2015’s Top Franchise Opportunities:
A look at what makes a franchise great and how to invest in one
When it comes to investing in a franchise, don’t be a magpie. The shiniest opportunity, the one riding the latest trend or getting the most media hype, may not be the best. The single most important thing to ensure you are choosing the right franchise for you is due diligence. Franchise Business Review’s guides and reports are a great place to start. They are not derived from the crunching of widely available numbers. Instead they are based on the personal insight of thousands of franchisees.
(Download full FREE report as a PDF document.)
THE VOICE OF FRANCHISEES
Franchise Business Review is an independent national market research firm focused on franchisee satisfaction and performance. To create our 10th annual Guide to Today’s Top Franchises, we surveyed 28,500 franchisees representing over 350 franchise brands. Only 200 franchise companies made this year’s guide as a result of their franchisees ranking them high enough to meet our criteria.
Here’s how our research process works: We invite all franchise systems with a minimum of 10 franchisees throughout North America to participate at no cost. Next, we survey their active franchisees who 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 16 questions ask franchisees about their market area, demographics, business lifestyle, overall enjoyment running their franchise, and role in the franchisee community. Finally, we rank the top franchise brands based on their overall survey results to come up with our annual list of the top 200 franchise opportunities for this report.
THE IMPORTANCE OF FRANCHISEE SATISFACTION
Franchisee satisfaction ratings are like when Dorothy looks behind the curtain and finds out the truth about the wizard. They show you whether or not a franchise opportunity is really as good as it appears and fits your values and vision by providing insight into a system’s culture, training, leadership, financial outlook, franchisee community and much more.
Franchisors are increasingly measuring franchisee satisfaction and using the results to improve their networks and attract potential franchisees like you. If the franchise you are looking at does not survey its franchisees and share the results, it could be a red flag. Be sure to ask them why they do not. Openness contributes to a trusting relationship between franchisee and franchisor. In fact, the companies named in this report were rated higher by their franchisees when they were asked “Do you trust your franchisor?” compared to all franchises that participated in our survey. This finding didn’t surprise us since most of the companies in this report share their satisfaction survey data with their franchisees.
WHAT’S HOT, WHAT’S NEW
While compiling this year’s report, we discovered several new and interesting insights. The five franchise industries leading the way in franchisee satisfaction are: Advertising & Sales, Education, Senior Care, Real Estate and Child Services. Sports & Recreation, which almost tied for 5th place with Child Services, may well make the top five sectors list next year. While Food, Travel & Hospitality and Automotive tend to average lower franchisee satisfaction across the board, several franchises in these sectors had outstanding ratings including Hwy 55 Burgers, Cruise Planners and Christian Brothers Automotive.
When it comes to the most unique business model we’ve seen in a while, Apex Fun Run is the winner. The company makes money by raising money. Since 2012 its franchisees, who implement high-energy fundraising programs that entail teaching leadership and fitness to kids, have raised $12 million on behalf of schools.
It is also clear that people are increasingly willing to pay to have annoying critters removed. Two new mosquito and tick control companies, Mosquito Joe and Mosquito Shield, join Truly Nolen of America, A All Animal Control and Critter Control on this year’s list.
Fast-casual and personalization are the food trends that continue to gain in popularity as Your Pie’s joining our list shows. Its concept entails diners moving down an assembly line and choosing the toppings for their personal-sized pizza pie, which is then popped into a large oven that cooks it in a few minutes.
A PERFECT 10
Consistent annual placement as a top franchise in our Guide to Today’s Top Franchises demonstrates reliable performance. This year, ten companies have earned the honor of being featured in our newly created Hall of Fame as the result of appearing on our list for 10 consecutive years. They are ActionCOACH, FASTSIGNS, Heaven’s Best Carpet Cleaning, HomeVestors, JumpBunch, Miracle Method, Our Town America, Pop-A-Lock, Two Men and a Truck and Wild Birds Unlimited.
