Wall Street Journal's 25 High-Performing Franchises for 2008
Frandata, a research firm serving the franchise industry, has chosen these franchise investments for the Journal out of its list of some 2,100 franchise systems in the United States.
The list of the 25 high-performers is in alphabetic order, not in order of best performance.
This year's list has a different make-up than year's past. Reporter Raymond Flandez observes, "The fast-food industry's power-grip on the franchising industry is slowly loosening, as industries serving the consumer and residential markets are expanding rapidly and performing well financially."
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Here is how Frandata selected these 25 out of 2100 franchise chains, according to journalist Laura Lorber.
How did we [Frandata, helping the Wall Street Journal's Small Business section] identify the 25 on our list? We started with a pool of about 2,100 brands for which detailed performance information was available in their 2007 UFOC, including financial statements. We first separated out brands for which financial performance isn't reported individually. This step eliminated from consideration systems such as McDonald's, Dunkin' Donuts and other well-known names that report results only from the corporate parent level. After this cut, our set stood at about 700 brands.
Our next cut was across three criteria:
-- Franchising seven or more years
-- Reporting positive net income and shareholder's equity between 2004 and 2006 (the most recent year for which data was available)
-- Operating 100 or more franchised units
We identified 220 companies that met these standards. From there, we looked at each brand's average three-year return on equity from 2004 to 2006, as well as the average franchise-unit turnover and cancellation rates from the same period. (Turnover represents the portion of a company's existing franchise units that were either closed – "cancelled" in franchise jargon -- sold back to the franchiser or to another franchisee.) Brands that didn't report this information were taken out of the running.
We eliminated brands with the lowest average return on equity and those with above-average turnover and cancellations rates for the group, about 10% and about 2%, respectively. This left us with 50 brands.
Next, we sorted through the brands' reported data, comparing them on the following measures:
-- Franchise net income/shareholders' equity ratio
-- Franchise unit turnover
-- Franchise unit cancellations
Among the brands that made our final list of 25, their capital base, as measured by shareholders' equity, was at least $820,000 for fiscal year 2006. And, each had a 23% or higher average return-on-equity ratio (net income divided by shareholders' equity) over the past three years and for 2006. Their turnover rate, each at a minimum of 10%, is on par with the industry average. Their cancellation (closing) rate, at a minimum of about 2%, is lower than the just under 3% for the industry average.
The analysis got us down to 28 brands. From there, three were eliminated from the final list. Two registered cancellation rates somewhat higher than others on the list. The third had seen its return on equity drop to 8% in 2006, the most recent year reported, and while it's three-year average was in line with the rest, the recent dip made it an outlier.
Thus, we arrived at our list of 25.
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