For the last 40 years, Entrepreneur Magazine has released its Franchise 500 List, ranking the “best” Franchises in America. They rank them based on Five Pillars: Costs & Fees, Size & Growth, Support, Brand Strength, and Financial Strength & Stability. The giants at the top aren’t much of a surprise, with McDonald’s, Dunkin’, and Taco Bell all in the top 5. Many other big names are also scattered on the list. The Franchise 500 gives information on investment costs, and many other things you can expect if you decide to purchase a franchise for a specific company. If you are interested in purchasing a franchise, this list can be a great asset. However, it shouldn’t be your only resource, and most certainly does not tell the whole story.
The Small Business Administration keeps track of the default (failure) rates for franchises. The SBA releases a list of Top 50 Best (lowest) Default Rates, and a list of the Top 50 Worst (Highest) Default Rates of franchises every year. It’s a tool that gives a basic idea of how franchises for certain companies are performing and can be a great asset in your decision-making process. The SBA default rates are a great example of how the Franchise 500 doesn’t tell the whole story.
Among the Top 50 of the Franchise 500 based upon a recent review, only eight had a top 50 Lowest Default Rate: #4 Taco Bell (33rd Lowest Default Rate), #5 UPS Store (39th lowest default rate), #6 Culvers (12th lowest default rate), #8 Great Clips (19th lowest default rate), #11 Jimmy John’s (29th lowest default rate), #17 Sport Clips (11th lowest default rate), and #27 Hampton Inns (31st lowest default rate). Six members of the Franchise 500 have one of the 50 highest default rates, the worst of which is #356 on the list, Buffalo Wings & Rings. Buffalo Wings & Rings had the 11th Highest Default Rate at 66.67%. That means that two-thirds of the franchises under this company ended up failing.
The two best franchises when it comes to default rates in our review were Comfort Keepers at 8%, and Christian Brothers Automotive at 8.2%. Comfort Keepers is nowhere to be found on the Franchise 500, and Christian Brothers Automotive comes in modestly at #210. Another interesting point is that top franchises such as McDonald’s, Sonic, and others aren’t on either the Best Default Rate List or Worst Default Rate List. The 50th best default rate is at 25%, and the 50th worst default rate list starts at 52%. This means, that for McDonald’s and other top franchises, between a quarter and about half of their franchisees failed. That’s still a surprisingly large number, especially for companies that are supposed to be the very best franchises in America.
In conclusion, the Franchise 500 list is a common place to start someone looking to get into franchising. The list provides important information on investment costs, and other things that will help get you started. But also review the Top 50 Worst and Best SBA Default Rate lists, as that information can provide you a basic idea of the failure rates for certain franchises. Importantly though, please understand that purchasing a franchise is usually a significant investment and should not be taken lightly. When deciding on what franchise opportunity, prospective franchisees should take a multi-disciplined approach. Prospective franchisees should get a lawyer, accountant, banker, and even marketing professionals involved into the decision-making process. If a specific location is key (such as retail or restaurants), prospective franchisees will also want to consult with a commercial real estate agent. Make sure you do your research on initial investment costs, financial representations, default rates, franchisee satisfaction, and many other factors before you go into the franchising business.
*Special thanks to my summer clerk, Quinn Mahoney, for his research and assistance in writing this blog post. Quinn is an Applied and Computational Mathematics and Statistics Major at Notre Dame with a minor in Actuarial Science.
**We do not endorse any particular franchise opportunity.