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Posted on Mar 31, 2011

Understanding Franchise Opportunity Rankings: The Entrepreneur Franchise 500

[caption id="attachment_4314" align="alignright" width="375" caption="Best in Show: Entrepreneur's Annual Franchise 500 Rankings"]Entrepreneur Franchise 500 Rankings - Top Ranked Franchise Opportunities[/caption]

You probably viewed it on the web or bought a copy at your local newsstand. Maybe you've run across the glossy franchisor advertisements in the magazine itself. Perhaps you've even seen it referenced in the banner ads, pop ups, and sponsored links paid for by Franchises boasting of a #1 ranking in a certain category. Chances are, if you're looking for a franchise opportunity, you've at some point viewed the latest edition of the Franchise 500 published by Entrepreneur each January (now in its 32nd year ranking the franchise industry).

The Franchise 500 list is the most well-known and commonly cited of the various franchise rankings, but some confusion surrounds the methodology behind Entrepreneur's ratings. Through a series of articles on FranchiseHelp.com, we'll take a closer look at what goes into compiling these rankings (those from Entrepreneur and those from other sources) and what a prospective franchise buyer can glean from them when trying to make an informed decision about joining a particular franchise system.

So what can you, as a prospective franchisee, really take from reviewing the Franchise 500?  Is a top-10 ranked franchise better than a lower-ranked franchise system?  Is a #1 ranked franchise in a particular category inherently better than all the others in that category?  What is the relative difference between say, the 50th-ranked franchise vs. the 100th-ranked franchise in a given year?

Understanding The Franchise 500 Rankings

Each edition of The Franchise 500 ranking always includes a straightforward explanation of what goes into its ranking -- and what the ranking is not. Although the precise formula is not revealed, the most important factors that go into the ranking, according to the explanation, include “financial strength and stability, growth rate and size of the system.” Notably, the ranking does not take into account franchisee satisfaction in ranking a franchise organization. As the explanation states, “[The ranking does not] measure subjective elements such as franchisee satisfaction or management style, since these are judgments only you [the prospective franchise owner] can make based on your own needs and experiences.”

The Franchise 500 explanation goes on to recommend thus: “Remember that the Franchise 500 is not intended to endorse, advertise or recommend any particular franchise. It is solely a research tool you can use to compare franchise operations.”

We contacted Entrepreneur while researching this article to request further explanation of how their rankings are calculated, but they declined to comment beyond the methodology explanation already provided on their website.

Volatility in the Top 10 Franchise Ranking Positions

The following chart shows the top 10 ranked franchisors from the Franchise 500 survey in 2011, 2010, 2009, and 2008. We’ll use this chart to explore some patterns and trends emerging from the top 10 ranked franchise systems during these years.

Entrepreneur Franchise Rankings: Top 10 Franchises (2008-2011)

Position 2011 Ranking 2010 Ranking 2009 Ranking 2008 Ranking
#1 Rank Hampton Hotels Subway Subway 7-Elven
#2 Rank AMPM McDonald's McDonald's Subway
#3 Rank McDonald's 7-Eleven Liberty Tax Dunkin' Donuts
#4 Rank 7-Eleven Hampton Hotels Sonic Drive-In Pizza Hut
#5 Rank Supercuts Supercuts Intercontinental Hotels McDonald's
#6 Rank Days Inn H & R Block Ace Hardware Sonic Drive-In
#7 Rank Vanguard Cleaning Dunkin' Donuts Pizza Hut KFC Corp.
#8 Rank Servpro Jani King UPS/Mail Boxes Intercontinental Hotels
#9 Rank Subway ServPro Circle K Domino's Pizza
#10 Rank Denny's AMPM Papa John's Re/Max LLC

The data reveals that the Franchise 500 had considerable volatility in the top 10 ranked franchise systems when the data is viewed for a 3-year span for the most recent years evaluated. In fact, only 2 franchisors from the top 10 in 2009 appear again in the 2011 top 10: Subway (ranked #1 in 2009 and #9 in 2011) and McDonald’s (ranked #2 in 2009 and #3 in 2011). Subway and McDonald’s were also the only 2 franchisors to appear as a top 10 brand in all of 2008, 2009, 2010, and 2011. Sonic Drive In, pegged at #4 in the 2009 ranking, didn't even make the list in the 2011 edition. Of all the top-10 listed franchises in 2009 which made the ranking again in 2011, UPS Store/Mail Boxes Etc. took the largest drop, falling from #8 to #46.

If viewed across the 3-year span from 2008-2010, 6 out of the 10 franchisors listed in 2008 did not repeat as top-ranked franchises in 2010. Viewed across a 2-year span, the ranking volatility depends on which consecutive years are being evaluated: for example, only 3 franchisors did not make a repeat appearance in the top 10 in 2011 after making it in 2010: H & R Block (#6 in 2010, # 27 in 2011); Dunkin’ Donuts (#6, #15); and Jani King (#8, not listed in 2011). But only 50% of the top-10 ranked franchises repeated in 2010 after being listed in 2009. Likewise, only half of the 2008 top-10 ranked franchises repeated in 2009.

