Our Methodology
Measuring the success of a franchise brand often centers on its unit growth, where the number of franchise units are tracked over time to understand how often new franchisees enter the market. Unit growth rates are a great way to determine how well a franchise business performs, because the best franchise businesses will consistently grow over time as new business owners open franchise units in their own markets. But growth rate is only part of the story - we also want to consider how many existing franchise units continue operating each year.
Consistently opening new franchise units is a great sign of a successful franchise business, but potential franchise owners also need to know that these units continue to be successful over time. So, we start our analysis with franchise brands that have above average growth rate, less than $1MM average initial investment, and at least 50 franchise units, then analyze each brand's continuity rate.
What Is "Continuity Rate"?
Continuity rate refers to the percentage of existing franchise units that continue to operate each year. A sign of a successful franchise system, consistently high continuity rates mean very few, if any, franchisees wind up closing their business.
How Do We Measure It?
We start with data from the Franchise Disclosure Document (FDD) that franchisors are legally obligated to publish. Each franchise brand must disclose annually how many franchise units were opened, and how many were closed. More specifically, every franchise must disclose how many units were:
- "Terminated" – Franchise agreements terminated by the franchisor before the end of the term, without any compensation made to the franchisee.
- "Not Renewed" – Franchise agreements not renewed at the end of the term.
- "Ceased" – Franchise units that ceased operations for any reason other than the above two.
- "Reacquired" – Franchise units that transferred ownership from the franchisee to the corporate franchisor.
In each of these cases, the franchisee elected to discontinue operating the franchise unit. There are many reasons a franchisee may choose to end their franchise contract, but generally profitable enterprises will continue to operate, though they may be sold between franchisees. Closing, or transferring to the franchisor may indicate poor performance or an inability to sell to another franchisee.
In the Franchise Disclosure Document (FDD), Item 20 delves into the franchisor’s historical and current data on franchise outlets and franchisee information, including terminated agreements, non-renewals, ceased operations, and reacquired units.
We measure continuity rates by analyzing each franchise brands unit metrics over the past five full years, from 2018 through 2022. We start with the number of operating units at the beginning of each year, then deduct those that closed for any of the above reasons. The result is divided by the total number of franchise units to get a ratio or percentage:
(Total Units – Closed Units) / Total Units = Continuity Rate
We calculate continuity rate for each of the past five years, then take a weighted average to arrive at average annual continuity rate. Franchise brands are ranked by the average, and in the case of a tie, 5-year growth rate is the tie breaker.
Why Exclude Capital Intensive Franchises?
We limit our analysis to those franchises with an average initial investment under $1,000,000. Franchises with very high capital requirements tend to have far longer time horizons, and close at very low rates unless the time frame is expanded to decades. As such, our list would skew towards franchises that are out of reach to most franchise investors.
Why It's Important
When evaluating franchises, unusually high closure rates (low continuity rates) are typically a red flag, and potential indicator of poor performance by the franchisor, franchisees, or both. Franchises with higher continuity rates can help assure potential franchisees that the system is effective, and that the franchisor is diligent about selecting new franchisees that will be a good fit for the business.
Evaluating franchise opportunities is a complex process, but the bottom line is an effective, profitable franchise system will grow, and its franchisees will continue to operate them. To learn more about researching franchises, see our Franchise Learning Center.
Want to see more available franchises? See our Franchise Directory.
