Top Franchises 2012

by Franchise Business Review

The 2012 Guide to Today’s Top Franchises takes a close look at the data compiled as part of FBR's annual franchisee satisfaction awards. We explore what concepts and franchise models are most popular in 2012, what’s involved from an investment and financing standpoint, what skills and attributes contribute to a franchisee’s success, and how franchisee satisfaction has fared in the past year.

(Full text of report is below. Download full Free Report to view charts, graphics, and more info.)

Introduction

In 2005, Franchise Business Review set out to identify the top brands in all of franchising based on our annual survey of franchisees. Originally dubbed the “FBR50” because it included only 50 companies, the list has grown to include more than 150 companies spread out across three categories (small, medium, and large franchise businesses). In addition to providing the base for our awards program, our annual survey supplies us with a considerable amount of data, as well as a unique view of franchising from the inside.

We will take a close look at that data in this report. We will explore what concepts and franchise models are most popular in 2012, what’s involved from an investment and financing standpoint, what skills and attributes contribute to a franchisee’s success, and how franchisee satisfaction has fared in the past year. We will also forecast where we think franchising is going, and we’ll identify the top franchises based on our franchisee satisfaction research.

Methodology

The data for this report was compiled as part of Franchise Business Review’s annual Franchisee Satisfaction Awards, which recognize the top franchise brands based on overall franchisee satisfaction. Now in its 7th year, the FBR50 is the only awards program to look at actual franchisee satisfaction data and rank companies based on that.

To compile the data for this report, we surveyed over 22,000 franchisees, representing more than 300 brands and 135,000 franchise units/locations. Our survey is open to all North America-based franchise companies at no cost. (Not all brands are willing to survey their franchisees, which may be a red flag in
and of itself.)

Our survey is given to all active franchisees within a system. Franchisees answer 33 benchmark questions ranking their franchise system in the areas of financial opportunity, training and support, leadership, operations and product development, core values (e.g., honesty and integrity of franchisor), general satisfaction, and the franchisee community. An additional 19 questions ask franchisees about their market area, demographics, business lifestyle, overall enjoyment running their franchise, and role in the franchisee community.

From this data, we identify our list of Top Franchises, which includes companies with above average satisfaction among the companies we surveyed. We also interviewed senior executives and franchisees at many of the franchise companies. Their experiences enabled us to back up our data with first-hand insight.

Models/Concepts

The most popular franchise sectors by satisfaction (the categories with average satisfaction 5% to 10% higher than other categories) are Cleaning and Maintenance, Fitness, Health and Beauty, Pets, and Senior Care. However, the variety of business types seen in our list of Top Franchises (a luxury real estate business, a waxing center, and a business consulting firm, to name a few) proves that no particular franchise model guarantees better franchisee satisfaction over another.

Despite a few misses (the downfall of Curves being the most notable), the fitness sector thrived in 2011, and it will likely remain strong in 2012. In fact, so many fitness companies were added to the Top Franchises list this year that we added a new category just for them (they had previously been included in our Sports & Recreation category). Fitness Revolution, a personal training concept new to FBR’s awards listing, placed second on the overall list.

Senior care and lower investment concepts (those requiring an average initial investment of under $100K) continue to be popular in 2012 as they have in past years and therefore represent a significant portion of our list. Home Instead Senior Care holds the #1 spot for the second year running (this is their sixth consecutive time in the top 10).

The number of food franchises on the list also increased significantly in 2012, despite the fact that franchisee satisfaction in the food and hotel sectors in general is running close to 10% below average. For food franchises that are doing it right—Firehouse Subs, Voodoo BBQ and Grill, and Auntie Anne’s, for example—franchisee satisfaction remains high in spite of what might be happening at other brands within the sector.

Investment

Franchising offers a wide range of investment options for prospective franchisees. Some concepts require less than $50,000 to get started, while others cost a million dollars or more.

