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Study: Bottom Quintile of Franchisors Churn Franchises Three Times More than the Top

LOUISVILLE, Ky.—The bottom 10 percent of bad franchisors have more than triple the churn of franchised stores from franchisor terminations of stores and ceased operations by franchisees than the top 10 percent, according to a 5 year research of Franchise Disclosure Documents by FranchiseGrade.com.

The numbers show there is a clear division between the good and the bad franchisors. Those bad apples are spoiling the franchise industry, according to a study of 2,260 franchise systems in the United States.

To be sure there are franchise investments that have an A grade based on store income, low franchise unit churn and performance metrics. According to FranchiseGrade.com, FastSigns, Home Care Assistance, FastSigns and Christian Brothers Automotive are grade "A" franchisors that do it right for franchise owners.

But how bad are the worst in spoiling the industry? The answers to that are multifaceted. In its first report of many, FranchiseGrade.com simply points out that from 2010 to 2015, the bottom 10 percent of franchisors, or 226 franchising firms, churned 58,440 franchises that they terminated or had to cease operation compared to a more placid 19,436 franchises for the top quintile. The bottom quintile of franchisors terminated 25,965 franchises and 32,475 of their franchised establishments ceased operations. Compare that with the top 10 percent which had only 8,752 terminations and 10,684 ceased operations.

In other words, franchisors on the bottom quintile churned franchises three times greater than those in the top (see chart).

Looked at another way, sickly franchisors in the bottom quintile had 79.2 percent unit turnover of a bad kind. The 79.2 percent consisted of 1) franchise terminations by franchisors, 2) non-renewal of licenses, 3) reacquisition of the franchise by the franchisor, and 4) franchises that ceased operations. The remaining category of 20.8 percent was 5) sales to franchise buyers, or what is technically called turnover. All five categories put together are called the total turnover rate, which is not to be confused with turnover. Compare that 79.2 percent of unhealthy turnover in the bottom quintile with the top quintile of franchise systems that have only 53.5 percent turnover from the more harmful categories of 1) through 4). That is to say, the top quintile had a healthier 46.5 percent of turnover from the better category of #5, turnover by sales of franchise locations, compared to all categories, while the bottom quintile had only 21.8 percent from the sales of franchises compared to total turnover. That turnover ratio of 46.5 percent in sales over total turnover is still not ideal, but it is significantly better than the worst quintile.

The sizable investments into high turnover systems means it is tough for franchisee investors to figure out where their money is best put to use.

"Unhealthy franchisors cost franchisees their investment, foster an unfavorable image of the franchise industry and detour good franchisee investments away from strong, healthy franchise systems into unhealthy systems," says Jeff Lefler, chief executive officer and founder of FranchiseGrade.com.

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Don Sniegowski is editor of Blue MauMau, the daily news journal for franchise & small business owners. Call him at +1 (270) 321-1268, tweet @bluemaumau or email don@bluemaumau.org.