Understanding the Franchise 500 - Cover Story

Entrepreneur, Jan, 1996 by Debra Phillips

Welcome to the online version of Entrepreneur's 17th Annual Franchise 500(r).

The initial Franchise 500 in 1980 was the first ranking of franchises in the industry. Today, that is no longer the case. But Entrepreneur's Franchise 500 remains the best and most comprehensive rating of franchises in the world. Over the years, we have refined and perfected our procedure, giving us a formula that truly identifies today's top franchise opportunities.

This year's Top 10 List is dominated once again by food franchises, which shouldn't come as a surprise to anyone familiar with America's eating habits. At the top of the list, for the eighth time in nine years, is Subway.

In other food franchise trends, bagels continued to take America by storm. The juice bar category also showed growth, while coffee franchises remained strong as well.

One of the most interesting developments in this year's ranking was the emergence of a new senior care services category, including assisted living and senior day-care centers. Business services continued strong; a new category in this industry is employee leasing franchises. And parents concerned about their children's education spurred the growth of children's learning centers.

Although any legitimate franchisor can be listed in the Franchise 500 (this year, we list 915 franchises), only those companies with a U.S. or Alberta, Canada, disclosure document and whose information Entrepreneur verifies from those documents are eligible to be rankedugiving us the top 500 franchises.

Franchisors whose questionnaires were verified by Entrepreneur, 77 percent in this year's survey, are identified in the listings by an asterisk (*) before their names. Companies that submitted unverifiable data are listed alphabetically beneath those that are verified. Only companies with the asterisk were eligible to receive a ranking in the survey.

Numerous factors, including length of time in business and number of years franchising, number of franchised and company-owned operating units, start-up costs, whether the company provides financing, growth rate, percentage of terminations, and the company's financial stability, are weighed according to our exclusive formula. Data was audited by an independent CPA firm. These factors are objective, quantifiable measures of a franchise operation. All companies, regardless of size, are judged by the same criteria. We do not measure subjective elements such as franchisee satisfaction or management style since these are judgments only you can make based on your own needs and experiences.

Based on the results of the formula, the rated companies are listed within their categories in order of their ranking. If a company qualified for a ranking within the top 500, its position is listed in the far right column under "Franchise 500 Ranking."

The remaining information is self-explanatory. "Where Seeking Franchises: U.S. and Foreign" shows where franchisors are planning to expand. In 14 states (CA, HI, IL, IN, MD, MI, MN, NY, ND, RI, SD, VA, WI and WA), franchisors are required by law to register their disclosure documents before they can sell franchises. Franchise companies that are registered in most of these registration states and are seeking new franchises nationwide are indicated in our listing by "ALL." Companies that are seeking franchises nationwide but are not registered in the above states are indicated by "N/R."

The franchisor's growth over the last three years is shown by the number of company-owned and franchised outlets for 1993, 1994 and 1995. Another key column lists the start-up costs necessary to open the franchise. This figure is affected by real estate and construction costs (if applicable), inventory, location, type of business and many other variables. For easy reference, the initial franchise fee is listed separately. Additional costs such as royalty fees, usually expressed as a percentage of monthly gross sales, are also listed separately.

Some companies provide financing of their franchise fees or their total start-up costs, or even offer equipment leasing options for franchisees. The "Type of Financing" category details the kind of financing provided by each company.

Remember, the Franchise 500 is not intended to endorse, advertise or recommend any particular franchise(s). It's solely a research tool you can use to compare franchise operations. Entrepreneur stresses you should always conduct your own independent investigation before you invest money in a franchise. Read the UFOC and related materials carefully, get help from an attorney and CPA in reviewing any legal documents, talk to as many existing franchisees as possible, and visit their outlets. The best way to protect yourself is to do your homework.

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