At FranchiseGrade.com we have developed a revolutionary method for grading franchise systems through what is perhaps the most comprehensive and in-depth analysis within the franchise industry. We call this method our Franchise Performance Index™.
Our FPI platform is used to grade franchise systems against their natural competitors by measuring past and current success of franchise sectors and specific franchise systems.
Franchisee investment risk analysis includes the following;
Investment Structure provides an analysis of the initial franchise fees, working capital requirements and annualized costs. A prospective franchisee must analyze a specific franchise investment to ensure that there is a favorable relationship between their available investment capital and the franchise investment required.
Ongoing Fees are a benchmark of total royalties and reoccurring fees. It includes a combination of the royalty rate and national and local advertising fund contribution fees. This grade includes an analysis of the types of fees and the degree of complexity within Item 6 and any other franchisee financial obligations to the franchisor.
Franchisee territory and related contractual rights represent one of the three top priorities to consider when evaluating a franchise opportunity. The key attributes of a franchisee territory include; the quality of the territory, the potential for continued growth and whether the territory is both protected and exclusive. The term of the franchise agreement and the annualized cost of the investment are included in this grade.
Franchise litigation provides information regarding current and prior legal actions between a franchisor and franchisee. A lack of significant litigation in the FDD of a mature franchise system can be considered an indicator of a successful franchise system with satisfied franchisees. We refer to this measure as the Litigation to Outlet Ratio, which can be used to compare the amount of litigation for franchise systems.
Franchisee turnover is an important consideration for a candidate to review. It includes franchisee terminations, franchisee ceased operations and franchisee transfers. A high percent of terminations and ceased operations relative to franchisee locations is an indicator of an unhealthy franchise system. A high number of transfers can indicate a vibrant franchise system where there is a convergence of franchisees seeking to cash out their investment and buyers seeking to invest in a franchise operation.
One of the most important measures of a franchise system is the growth of the franchise network. A major difference between healthy and unhealthy franchise systems is where there is positive franchise outlet growth over a sustained period of time. Although there are examples of franchise systems with dynamic outlet growth, some of these systems were labeled as unsuccessful franchise systems.
Item 19 Disclosure
The grading platform is based on the following criteria: Can a prospective franchisee create a reasonably accurate proforma and cash flow analysis utilizing the data provided in Item 19. Each grade is based on the ability of a franchisee candidate to analyze financial data based upon the financial information disclosed in Item 19. To receive an A grade, a franchise system must provide more detail than simply gross revenues.
When used as an integral part of the franchise due diligence process, FPI enables prospective franchisees to identify the best franchise opportunity for them. We take pride in ensuring that the research and data collected by FranchiseGrade.com provides value for all franchise industry stakeholders and investors.
As a multifaceted grading platform, our Franchise Performance Index™ (FPI) is used to analyze and grade franchise investment options. We validated the importance of these variables through a number of channels including:
- Feedback from franchising experts, the results of which can be found in our Franchise Expert Survey. (PDF download)
- Our FPI was carefully examined and tested by members of our Advisory Board to ensure all graded variables provided value to the index. Specific tests were designed to ensure accurate collection of the data.
- Additional feedback was obtained through our Prospective Franchisee Survey, to ensure the needs of investors were included in our research.
Collecting data from 2,400 franchise systems has helped us gain some experience and knowledge as our basis for understanding franchise performance standards. Our comprehensive, yet neutral grading platform ensures unbiased results when comparing franchise systems, regardless of size and financial value.
Any grading and analysis of franchise system performance is based on the best available information at the time. Our goal is to continue to collect data and refine our analysis to better grade franchise performance and analyze the health of franchise systems. All data is collected on a past performance basis and doesn’t guarantee future success. Please read our disclaimer carefully.