisee profitability, repeat investment, turnover, franchisee capitalization, management depth, time to break even, support cost per unit, and whether franchisees are building wealth rather than simply producing top-line royalty revenue.

I would much rather attend a conference session titled “Why Our Growth Plan Was Wrong” than another session promising a new formula for doubling franchise sales. The person willing to explain what did not work, why management missed it, and what they changed may be the person with the most useful experience in the room.

What Should a Board Be Measuring?

Boards and investors understandably want growth, and management teams are often compensated for growth. The challenge is not to eliminate franchise growth as a measure but to put it in the company of measures that tell us whether the growth is creating a stronger, more sustainable franchise system.

I would want to understand not only gross openings but also net openings, closures and transfers. Not only the number of franchisees recruited, but how many existing franchisees are expanding. Not only average unit volume, but the distribution of unit-level economics and how much capital franchisees retain after required reinvestment. Not only field-visit activity, but whether support is improving performance. Not only signed development agreements, but also whether those agreements turn into open, sustainable units on schedule.

And I would want to know what the system costs to grow. How much acquisition cost is attached to each new franchisee? How much of the growth comes from third-party sellers, and why do internal recruitment staff need that crutch to be productive? How much continuing infrastructure must be added? What is the cost of onboarding another first-time owner compared with adding another unit for an experienced operator? What happens to the franchisor’s economics when the system changes the class of franchisee organization it recruits?

Those questions do not produce one simple score. That may be why they are less likely to appear on a trophy.

What is easiest to measure should not become what is most important to manage.

Before Turning the Page…

Article One asked us to reconsider the assumptions embedded in the franchise system. This article has focused on one of the most visible of those assumptions: that adding units is itself evidence that the system is healthy.

The examples are deliberately different. Chicken Delight was an early franchise phenomenon whose economic structure and legal environment changed around it. Quiznos demonstrated that extraordinary development could coexist with serious franchisee disputes and structural economic questions. Xponential shows that even a contemporary, sophisticated and still-operating platform can face regulatory scrutiny over the information and processes supporting franchise sales. Subway reminds us that scale can require later rationalization. Steak ‘n Shake reminds us that contraction and redesign can sometimes improve the business.

None provides a best practice to copy. That would contradict the purpose of this series. They give us questions to ask in context.

Growth is not the objective. Sustainable growth is the result of a franchise system that works.

If the health of the franchise system increasingly depends on franchisees that can build management organizations, invest repeatedly, assume different responsibilities and grow without requiring the franchisor to recreate the same support infrastructure at every unit, then the franchisee itself has become part of the system-design question — and the franchisee has changed. Which takes us to the next question:

Who, exactly, are we designing the franchise system for?

That is where Part Three will begin.

If this series raises questions about your own system — or if you’d like a candid conversation about what it would take to strengthen it — we’d welcome that discussion. MSA Worldwide has been helping franchisors build systems that are genuinely worth owning, worth operating, and worth growing for nearly four decades.

Michael Seid is Managing Director of MSA Worldwide. You can reach him at mseid@msaworldwide.com or 860-523-4257.