Franchise Business Review’s Top Franchises ranking has always included a number of low-cost opportunities, and this year is no different. Companies like JumpBunch and FocalPoint Coaching, which require average initial investments of $50,700 and $57,475, respectively, make our list year after year. There are also many mid-range investment concepts (e.g., BrightStar and Christian Brothers Automotive), as well as higher-end investments (e.g., Aaron’s and Jack in the Box) that have made our list multiple years, proving that there’s no clear correlation between investment size and franchisee satisfaction. The average investment of the top 10 overall franchises on our list ranges from $10,545 to $339,025, with the average initial investment of the top 10 being $119,568.

The size of the initial investment typically depends on the real estate and equipment needed to run the business. Many of the lower cost franchise concepts are businesses that can be run from the home, at least initially. Businesses that require a bricks-and-mortar location are obviously much more expensive, with full service restaurants and private childcare centers being among the most costly to set up and run.

Acquiring financing remains a challenge, and both franchisees and franchisors have been affected by this.

“[The financial situation] puts a higher standard on our concept in general because differentiation and competitive distinction is absolutely critical in this environment,” said Mary Obana, President and co-founder of Koko FitClub, a fitness concept that blends technology with customized personal training. “For us, it’s really been about making sure people are capitalized for success. Our financial requirements have actually gotten higher.”

Concepts requiring a mid-level investment (around $150K) seem to be the most difficult to finance because they are often not small enough to be financed from a personal savings, yet they are not big enough to qualify for other funding (an SBA loan, for example). And as people have lost equity in their homes over the past four years, so too have entrepreneurs lost a possible cash outlet for their businesses.

“Our investment level got hurt in terms of the ability to start up for our franchise candidates,” said Rich Wilson, president and CEO of CertaPro Painters, which has an average initial investment of $141,500. “In ‘04-‘07, people were using home equity to at least augment their initial cash outlets. Now, almost exclusively on our new franchise start-ups, it’s going to be 401k rollovers.”

(To download this report in its entirety, click here.)

401k rollovers have become an increasingly popular way to finance a franchise investment over the last few years. Many people don’t even realize that there are programs available to them that can leverage their retirement savings for a business investment opportunity, without incurring early withdraw penalties. Franchise Business Review has partnered with two highly reputable financial companies—Directed Equity and Guidant Financial—that specialize in these types of financing programs (more information is available at www.FranchiseBusinessReview.com).

In light of the financing challenges, a number of franchisors at all levels of investment have created new ways to make financing a franchise possible or
to make running that franchise less expensive. Some franchisors (e.g., Snap-on Tools) provide internal financing options while others have strong relationships with preferred third-party lenders.

Many franchisors have taken a hard look at their franchise models in an effort to reduce costs. This is especially true in the food sector, which has traditionally been a higher investment model. Thanks to the economy, real estate and equipment are less expensive than they were five years ago, and franchisors and franchisees can negotiate much better terms.

“We have not changed anything with our investment model,” said Jim Carpenter, president and CEO of Wild Birds Unlimited. “What we have done is make sure that the initial investment that franchisees are spending their money on is working harder than ever. We’ve studied the opening expenses, the opening campaigns, things like that, and we’ve worked hard to make the investment
work harder.”

Mary Obana says franchisees are drawn to the Koko FitClub concept because the majority of the investment (workout equipment and technology) is a fixed cost that remains constant over time, unlike businesses that have widely variable costs and are subject to price fluctuations.

“A lot of our owners love the predictability of the model. It’s less vulnerable to a lot of these external variables that, to a lot of retailers, have a negative impact on their margins,” Obana said.

Franchisors are being much more upfront with company financial information early on in the franchisee recruitment process. Many of the companies we talked to have beefed up their Financial Disclosure Documents (FDD) in the past couple of years in order to provide more accurate information to prospective franchisees.

