The 2010 AllBusiness AllStar Franchises: How We Chose Them

It's been a year since we picked our 2009 AllStar Franchises and what a year it's been -- one of the toughest the $835 billion franchising industry has ever faced since its inception way back in the 1800s.

How tough is tough? Past recessions often caused a boom in franchising as the unemployed tapped into their entrepreneurial spirits and started new businesses. This recession, however, marked by drastic reductions in credit and capital, has seen no such uptick. In fact, as the year

draws to a close, the number of franchises is expected to decline by 10,000, or 1.2 percent. 2010 is not expected to be much better.

Our team, headed by Maria Anton and Rieva Lesonsky who have spent decades immersed in the field, analyzed more than 800 franchises to pick our top 300. We were forced to drop more than 70 franchises off this year's list. No longer in our Top 10 are Dunkin' Donuts and Jani-King, both of which experienced legal troubles with franchisees. Cold Stone Creamery lost the most in ranking, going from #77 last year to #288 this year.

But thankfully, not all franchises suffered. Some, particularly those who have expanded overseas and have tapped into new sources of capital, are doing well. Subway has retained its #1 spot. Rounding out our top five are Liberty Tax Service, Jazzercise, Jimmy John's Gourmet Sandwich Shops, and Jack in the Box. The largest ranking gainer was AmeriSpec Home Inspection going from #299 last year to an impressive #98.

Other highlights from this year's list:

• Food and beverage franchises experienced a particularly tough year with consumer spending falling off a cliff. Pizza Hut's U.S. sales were down and its D&B Financial Strength Score dropped from #169 to #210. Overall, approximately 15 food and beverage franchises are no longer part of our top 300. That said, those food franchise with a specific niche are doing well. Jimmy John's sandwiches have almost a cult following, which helped to catapult the company from #17 to #4. And Hot Stuff Foods was one of the largest ranking gainers, going from #252 to #72.
• Senior care franchises are expanding rapidly and continue to climb in the rankings. The top three: Home Helpers (#32), Home Instead Senior Care (#48), and Comfort Keepers (#61).
• Another bright spot: As consumers watch their pennies, they are turning more and more to cheaper hair salons like Great Clips, which made a steady climb from #22 to #20, and Supercuts, which jumped from #39 to #29.
• Successful franchises have hit upon another strategy to prosper. They have created smaller "footprints" of their original franchise concepts. Gold's Gym (#88 skyrocketing from #131) is offering franchisees a smaller size gym that requires less upfront capital to buy. The same goes for Friendly's Restaurant (#137, which did not even make last year's list). Friendly's has created smaller express restaurants to augment its full-service establishments.
• No surprise here: Real estate franchises were big losers (United Country Real Estate plummeted from #19 to #125) and retail was also down (Ace Hardware dropped from #29 to #105, and Petland did a free fall from #126 to #229).

As we said last year, we believe our list is the most transparent and interactive ranking of its kind, the only such ranking that lets would-be franchisees sort and surface information that's the most important to them such as financial strength and company growth. It is also the only list that draws upon the in-depth financial analysis of our parent company, D&B (Dun and Bradstreet).

Let us know how we can improve our list (e-mail us at editorial@allbusiness.com) and please keep in mind that purchasing a franchise is not an easy process. You should not solely rely on our list to make this important and complicated business decision. Carefully read the Franchise Disclosure Document (FDD), have an accountant review the company's financials, research competitors, and talk to as many current and former franchisees as possible. If you are interested in learning more about how we picked our winners, read our methodology below.

Now on to the 2010 AllStars. -The Editors

Our Methodology
To be eligible for our AllStars list, a franchise company had to have a Franchise Disclosure Document and have at least 25 current domestic franchised units (or 100 company-owned units and 5 domestic franchise units).

We used a number of criteria to rank our winners: franchise unit growth rate, financial strength, system size, years in business, years franchising, availability of financing, and Web (brand) visibility. Each franchise was scored against these criteria, and in some cases criteria were combined to create six subindices. Within each subindex, franchises were ranked, and then these ranks were weighted by importance and summed to produce the overall AllStar rank. The six subindices are described below.

Growth Rank
The growth subindex is a measure of how fast a franchise system is growing. The more growth a system experiences, the more opportunity it offers. We looked at the net change in the number of franchise units over three years for each system. We then weighted these changes according to the type of franchise (U.S.-based unit growth was weighted more heavily than international growth or conversion-unit growth). Also, growth in the most recent year was given more weight than in the previous year. The growth rank received the heaviest weighting in our overall AllStar rank.

D&B Financial Strength Rank
We weighted and combined D&B's predictive Commercial Credit and Financial Stress Scores into an overall financial strength rank, which received a strong weighting in our overall rank. Keep in mind that this is a comparison ranking, so winners that scored low only scored low out of our pool of 300 and may still be strong financially. The score uses the full range of D&B information, including financials, comparative financial rations, payment trends, public filings, demographic data, and more. Of the two scores, we weighted the Financial Stress Score more heavily.

System Size Rank
The system size rank is a measure of the size of the franchise system. The larger and more established the system, the stronger the brand awareness and the safer the franchise investment is likely to be. We assigned points based on different weightings for the number of U.S.-based franchise units (heaviest weighting), company-owned units, and non-U.S.-based units (lightest weighting).

Longevity Rank
The longevity rank is a measure of how long a franchise company has been around. The longer a company has been in business and franchising, the safer the investment is likely to be. We assigned points based on the number of years a franchise company has been in business and for how many years it has been franchising. Years franchising was given more weight than years in business.

Web Visibility Rank
To determine a franchise's Web visibility, we combined Google PageRank and Alexa Traffic Rank. These metrics were recorded for each franchise system's primary consumer-facing Web site, weighted, and summed to produce the overall Web Visibility Rank. We believe this rank to be an excellent measure of a franchise company's brand awareness on the Web.

Financing Rank
We looked at the number and types of financing assistance each franchisor offers its franchisees. The more financing support offered, the more committed the franchise company is to its franchisees, and the better the opportunity for the franchisee.

See the full list of 2010 AllBusiness AllStar Franchises.