STAYING POWER MATTERS
Investing in a franchise is probably the largest expenditure you’ll make after the purchase of your home, so it is crucial to determine if the company has staying power. Key factors that influence a franchise’s enduring success include innovation, adaptability, market customization, customer retention and training & support.
Let’s take a look at what goes into each of these areas so you can better understand what to look for and know what questions to ask when researching these and similar opportunities.
Innovation: While a few industries do not need to invest heavily in research and development, most companies today have to engage in constant innovation in order to keep their brand fresh and their businesses growing. What are the franchises you are considering doing to further develop their service or product, maintain their creative edge, and stay relevant to their customer base?
“We are very aggressive when it comes to innovation,” says Auntie Anne’s Vice President, Global Marketing, Heather Neary. “We stay on top of consumer trends to ensure we are providing them with the solutions they are seeking and leverage technology on behalf of our franchisees and customers.”
The franchise brands named in this report scored about 12% higher than average in innovation and creativity. Perhaps more telling is that there were over 36% more occurrences of an “excellent” rating, the highest response option, by franchisees of the Top 200 Franchises, showing these systems are focused on evolving their brands in order to meet changing consumer needs and desires.
“We have always believed that if people, products and presentation are carefully managed that our franchisees will be successful. With this in mind, we started the Energy Project, which outlines best practices to create a high energy, positive customer experience in our stores,” says Jim Carpenter, Founder, and CEO of Wild Birds Unlimited. “It addresses products and presentation, as well as how to interact with customers.”
Adaptability: How will the franchise be able to weather shifts such as changes in the minimum wage, healthcare requirements or the economy that could impact your business? These hot topics should be on every system’s mind.
“We have a full-time, six-person Government Team and engage outside consultants on an as needed basis,” says Jeff Huber, President & Chief Operating Officer at Home Instead Senior Care. “Their job is to advocate for government policy and public opinion in favor of at home care for seniors.”
Market Customization: Can you customize your franchise’s offerings to your marketplace to ensure a sustainable revenue stream?
“We have some franchisees who contract with local schools, hospitals and skilled nursing facilities, while others maximize our National Account partnerships with highly-skilled nursing or workers’ compensation cases,” says Shelly Sun, CEO and Co-Founder of BrightStar Care.
“In addition to our core menu, our franchisees can elect to offer breakfast and smoothies,” says Auntie Anne’s Neary. “This has helped us extend our offerings to non-traditional locations including universities, food trucks and airports.”
Customer Retention: What will the franchise do to help you keep customers coming back? Beyond delivering a great experience, generating repeat business relies on a variety of approaches, top of which is customer rewards.
“We launched My Pretzel Perks, a mobile customer loyalty app, in August. Depending on the number of points a customer earns, they can attain one of three loyalty tiers: Pretzel Fan, Pretzel Lover or Pretzel Perfect,” says Neary.” Rewards ranging from special discounts and offers to free products are given with every 300 points earned as well as when a loyalty tier is reached.”
Almost all franchise systems today also gather and analyze customer feedback. “Obtaining direct feedback from our customers helps us to improve business operations, correct shortcomings, and deliver excellent customer service,” says Chuck Pistor, President of Miracle Method. “We currently have 97 to 98 percent customer satisfaction.”
“It costs far more to lose a customer then to bring one back in,” says Leeward Bean, Owner of Big Frog Custom T-Shirts, which encourages its franchisees to send clients handwritten thank you notes.
Training & Support: What training and support will the franchise provide? Strong initial and ongoing training and support programs will be crucial for your success and help ensure your franchise brand stays strong. This is highlighted by the Training & Support section of our survey being the one that showed the greatest variation between all franchises surveyed and the 200 in this report. The top brands were scored 13% higher by their franchisees compared to those that did not make our list.
“We have invested hundreds of thousands of dollars to develop a leadership program for our franchisees that teaches them how to work ‘on’ their business, build the right team, set goals for their business, and to live in a 90-day world with an emphasis on focusing on the most important things first in order to expedite results”, says Brightstar Care’s Sun.
