Who’s Behind the Lease? How to Underwrite Franchisee Financial Strength

In the world of net lease investing, the name on the storefront is often not the name on the lease. From fast-food drive-thrus to auto service centers, many national brands operate under franchise models — and it’s the franchisee, not the brand, who holds the lease obligation. For investors, this presents a critical question:

Who’s really behind the lease — and can they pay it long term?

Underwriting tenant credit is central to risk-adjusted decision-making in single-tenant net lease (STNL) deals. But when the lease is held by a franchisee rather than a corporate guarantor, investors must dig deeper to assess financial viability.

Here’s how to do it right.

1. Understand the Franchise Structure First

Franchise systems vary widely. Some franchisees own one unit. Others operate dozens, even hundreds, across multiple states. Before you dive into financials, clarify:

  • Franchisee Type: Is it an individual owner/operator, a multi-unit operator, or a private equity-backed platform?

  • Entity Holding the Lease: Many leases are signed by a special purpose entity (SPE). Who owns it? Does it have a parent company guaranty?

  • Franchisor Involvement: Is there any credit enhancement, such as a franchisor guarantee or step-in rights?

These distinctions matter — not all franchisees are created equal.

2. Request and Review Franchisee Financials

When underwriting non-credit franchisee tenants, always request:

  • 3 years of Profit & Loss statements

  • Balance Sheets

  • Bank statements or liquidity verification

  • Debt schedules

  • Franchise agreement term + renewal options

Key financial benchmarks to evaluate:

  • Fixed Charge Coverage Ratio (FCCR): Measures ability to meet debt and lease obligations. Look for >1.25x.

  • EBITDAR Margin: Earnings before interest, taxes, depreciation, amortization, and rent. Indicates operational efficiency.

  • Net Worth / Liquidity: Multi-unit operators should have meaningful cash reserves and assets.

  • Unit-level Profitability: Is this specific store profitable or subsidized by other locations?

3. Look at System-Wide Performance

Even if you’re only buying a single-location property, understanding the broader franchisee portfolio provides critical context.

  • How many units do they operate?

  • Are they in expansion or contraction mode?

  • Have they ever filed for bankruptcy or defaulted on leases?

  • Are they current on all other rent obligations?

Platforms like NetLeaseWorld.com often compile franchisee profiles, including prior defaults, industry watchlists, and operating history across brands.

4. Benchmark Against Industry Norms

Not sure if your franchisee is underperforming or a top operator? Compare them against industry averages for:

  • Sales per unit

  • Operating margins

  • Rent-to-sales ratios (ideally below 10%)

  • Franchise failure rates by brand (publicly available through Franchise Disclosure Documents – FDDs)

5. Consider the Lease Structure as Your Backstop

Even a weaker franchisee may still be a viable investment if the lease terms protect you. Pay attention to:

  • Personal Guarantees or Parent Company Guaranties

  • Security Deposits or LOCs

  • Rent Escalations that track inflation

  • Strong default clauses and legal recourse

  • Long-term lease term (10+ years preferred)

Well-structured leases with solid operators — even without corporate credit — can generate excellent cash flow with above-market cap rates.

6. Use Third-Party Verification Tools

Sites like Placer.ai, Net Lease World, and others allow investors to:

  • Track real-time foot traffic to specific locations

  • Compare unit performance to regional competitors

  • Monitor trade area demographics and changes

This real-world data supplements financial underwriting and can reveal red flags like declining visits or changing customer behavior.

7. Understand Re-Leasing and Exit Risk

Even if a franchisee looks strong today, ask:

  • What happens if they default?

  • Is this location desirable for future tenants?

  • Are there alternative operators in the market?

Evaluate traffic counts, visibility, zoning, and site fundamentals. These attributes can protect your downside in the event of tenant turnover.

Final Thoughts: Franchisee Credit is the Silent Risk

Too many investors focus on brand recognition and ignore the party actually responsible for paying the rent. In franchise deals, tenant strength lives and dies by the operator — not the logo on the sign.

The good news? With disciplined underwriting and a firm understanding of lease structures, franchisee-tenanted properties can deliver premium yields with manageable risk.

🔎 Want help underwriting a franchise-backed deal?

At Net Lease World, we analyze the financial strength of franchisees every day. Whether you’re evaluating a single-unit Pizza Hut or a 100-unit Dunkin’ operator, our platform connects you with off-market listings, tenant profiles, and detailed credit reviews.

Get a second set of eyes on your next deal — or browse thousands of STNL properties at www.NetLeaseWorld.com.

If you’d like to speak to a Net Lease Investment Property expert, visit www.TDCommercialGroup.com to schedule a consultation.

Franchisee Underwriting FAQ

1. What if the franchisee won’t provide financials?

If a franchisee refuses to share financials, that’s a red flag. In net lease investing, transparency is key — especially when there’s no corporate guaranty. If the tenant is small, you may want to negotiate for additional protections like a larger security deposit, a personal guaranty, or a shorter initial term. Alternatively, move on to a deal with clearer risk visibility.

2. How can I tell if a multi-unit franchisee is financially strong?

Look for signs of operational scale and financial discipline: strong FCCR, consistent unit-level profitability, good liquidity, and a stable or growing portfolio. Bonus points if they are backed by private equity or operate across multiple brands — it often signals professional management and stronger creditworthiness.

3. Is a franchised tenant always riskier than a corporate tenant?

Not always. In fact, strong franchisees can outperform corporate stores in local markets due to hands-on management and community ties. However, because there’s no national balance sheet behind the lease, you must underwrite the individual operator thoroughly and structure the lease with risk in mind.