Robert Holmes recently published a well researched article on TheStreet.com, a popular stock market website, where he talks about the benefits of investing in the shares of publicly-traded franchise companies.

He starts the article with an overview of the franchise business model, and then goes on to discuss the performance of 10 top publicly-traded franchise companies — a majority of which have outperformed the general market (i.e. the SP500) year-to-date.   The 10 companies that he featured are:

1.) McDonald’s (MCD) – up 7.5% YTD (all figures are as of May 26, 2011)

2.) Denny’s (DENN) – up 12.9% YTD

3.) DineEquity (Applebee’s, IHOP) (DINE) – up 10.2% YTD

4.) Krispy Kreme Donuts (KKD) – up 23% YTD

5.) Jack in the Box (JACK) – up 3.2% YTD

6.) Sonic Corp. (SONC) – up 12.7% YTD

7.) Tim Horton’s (THI) – up 10.6% YTD

8.) AFC Enterprises (Popeyes) (AFCE) – up 10.3% YTD

9.) Winmark Corp (Plato’s Closet, etc) (WINA) – up 9.5% YTD

10.) Pizza Inn (PZZI) – up 20% YTD

This article got me thinking about the pros and cons of  investing in a franchise company’s stock versus buying a franchise.  I’ve been on both sides:  I used to own a UPS Store, which I sold in 2006, and I’ve invested some of the proceeds in stocks.

The Pros of Investing in Stocks of Publicly-Traded Franchise Companies:

1.  Investing in stocks of publicly-traded franchise companies makes it possible for someone to diversify his investments across different franchise companies in a variety of industries and geographic regions.  Buying a franchise is like  making one big bet on a single franchise concept in a unique location.  Talk about putting all of one’s eggs in a single basket!

2.  Since the stock market is the ultimate liquid marketplace, it is very easy to cash out on one’s investment at any time during regular trading hours.  Selling one’s franchise business takes a lot more time and effort to complete, and there is no assurance that a buyer will step in when the owner is ready to retire from the business.

3. There is a lot of public information available to investors, including quarterly earning reports, which makes it easier for an investor to evaluate how much a company is worth.  On the other hand, prospective franchisees have to decipher vague, general statements made in Franchise Disclosure Documents — most of which do not make any specific earnings claims.

A prospective franchisee has to rely on information provided by current franchisees and it’s not very easy to determine if the data received is specific to the particular franchisee or representative of the entire network.

The Cons of Investing in the Stock of Publicly-Traded Franchise Companies:

1.  For me, the biggest negative of investing in stocks is the lack of control over the direction of the share price.   There is not much a small investor can do to influence the decisions of management when it comes to strategy, spending, and the general direction of the company — much less any control over the actual performance of the stock.  There is a certain feeling of helplessness when one invests in stocks.

A franchisee on the other hand can take specific actions to determine the growth and future of his own small business.  For me, this feeling of power over one’s fate is the source of true happiness and contentment.

2.  Whereas a prospective franchisee can take out an SBA-loan to finance up to 80% of his initial investment, a small investor cannot borrow money to purchase up to 80% of the share price of a publicly-traded company.  Brokers allow investors to buy stocks on margin but margin requirements are higher (usually 50% of the stock price) and buying stocks on margin doubles the risk of investing.  It’s not something I would recommend to the average individual investor, especially those who do not have the time to focus on trading during regular working hours.

The decision whether to buy a franchise or invest in the franchise company’s stock boils down to the investor’s goals and objectives, and what he finds most fulfilling and important in life.

Click here to read “Why Franchises Are Good for Investors” by Robert Holmes at TheStreet.com.

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