#1 Franchise Ranked in a Category: Bragging Rights with More Consistency

The Franchise 500 segments each franchisor in the ranking into a broad classification, followed by a more specific industry category. In the 2011 ranking under “Automotive”, for example, there are several more specific categories, the first three being “Appearance Services”, “Oil Change Services”, and “Rentals and Sales.” Franchisors ranked #1 in each category welcome the designation as a bragging right and typically use the accolade to promote their franchise opportunity in as many media channels as possible. Indeed, the magazine edition of each Franchise 500 is packed with #1 category advertisements from franchisors, and PR releases are typically fired off to the wire agencies promoting the franchisor’s number #1 placement in their category.

There is much more consistency in the #1 rankings for each category listing as compared to the overall rankings. In exact-matching category classification titles in 2011 v. 2010, the #1 ranked franchisor in each category remained the same 62 times v. 27 changes for the category leader. In reviewing 2011 category leaders v. 2009 category leaders with exact-matching classification titles, 52 franchisors kept their top spot, while 34 were replaced with new category leaders.

Advice For Prospective Franchisees When Reviewing the Franchise 500

Given the data issues, ranking fluctuations, and other revelations described above, how can a prospective franchisee make the most out of the Entrepreneur rankings? Given what our analysis has revealed, here are our recommendations:

  • Heed the advice of the Franchise 500 ranking explanation. As Entrepreneur indicates, the ranking is not an endorsement or recommendation of any particular franchise system. Furthermore, the ranking doesn't take into consideration subjective elements of the franchise such as franchisee satisfaction, franchisor support of its franchisees, franchisee profitability, and relationship issues between Franchisor and Franchisees. These aspects not covered in the ranking are extremely important factors in choosing a franchise system and need to be investigated thoroughly by a potential franchisee.
  • Look at several years of placement data in the Franchise 500 when considering any particular franchise investment, as overall rank from year-to-year can fluctuate considerably. Fall outs or free-falls from the ranking from one year to the next should prompt questions to the franchisor for the reasons why this may have happened. Steady increases up the Franchise 500 chart are better than sudden “flash in the pan” elevations to the top 10 followed by an exit from that lofty ranking in the following year. The former indicates consistent and steady (healthy) growth; the latter is usually a symptom of system over-expansion followed by closures. Previous years' top 10 rankings information is available on the internet, though you may have to visit your local library to see prior editions of the full Franchise 500 rankings.
  • Pay attention to a brand's staying power: consistent annual placement as a franchisor category leader is a strong sign, demonstrating continued performance in the segment in which the franchisor does business. Comparing same-category franchise systems may very well have more value for a prospective franchisee than comparing overall rankings since one’s search for a franchisor will at some point be narrowed down to few industry-specific sectors and thus the comparisons between franchise systems within a category will be more relevant.
  • Make sure you are comparing “apples to apples”. Are you comparing one franchise that shows worldwide units vs. another one that just reported or only has U.S. units? Since size of the franchise system itself is a stated important factor influencing overall rank, a franchisor that only has U.S. units or reports only U.S. franchise units might not fare as well, even if their domestic franchisees are far outperforming those of an international competitor. A franchisor that has a high rank on the strength of just its U.S. franchisee population is particularly impressive.
  • Beware the "miscellaneous". Almost every general industry heading has at the end of its section a “Miscellaneous” category, and it's probably harder to compare franchises across the “Miscellaneous” categories. In the “Food/Retail Sales” general heading for 2011, for example, you will find “Miscellaneous Food Businesses” as the last category in that segment. Yet credibly evaluating the Logan Farms Honey Glazed Hams franchise, the miscellaneous category leader, against Water 2 Wine, listed 4th in this category, is probably a difficult comparison.

Are the Franchise 500 Rankings Valuable for Prospective Franchisees?

At the end of the day, whether one agrees with their methodology or that a ranking of #1 vs. #35 truly speaks to any differentiation between franchise opportunities, Entrepreneur provides a useful service in compiling a large and diverse set of franchise systems and organizing them into their annual Franchise 500 Rankings. While their approach excludes many important factors to consider when buying a franchise, the Rankings -- when understood for what they provide (and what they do not provide) -- can serve a useful purpose in simply helping a potential investor get a better sense for the various franchise opportunities, and industry categories, available today.

While we would caution heavily against anyone making a final investment decision -- or even excluding a particular franchise system from further investigation due to a "poor" showing in the Franchise 500 list -- we do believe, if used correctly, the Rankings can serve as a valuable resource for prospective franchisees.

Author Deven Klein has 16 years experience working for a large, international franchisor, first leading its legal department and then its franchise development department.

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