Best And Worst Franchise Rankings: Understanding The Methodology

Fox Rothschild LLP

Fox Rothschild LLPThe 2019 “Best and Worst Franchise” rankings have been published by Forbes. The franchise analytics firm, FRANdata, was commissioned to apply a methodology that ranks franchise brands on “health and appeal,” from the perspective of a prospective franchisee. This is the fifth report FRANdata has produced for Forbes, this time using information spanning the five-year period between 2013 and 2017. While the rankings are interesting, the methodology used by FRANdata must also be considered because the interests of franchisees buying into a franchise system may be very different than the interests of lenders, investors, and competitors.

Over 3,000 brands had to be considered, but FRANdata would consider only franchisors that had a least 20 franchise units at the beginning (2013) and the end (2017) of the examined period. The brand needed to demonstrate it had been actively marketing franchise opportunities and enough performance history over the five years to be considered. These brands needed a sufficient number of franchisees to demonstrate that the business is adaptable to different geographic markets, and that their performance could be replicated.

The five criteria used for evaluation were: (1) system sustainability; (2) system demand; (3) value for investment; (4) franchisor support; and (5) franchisor stability.

Success is built on the sustainability of the system. Fast growth and demand for franchises is effectively only a snapshot of the value of that brand, in terms of business opportunity and consumer perspective. Fast growth only has value if that growth is health and sustainable. Sustainability was weighed more heavily to emphasize the importance of a healthy system to the long-term success of franchise business owners.

The primary measure of an investment is return on investment. The value of investment criterion assesses and rewards brands that allow transparency into franchisee unit earnings data in the Franchise Disclosure Document. This metric assesses and highlights brands that allow transparency into this data, have sound unit economic performance, and offer operators a possibility of achieving financial success.

Franchisor support and franchisor stability also are of great importance to potential franchisees. Support is important because it has been shown that the amount of initial and ongoing support provided by the franchisor directly correlates to the success of franchise units in the system. Additionally, one of the benefits of joining a franchise system is the level of operational and financial knowledge and support a franchisee can derive from the franchisor.

The criteria did not list certain other issues that lawyers might consider as important, such as litigation and bankruptcy history of the company or its key employees, balance sheet contingencies, trademark strength, and trends in the marketplace that might affect future operations or profitability, such as labor or finance costs.

For the franchise buyer, the decision often is made on culture and lifestyle, rather than plain metrics. The buyer needs to invest themselves into the brand and be proud of its investment. The same is true of any other investor into a franchise company. The brand is everything, and you must adopt the brand to be successful. It is good to see that so many brands are growing through strong franchisee and investor interest.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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