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2 Comments

Ed Teixeira's picture

Franchise Ranking

Mario, I see a nice slow pitch I can slug. So many franchise rankings are based upon a few general categories, which exclude a number of important variables that determine how well a franchise system performs. The result is that a system like Quiznos can become the darling of franchising because of its rapid growth and being ranked a top franchise by a leading publication. At FranchiseGrade.com we developed the Franchise Perormance Index, which includes a number of performance variables, to identify and rank healthy franchise systems. Some of our 2016 Top 500  franchises at the top of the rankings don't represent the most highly recognized brands but have performed well. Strong growth, no litigation, Item 19 disclosure and low franchisee turnover. We go so far as to grade the quality of the Item 19 FPR. That's the reason why some so-called well-known franchise brands are either at the bottom of our ranking or not listed at all. I always felt that it's the quality of a franchise system that truly matters, not its size. 

Darnelle White's picture

How much can I make comes first. Then risk.

Factors included each franchise company’s growth rate, size, the number of years a company had been in business, startup costs, financial numbers, litigation history, terminations and certain financing data. —  Atty Mario Herman

Those factors are out of order. Here are the two most important measurements for a franchise buyer.

1.) Obtain franchise store EBITDA first: Financial numbers come first and foremost above all else. A franchise buyer should find out— how much can I reasonably make if I'm just an average joe in this system? How much do all of my peers on average make in store EBITDA? What is the value now for the future cash flow for the term of my store? You'll want to know EBITDA for all 1-, 3-year-old and then all stores in the system.

This type of measurable data may be hard to find. It may be intentionally hidden. Yet without it, no franchise investment should be made.

Let's not kid ourselves. A lucrative investment can buy an investor peace of mind and job satisfaction. If a franchise buyer can easily make a boatload of money, they can put up with a lot of garbage. If their money is just eaten up, the nicest franchisor will at best be an irritant and at worst, the Devil himself.

2.) Then obtain risk metrics: In regard to the specific franchise system a buyer looks into, what is the number of terminations of franchises by the franchisor, ceased operation (i.e. owner went under), and overall franchise turnover rates? These published metrics gauge the risk of a franchise business. For example, if a franchise system is churning stores at 15 percent a year while an independent small business with similar revenue will lose its owners at only 10 percent a year for five years, then the safest path is to invest in the independent business. Or look for a competitor franchise with less than 10 percent turnover rate. (This franchise turnover rate data is available for a small fee with researchers such as FranchiseGrade.com and from many Franchise Disclosure Documents)

Is this sector rising as a whole? Or is it in its sunset stage? Would my store be in the shrinking video store, electronics retail shack, or quick print shop sector that seems to be winding down? Or would I be in the rising home healthcare, fast-casual restaurant or select service hotels sector?

After that an investor can compare franchisee satisfaction rates, risk of franchisor bankruptcy and the qualitative information on franchisee engagement, franchisor management style, etc. But the foremost consideration is (1) how much can I make for the life of my business investment and (2) at what risk.