“We have a really robust Item 19, so it enables the franchisee to go to the bank with a good knowledge of the past performance of our franchise system,” said Jim Carpenter of Wild Birds Unlimited. “In the last year, we also added the adjusted net operating income for our franchisees.”

Franchisors are also providing prospective franchisees with more information to prove to banks that their concept works. In fact, many franchise companies are using FBR’s Franchisee Satisfaction Reports to help educate local and national lenders about the success of their franchise opportunity.

Profitability

Business profitability and potential return on investment are both usually top-of-mind with anyone looking to invest in a franchise, yet they are extremely difficult to project. There are still many franchise companies that refuse to disclose any meaningful financial figures in their FDDs. And even if they do, it will likely be gross revenue figures, which say very little about the potential profitability of a business.

Also, while profitability is critical to any business, you must consider the whole financial picture of the business to accurately evaluate it. This evaluation should include the total upfront investment and any future capital investments that may be required. For example, annual profit of $50,000 from a business that cost you $75,000 to start is very different than $100,000 annual profit from a business that cost you $500,000 to start.

And finally, you really need to understand the long-term potential resale value of your business before you can fully understand the bigger financial picture. All that said, we provide this franchisee profitability research, as well as the cautions and footnotes that follow.

Based on our research, year-over-year profitability across all sectors is up 2% year-over-year, evidence that the economy continues to recover. Our current data shows the average franchisee reports annual gross revenue of between $250,000 to $500,000, with average net profits of $66,000.

Our overall Top 50 companies for 2012 have an average profitability of $74,000 (12% above average).

It’s important to note that these average profitability figures can be misleading,
and we caution anyone looking to invest in a franchise to do significant due diligence on the financial model of any business they are considering. Most new franchise business, regardless of industry category, will take several years to achieve profitability, even for the most successful franchisees. As a rule of thumb, we advise prospective franchisees to have significant cash reserves in the event that their new business takes longer to achieve profitability compared to what they are projecting.

Further Caution: The above profitability figures include both new franchisees and franchise operators that have been in business for 10+ years, as well as people that own multiple franchise locations/units. While these averages may be helpful for benchmarking certain categories, they should not be used to set financial expectations for your business. For example, while the senior care franchise sector is reporting above average annual profitability ($92K on average), it may take you 5+ years of operation, and investing in several locations to come close to achieving such numbers, if at all.

Thirty-six percent of the franchisees we surveyed were operating non-profitable businesses, and median profitability across all franchise categories is in the $25,000 to $50,000 range (again, seasoned operators and multi-unit owners significantly skew the averages).

One major change that we’ve seen in the past few years is that franchisors are really focusing more on unit-level economics and franchisee profitability.

“We made a very concerted effort at the end of 2008—primarily for defensive measures—to use our support staff to approach our franchisees not only through annual planning but also through monthly trends and quarterly budget reviews. That has helped profitability at the unit level dramatically,” said Rich Wilson of CertaPro Painters.

Unit-level profitability is something that is obviously important to franchisees but franchisors haven’t always had it top of mind. Now, because of the economy and pressure from franchisees, franchisors are finally responding, and it’s showing in our research as franchisees are rating support higher than a few years ago.

The flip side to this is that franchisees are rating market competitiveness lower. Local Market Competitiveness has dropped from rating of 66 in 2010 to a rating of 59 in 2012—an 11% decrease in just one year.

Market Analysis

The franchising sector is much more optimistic going into 2012 compared to a year ago. The economy is improving, unemployment is down, the stock market is stable (at least today), and both franchisors and franchisees are hopeful about what the future may bring. That said, franchisors are still 30% more optimistic than franchisees based on our Annual Franchise Outlook survey (conducted fall 2011). According to that same survey, the majority of franchisees (57%) are optimistic about this year, and they expect gross revenue increases of 6% to 10%, and increases in net profits of 1% to 5%.

