Understanding Entrepreneur’s Franchise 500

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Understanding Entrepreneur’s Franchise 500 (from www.entrepreneur.com)

After months of work, we’re proud to present Entrepreneur’s 34th annual Franchise 500 ®. Here’s the scoop on how the first, best and most comprehensive franchise ranking in the world comes together.

The process began in July 2012, when we asked franchisors to participate in this year’s survey. Each submission was vetted before being entered for data analysis, with 824 companies making the first cut. Of those, the top 500 companies made the Franchise 500® ranking, based on financial and statistical data from July 2010 through July 2012.

Only franchise companies that supply full Franchise Disclosure Documents (FDDs) or Canadian Disclosure Documents and whose information is verified by Entrepreneur can be listed in this issue. To be eligible for the Franchise 500® ranking, a franchisor must have a minimum of 10 units, with at least one in the U.S. The company must be seeking new franchisees in the U.S., and it cannot be in Chapter 11 at the time the ranking is compiled. (The exception to these rules is Canada-based companies that are expanding only in Canada.)

All companies, regardless of size, are judged by the same criteria: objective, quantifiable measures of the franchise operation. The most important factors include financial strength and stability, growth rate and size of the system. We also consider the number of years a company has been in business and the length of time it has been franchising, startup costs, litigation, percentage of terminations and whether the company provides financing. Financial data is analyzed by an independent CPA. We do not measure subjective elements such as franchisee satisfaction or management style. The objective factors are plugged into our exclusive Franchise 500® formula, with each eligible company receiving a cumulative score. The 500 franchises with the highest cumulative scores become the Franchise 500®.

Remember that the Franchise 500® is not intended to endorse, advertise or recommend any particular franchise. It is solely a research tool that can be used to compare franchise operations. Entrepreneur stresses that one should always conduct an independent investigation before investing in a franchise. Read the FDD and related materials carefully, get help from an attorney and a CPA in reviewing any legal or financial documents and talk to as many existing and former franchisees as possible and visit their outlets. The best way to protect yourself is to do your homework.

Research compiled by Tracy Stapp with assistance from Mahendran Arullendran, Sungwoo Lee, Lauren Robertson and Pollyanna Wong; financial analysis by David R. Juedes, CPA; graphic design by Megan Roy and Nancy Roy; additional assistance from Monica Santana and Jake Fournier.