“Our Franchise Business Consultant Team consists of members across the country who visit each of our franchises at least five times per year and communicate with them regularly in order to assist them with running their businesses as effectively as possible,” says Neary.
BUY NOW OR HOLD?
Is 2015 the year to finally go into business for yourself, but not by yourself, by investing in a franchise? A variety of franchise companies are enjoying tremendous growth, loans are more readily available, consumer confidence is up, and many economic experts believe our economy is back on track.
“Our business grew 40% between 2013 and 2014. We predict similar, if not even more growth in 2015,” says Brian Mattingly, President of Welcomemat Services. “Since we began franchising in 2011, our franchisee-owned units have gone from four to 40.”
“We did our five millionth move in the spring,” says Randy Shacka, President of Two Men and a Truck. “Our revenue went from $320 million in 2013 to $360 million in 2014. We anticipate $410 million in revenue in 2015.”
Financing is more readily available for franchisees than it has been due to the availability of a wider array of funding sources and loan requirements becoming less stringent.
“Just 18 to 24 months ago, most banks would not consider first time start-ups or acquisitions. They are, however, becoming more aggressive in the marketplace and will do so if candidates meet their requirements,” says Geoff Sieber, President and CEO of FranFund, which has been helping franchisees obtain funding for their businesses via traditional and non-traditional sources since 2006.
FUNDING YOUR FRANCHISE
When it comes to figuring out how much money you will need to launch your new business, franchise companies provide estimates of fees and startup costs in Items 5 – 7 of their Franchise Disclosure Document (FDD) and will often give you data regarding average monthly sales and year-over-year revenue growth. It is important to keep in mind that FDD information is typically average financial data across the entire franchise system, or sometimes only select markets, so some of it may not be applicable to your particular market, which has its own costs for real estate, labor and other factors. We advise you to identify these market variables in order to better estimate the total capital you will need.
Once you have a good understanding of the total capital needs of your new business, you can determine how much of the investment you can cover with personal savings, and how much you will need to borrow through other sources (ie. home equity loans, retirement savings, traditional bank loans, etc.). In addition, you should plan to have a cushion of debt-free funds to live on should your business not take off as quickly as you expect. Ideally, it’s a good idea to have at least a year’s worth of living expenses as a backup reserve. Also, be sure to ask about any available discounts. Many franchises offer them for female majority owners, ethnic minorities or military veterans.
Just like with any business loan, potential funders will look at your credit rating, liquid assets, collateral and experience. The important difference is that lenders understand they are providing funding for a franchise— a brand name business that is backed by a proven model for success.
“It is crucial that potential franchisees understand how they will be judged by lenders and be fully prepared prior to contacting any,” says Michael Rozman, Co-President and Chief Strategy Officer of BoeFly, an online loan marketplace. “They need a business plan for their future franchise that features not only the information provided by the franchisor, but about the business they want to establish including investment, competitive information, market information and projections.”
First time franchisees typically have a more difficult time obtaining loans from a national bank despite the recent loosening of requirements. Small Business Administration (SBA) loans, which are issued by a bank and partly guaranteed against default by the government, and community bank loans fill the gap.
The top three things banks do not like to see in loan candidates according to Sieber of FranFund are: unsecured high credit card debt, a short sale or foreclosure of a home during the past three years or a bankruptcy within the past three years.
Fortunately, if you are not an ideal bank loan candidate, there are still a variety of non-traditional funding sources available—including tapping into your retirement savings.
Many people don’t realize that you can invest up to 100% of your retirement funds into a franchise without taxes, penalties or a loan via a program called Rollovers as Business Start Up (ROBS). To qualify for ROBS you must have at least $50k in eligible retirement accounts such as an IRA, 401(k), or 403(b). Your retirement funds can be combined with a spouse’s, partner’s or traditional business loans.