While optimism in franchising is high, so too is caution. Franchisors and franchisees alike are approaching business partnerships with more restraint than they did in the past. Prospective franchisees are being more thorough with their due diligence efforts than ever before, and franchisors are being very selective of who they sign on to be franchise operators.

“We take care to determine whether franchisees have the financial capacity to actually grow in a marketplace and to survive,” said Mike Good, CEO of Sotheby’s International Realty. “The key to us is does someone have the capacity to survive another year or so if the market conditions would deteriorate in real estate.”

In its annual Franchise Business Economic Outlook report, the International Franchise Association says the number of franchise establishments will increase by 2% in 2012. If this projection plays out, this will be the first time this number has increased since 2008.

We also forecast conservative growth for 2012, but our projections, while conservative, are higher than what other franchise experts are predicting for the franchise sector as a whole. Historically, the award-winning franchise companies appearing on our annual ranking significantly out perform their competitors, and we expect this to remain true this year.

Franchisee Success Attributes

Obviously, the skills and attributes needed to be successful in a franchise depend to some degree on the type of business and the sector. Some sectors, like child services or senior care, are more people-driven and therefore require more in the way of empathy and interpersonal skills. Other sectors, like food, may require some knowledge and experience in the industry to succeed.

“We are very picky about the franchisee and their match with our system because we very much rely on a local store owner to know what’s happening with the birds in their area,” said Jim Carpenter of Wild Birds Unlimited. “They have to really have a passion for taking the products that we sell and making them match what’s happening in a local area.”

Regardless of the sector or business model, however, there are certain necessary skills and attributes that carry across all of franchising. Franchise brands across the board tell us they look for people with strong people management skills, as well as networking, marketing, and operational expertise.

Franchisee Satisfaction

Many of the award-winning companies that make our list year after year have managed to raise their franchisee satisfaction even higher this past year, which means our baseline franchisee satisfaction score in 2012 is higher than it has ever been. Last year, we saw overall franchisee satisfaction improve by 8% over 2010. In 2012, overall satisfaction continued to go up, but by a much smaller percentage (2% overall and 3.5% among our award-winners).

We also surveyed more franchisees than ever before. The reason for this is likely twofold: Prospective franchisees are researching franchise opportunities more thoroughly in the tight economy, which means they are actively requesting franchisee satisfaction data. Franchisors are quickly seeing that surveying franchisees is no longer an option; it’s a must. Transparency is the business buzzword of the decade, and franchising is no different.

The other reason that we think franchisors are more willing to have their franchisees surveyed is that, in general, franchisees are more optimistic. There’s less hesitancy on franchisors’ part to survey because they think franchisees are happy.

The award-winning companies we’ve seen emerge from the economic challenges of the past few years are stronger, better, and more transparent, and their franchisees are more satisfied.

Summary

All signs point to 2012 being a recovery year for the economy in general and for franchising. While the past few years may have presented challenges in the way of profitability, competition, and financing, the last year has seen improvements in all of these areas, and we project that trend will continue in 2012.

Regardless of the franchise concept, sector, or investment level, the award-winning companies we’ve seen emerge from the economic struggles of the past few years are stronger, better, and more transparent, and their franchisees are more satisfied. In short, “the best of the best”—our annual award-winners—are getting even better. They were impacted less by the recession than other franchise brands, and they are recovering and growing at a faster pace now.

Of course, no matter how great a franchise company sounds, it is always important for prospective franchisees to thoroughly research any business opportunity from multiple levels—not just to confirm that the business is healthy but also to ensure that the culture and fit is right for them.

Log in to leave a comment. If you're not an FBR member yet, click here.
Email:
Password:
	Keep me logged in
Comment:

You must register to post a comment. Registration is quick & easy. If you are already an FBR member, click here.
First Name:
Last Name:
Email:
Password:
Confirm Password:
Receive updates, notifications and special offers from Franchise Business Review
Comment:
Verification:	[ New Image ]