How we chose America's Star Franchisees

With tens of thousands of successful franchise owners across the United States, determining which ones were worthy of being identified as among America's Star Franchisees was not a simple task. There are close to 3,000 franchise companies in the United States collectively contributing $1 trillion annually to the economy, according to the International Franchise Association.

We reviewed 28,500 franchisees, representing 364 brands, between June 2014 to December 2015 as part of our annual franchise satisfaction survey. Our approach as a franchise industry market research firm is to perform independent surveys of franchisee satisfaction and franchise buyer experiences.

For our partnership with CNBC, we decided to leverage our annual research on top franchise brands as the first step in identifying top-performing franchisees around the country, those individual owners within franchise systems who exemplify a combination of financial success and professional satisfaction.

The three franchise company keys

There are many different metrics one can evaluate when looking for franchise business opportunities that will produce successful owners, but for this project, we first evaluated the franchise company on three key metrics:

1. Strong proof of concept in multiple markets.
2. Clean review of the franchise disclosure document.
3. Solid financial performance and a good opportunity for franchisee return on investment.

Proof of concept: The primary benefit of investing in a franchise is its proven track record of success in various markets. This track record only comes with more established brands of a certain size. While there are always interesting new franchise concepts, franchises with less than 100 open and operating units were removed from consideration. This narrowed down our list of applicable franchise brands to less than 500.

Clean reporting: Among these 100 brands, we did not need to eliminate any for reasons of litigation or bankruptcy, but FDDs were reviewed for these items. We also made sure each franchise system had a clean audit report. Finally, we looked for high unit turnover (in excess of 10 percent annually averaged over the past three years).

High return on investment: Brands were evaluated for their potential return on investment based on their required initial investment compared to average franchisee annual income. There was no minimum percentage, but companies with a higher ROI ratio (franchisee income to initial franchise investment) received a higher weighting. The median ROI ratio for franchising is a 0.4 based on median franchisee income of $63,000 and median initial investment of $165,000.

Note: Initial investment and start-up cost information for brands in America's Star Franchisees is sourced from 2015 franchise disclosure documents and could be updated during 2016.

The two fundamental questions for franchisees

Next, we put these companies to the franchisee test, looking at two key sentiment readings from owners in these franchise systems:

1. Broad franchisee satisfaction.
2. High regard of management by the franchisee community.

Broad franchisee satisfaction: Having surveyed franchisees from more than 900 franchise companies over the last decade, Franchise Business Review has observed how closely high franchisee satisfaction is tied to franchise performance. Nobody knows a franchise business better than its franchisees. They can truthfully answer the questions you need the answers to prior to investing in a franchise.

Will you receive good training and support? Are the systems and processes solid? Do the marketing programs actually drive business? Is the business performing well financially? And most importantly, would you recommend your franchise to others?

We used current data from our franchisee satisfaction research in order to eliminate any companies that did not have high satisfaction among their franchisees. This step further narrowed the number of brands that could make the top-tier franchise cut down to under 100.

It's important to note that some franchise companies don't allow third-party research firms to survey their franchise owners, or if they do, they don't share this information publicly. In these cases, brands were disqualified for lack of available data. While these franchise companies certainly have top-performing franchisees, we thought it was important to only include franchisees that represent brands where data is available.

Regard for management: We turned again to our research data for impressions on senior management at franchise corporations, specifically two survey questions:

1. Do you trust your franchisor?
2. Do you believe that your franchisor operates with a high level of honesty and integrity?

Any brands that did not rate well above benchmark on both these two key questions were eliminated.

When the top-tier franchise selection process was finally complete, just 68 brands made the final cut.

The 9 signs of top-performing franchisees

Within every franchise system, there is a small group of top-performing franchisees, the very best of the best. These were the franchisees we wanted to identify and profile for this project.

With a total pool of 26,262 franchisees within the 68 select brands, we again went back to our research: 13,422 franchisees from these brands had completed surveys.

The first step was to eliminate any franchisees that had not completed a satisfaction survey in the past 18 months or opted to remain anonymous. This step likely eliminated a number of highly successful franchisees, but we couldn't recommend anyone without data to back up their franchisee experience. We also eliminated all "start-up franchisees": those that had been in business for less than two years.

Next, we eliminated all but the most satisfied franchisees based on completed surveys. To identify the top franchisee finalists, they had to have answered the following nine survey questions with the accompanying responses:

1. The total investment in my business has been consistent with my expectations. (Agree or strongly agree)
2. Today, the overall financial picture of my business is: (Strong or very strong)
3. The long-term growth opportunity of my business is (Strong or very strong)
4. I trust my franchisor (Strongly agree)
5. I respect my franchisor (Strongly agree)
6. I believe my franchisor acts with a high level of honesty and integrity (Strongly agree)
7. Overall, how would you rate your satisfaction with this franchise (Excellent)
8. Would you recommend this franchise to others (Yes)
9. Annual pretax income
   (Preference was given to those with higher incomes. We have reviewed net income for the vast majority of franchisees on this list, though a few declined to share. We cannot disclose net income figures we have reviewed per our agreement with survey participants, but the 50 franchisees on this list make, on average, three times as much as industry average.)

The final step: Identifying 50 of America's Star Franchisees

The answers to those nine questions narrowed our list down to 1,700 top-performing franchisees. Choosing a single finalist from each state was extremely challenging. We looked at many different factors.

Only those whose survey responses said they were exceeding financial expectations, had high general overall satisfaction, would absolutely recommend their franchise brand to others and had the utmost respect for their franchisors in terms of their leadership skills as well as honesty and integrity were considered.

With the objective of highlighting the wide array of franchise concepts that exist in the United States — many people equate franchises with food — we identified 50 different top-performing franchise brands.

We started with the smallest state and identified top-performing franchisees who resided there whenever possible at each brand. The smallest states, such as North Dakota, South Dakota, West Virginia and Rhode Island, only had a handful of franchisee finalists, while bigger states, like Florida, had more than 100 finalists. To narrow the finalists down to one per state, preference was given to higher-income earners whenever income data was available. Preference was also given to franchisees who encompass interesting aspects of franchising, including multi-unit franchisees, multibrand franchisees and having been identified by their brands as among the best in their systems.

All of the 2016 America's Star Franchisees are exceeding their financial expectations, but money wasn't the only force behind their electing to become a franchisee. Some did so in order to earn enough to be able to have a lifestyle that enables them to be with family or friends more often, pursue a passion or because careers in other sectors hadn't provided professional satisfaction.

We found that these successful franchisees do have a lot in common. Most had been in franchising for many years. Many have owned multiple businesses or grown their single business to cover a very large service area. Most also work in the business with their spouse or other family members. As with any entrepreneurs, there is no doubt that they all worked very hard to achieve their level of success.

— By Eric Stites, CEO and managing director, Franchise Business Review