Craig Tractenberg of Fox Rothschild.

The 2019 “Best and Worst Franchise” rankings has 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. Before we review the rankings, we should review the methodology of FRANdata, because the interests of franchisees buying into a franchise system may be very different than the interests of lenders, investors and competitors.

Selecting the franchise brands for consideration is no small task. Over 3,000 brands had to be considered, but FRANdata would consider only franchisors that had at least 20 franchise units at the beginning (2013) and the end of the examined period (2017). 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 can be replicated.

Criteria Used for Evaluation

The five criteria used for evaluation were:

• System sustainability;
• System demand;
• Value for investment;
• Franchisor support; and
• 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 healthy and sustainable. Sustainability was weighted 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. The number-one complaint of franchisees is when they cannot make money despite the reputation of the franchisor. If the franchisor employs punitive remodel requirements, cannibalizes franchisees through competition or requires participation in money-losing advertising offers, the success of the franchise system will be eroded at the franchisee level.

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.

Winners and Losers

Freddy's Frozen Custard & Steakburgers chain celebrates its second-straight year atop the high-investment category of Forbes' list of Best Franchises to Buy with a 29% unit growth rate. This Kansas-based grill has grown to more than 340 locations with chainwide revenue of $474.7 million in system. Looking at their March 2016 FDD, they represent average annual sales of $1.6 million with a $1.2 million initial investment with 30% net profit on average at the franchisee level. Notably, number three on the same list was Culvers ButterBurgers and Frozen Custard, a Wisconsin-based direct competitor, with an initial average investment of $3.342 million and a five-year unit growth rate of 6%. A visit to these brands show a similar welcoming environment for families to sit down and enjoy burgers and custard, with substantial business through their drive-thru windows.

The top 10 list of winners did not include major or publicly held burger or quick service restaurant companies, which should not be ignored. These companies are countering the trend of less restaurant visits in favor of takeout or delivery. The May 2019 Restaurant Finance Monitor lists publicly held McDonald's Corp., Del Taco, Brinker International, The Wendy's Co., YUM Brands, Dine Brands Global, Dunkin' Brands and Denny's all strategically aligning with delivery partners and driving costs for the deliveries down, which ultimately benefits their customers. The companies which provide the best customer solutions for delivery will be the industry leaders in the future.

Will the franchise company have the money to invest into new technology? Not only will delivery apps provide better customer experiences, but look for more ordering through customer kiosks on the floor of the restaurants that provide quicker ordering, and in some cases, higher average checks per transaction.

On the Forbes loser list, the first and second worst franchises to buy were both car rental franchises. Thrifty Car Rental, with an average initial investment of $6.5 million has a five-year growth rate of -8.2%. Dollar Rent a Car, which is reported to have the same $6.5 million average initial investment has a five-year growth rate of -7%.  And just because burgers appear in the winning category, you need to look underneath the hood sometimes. The wonderful Steak & Shake chain based in Indianapolis has 580 units, with average unit sales of $1.8 million, lost 40 company restaurants since last year. According to the Restaurant Finance Monitor, first quarter same store sales at Steak and Shake lost 7.9% and guest counts were reduced by 7.7%. Compare Chick-fil-A, which reports “nonmall” average weekly sales of $5,724,126 in 2018.

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.