Putting out a list of top franchises is a tricky undertaking. I should know — I’ve been on the receiving end of some pointed criticism for a few of the choices I’ve made in the past. But that just comes with the territory, and I welcome the debate from all sides.
In my experience, for as long as the ranking methodology makes sense and the list is not intended as a mere marketing tool, people tend to respect a publication that takes a stand and expresses a definite point of view.
I appreciate rankings that are based on quantitative measures. But it’s so important for the criteria to be sound, because the results are only as reliable as the choice of inputs. As they say, garbage in, garbage out.
In this particular case, Forbes magazine, with the help of Robert Bond, chief executive of the World Franchising Network (a franchise database) and publisher of Bond’s Franchise Guide, took a sample of 110 of the most established franchise names and ranked them according to five variables:
- average initial investment (franchise fees plus equipment costs)
- total locations (the more the better)
- closure rate (the number of closings in the last three reported fiscal years divided by the total number of existing locations)
- growth in the number of U.S. outlets in the last three years
- and the number of training hours as a percentage of startup costs (the more support from the home office, the better)
Overall footprint and survival rates carried the most weight.
This list obviously favors well-known franchises with large footprints. Whether these opportunities offer the best bang for your buck is questionable.
But the real root of the controversy is Forbes’ emphasis on franchise closure rates. Based on its FDD, Snap-on Tools was considered to have had zero franchise closures in the past 3 years, and this propelled it to the very top of the rankings. Critics of Snap-on (and other mobile tool franchises) on the other hand, claim that, while it may be true that there were no franchise closures during that period, more than 1000 franchises were reacquired (for a small amount) by the franchisor only to be re-sold to new franchisees — a negative practice called “churning”.
In response to the criticism, J.J. Colao, the writer of the original Forbes article, posted a follow-up piece where he explains his ranking methodology in greater detail. He says, “Because of the ambiguous nature of reacquisitions, we did not include this figure in our tally of closures over a three-year period. In general, this worked well. For mobile tool dealers like Snap-on, this turned out to be a significant advantage. Without fixed locations to shut down, Snap-on generally takes back struggling franchises for a small cash payment or the forgiveness of debt. Very few are ever terminated.”
With refreshing humility, he goes on to say, “If the goal was to express the health of a system, then stating that the Snap-on franchisees experienced zero closures from 2008 to 2011 is misleading. Clearly, franchisees failed but were not accounted for under conventional methods. For the future, a better metric may indicate churn, whereby we take all transfer events, including reacquisitions, into account.”
So, there you have it.
Here is Forbes Magazine’s Top 20 Franchises for the Buck. What do you all think?
1. Snap-On Tools
7. Liberty Tax Service
8. Merry Maids
9. The Maids International
10. Jimmy John’s
11. Papa Murphy’s
12. Jack in the Box
13. Dunkin’ Donuts
14. Burger King
16. Edible Arrangements
17. Great Clips
18. Anytime Fitness
19. Pronto Insurance (Ambrosio’s note: Why was Pronto Insurance included in the sample, which supposedly consists of 110 of the most well established franchises?)
20. Massage Envy