“ROBS arrangements often enable a franchisee to start their business without debt, which increases their chances of being profitable sooner,” says David Nilssen, CEO of Guidant Financial, which specializes in guiding entrepreneurs through the ROBS process. “Profits can be retained for growth rather than being sent to a bank in the form of interest payments.”
Another option is a security-backed loan, which enables you to take a loan using a financial portfolio, such as a mutual fund, as collateral. There are several potential advantages to doing so. First, you can leave your portfolio in place, which enables it to grow. Second, because the loan is backed by your portfolio’s value, the interest charged will be lower than for an unsecured loan. It is important to note that the risk of borrowing against the value of your securities is that if your investments fall in value, the money borrowed will emphasize your losses.
A handful of franchisors also offer internal financing to approved potential franchisees. Those that do not often put candidates in touch with an established loan broker, who guides them through the process of building a professional, lender-ready package and connects them with potential lenders. Loan brokers typically charge borrowers an upfront $1,000 – $2,500 packaging fee that varies according to the complexity of the deal. Online loan brokers offer a variety of differently priced plans. In addition, since online brokers’ networks consist of thousands of local and nationwide lenders, it is possible that companies will compete for your loan, which in turn can yield better terms for you, the borrower.
“We do not take a one-size-fits-all approach to helping our franchisees obtain financing. Instead, we constantly work with our financing partners to provide a variety of options,” says Jeff Dudan, Founder and CEO of AdvantaClean.
DO YOU NEED PROFESSIONAL ADVICE?
If you wish to expedite the process of identifying the franchise that best fits your personal and financial objectives, as well as your budgetand skill set, an established franchise consultant can help. They can also assist you with getting a franchisor’s attention as a result of their connections and to complete and understand all the paperwork involved.
“I support my clients in all aspects of the franchise process including choosing a best-fit franchise, understanding the FDD and ensuring that their interactions with the franchisor go smoothly”, says Rick Bisio, who has been assisting new franchisee candidates for 22 years and is the author of The Educated Franchisee.
Whether you use a franchise consultant or not, after meeting a franchise company’s initial candidate criteria, you’ll be provided with their FDD. It is crucial to hire an attorney with extensive franchise experience to review the FDD before you sign the Franchise Agreement. An experienced franchise attorney understands all the elements of a Franchise Agreement—what you might be able to negotiate or not—and how each element affects another.
Areas to focus on in particular within an FDD, according to Richard Rosen, who has been practicing franchise law for over 35 Years and is principal at the Richard L. Rosen Law Firm, include:
- Territory & Market: How do the territory terms impact your market? How will renewal affect your territory?
- Transfer: How can you avoid the right to transfer being too restrictive or costly?
- Default and Termination Procedures: Are the terms regarding buying back your equipment or lease transfer favorable?
- Non-Compete: Do the terms enable you to be able to make a living after leaving the franchise?
HOW WILL YOUR LIFE CHANGE?
If you are used to working full-time, your hours probably will not change much when you own a franchise. According to our research, franchisees work an average of 40-50 hours per week across all industries. Forty-four percent reported working more than 50 hours per week, while 30% reported working less than 40 hours per week. That said, newer franchise owners—those in business for two years or less—report working longer hours on average. Be prepared to put in some extra time, especially those first few years, to get your new business off the ground.
If you must have all your nights and weekends free, franchising probably isn’t for you. Of the franchisees we surveyed, 52% reported working evenings at least a couple of times per week, with 24% saying they “almost always” work evenings. Almost three quarters of franchisees (74%) said they work weekends at least a couple of times per month, with 35% “almost always” working weekends.
The silver lining when it comes to owning a franchise is that 68% of franchisees said the hours they work are “flexible” or “very flexible” and 59% said their work/life balance was either “balanced” or “very balanced.”
WILL YOU MAKE ENOUGH MONEY?
“How much money will I make?” is the question that people want the answer to most when they start exploring franchise opportunities. It is a logical question to ask, but often a very difficult one to answer. There are many factors that play a role in estimating the potential revenues and profits of any business and ultimately what your “take-home” income might be.
One of the biggest mistakes we see new franchise business owners make is equating business profits with personal income, which leads them to enter into franchising with unrealistically high financial expectations. In most cases, a franchisee’s personal income is significantly lower than the profits that their business generates. This is due to a variety of things including taxes, loan payments and required business reinvestment—all of which gets paid out of a business’s profits.
Understanding how cash flows through a franchise is critical. In fact, it is such an important topic that we created a three-hour online course entitled “How Much Money Can I Make?”, which is available as part of our Franchise Buyer’s Toolkit™ at www.FranchiseBusinessReview.com/toolkit.
When we crunched the data for the 28,500 franchisees we surveyed, we found that their average annual pre-tax income was $80,000. We, however, know that average numbers can be misleading since they can be artificially inflated by a few top performers. When we looked at the median income for the same group of franchisees, it was actually under $50,000 per year. The bottom line is that many franchisees who do not do their homework in order to have realistic financial expectations earn less money than they
had originally planned to.
The good news is that the top 200 franchises listed in this report significantly outperform their competitors when it comes to meeting the financial expectations of their franchisees. On average, we found that franchisee incomes in these top brands are 15%–20% higher than other brands. In addition, in terms of your “upside,” the frequency of franchisees earning $250,000 or more was also 20% higher among our top 200 franchises.
It is difficult to generalize how much you will earn since there are often significant differences between concepts and other factors such as location and the economy come into play. If the FDD of the franchise you are considering has an Item 19, Financial Performance Representations, you will be able to obtain insight regarding revenue. It is important to note that the data typically represents total franchise sales, not profitability. To determine profitability, the cost of labor, rent, supplies, insurance, royalties, ad fees and other business expenses must be deducted from the sales figure.
ARE YOU AN IDEAL FRANCHISEE?
According to Bisio, the most successful franchisees are disciplined, financially stable, confident, natural leaders and enjoy learning. In addition, they have a sense of personal responsibility, a clear vision of what they want out of life, and a supportive network of friends or family.
You may think you will be a fantastic franchisee, but will the franchise system you wish to join agree? The majority of franchisors we interviewed said that business experience has replaced passion when it comes to what they look for most in a potential franchisee.
“We look for franchisees with proven business acumen who wish to be owner-managers, not owner-operators. Front-line staff who have passion can be hired,” says Carpenter of Wild Birds Unlimited.
While in the minority, some franchises still place a premium on passion, particularly those that offer services which involve extensive personal interaction with customers.
“We look for people who are passionate about serving kids and schools, not just about business,” says Scott Donnell, President of Apex Fun Run.
Since top performing franchisees generate higher royalties, many franchisors have potential franchisee candidates take a personality profile, which measures personality traits that relate to work performance.
“We had our top performing team members take a personality test and then pulled their common traits to create a profile of our ideal franchisee candidate”, says Mattingly of Welcomemat Services. “We compare the test results of potential franchisees to our ideal candidate profile.”
What does a personality profiling test mean for you? It may help you find the right franchise fit. Additionally, if a franchise company using a personality profile is more successful at selecting top performing franchisees, it will help its brand remain strong, as well as protect your investment as a franchisee.
THE BIG DAY
You’ll probably spend several months engaging in franchise research and discovery before reaching a decision. The 200 companies in this report provide you with a great starting point by highlighting franchise opportunities deemed the best-of-the-best by the franchisees who own them. Whatever franchise opportunities you decide to investigate, be sure to ask questions and to be candid about yourself, your goals and your expectations during the process.
The exciting day will eventually come when you will be asked by your chosen franchise system to say yes or no regarding whether or not you will join. If you’ve selected an opportunity that your research has shown is an ideal fit for you personally and your budget, your chances of succeeding are high.
For more information about researching franchises, or more specific details about the top franchise opportunities featured in this report, please visit us online at: www.FranchiseBusinessReview.com.