How we analyze franchises
Last updated on: June 14th, 2024
How UpFlip analyzes franchise opportunities
We take a structured approach to identifying franchise opportunities. This document is technical in nature to help you understand our method and determine whether you believe it is effective.
Even if you are confident in our method, you should always do your own research.
Our franchise selection process
Our franchise selection process follows these steps:
1: Ask three franchise brokers for their business recommendations.
2: Gather the franchise disclosure documents for all recommendations.
3: Analyze each franchise disclosure document.Categorize each franchise as disclosive or non-disclosive.
4: Gather financial information for disclosive franchises.
5: Rank franchises based on the search query.
6: Let’s look at each step in greater detail.
Step #1: Ask three franchise brokers for their business recommendations
To help the UpFlip community find and purchase franchises, we work with three franchise brokers. We asked the brokers their recommendations for:
- Industry-specific franchises
- Most profitable franchises
- Low-cost franchises
- Franchises under $100K
They suggested a combined 115 franchises.
We may pull other franchises in the future; we will disclose additional information when necessary.
Step #2: Gather the franchise disclosure documents for all recommendations
Next, we gather the most recent franchise disclosure documents for each franchise using the state of Wisconsin’s franchise disclosure website (which we chose for ease of use).
For the franchises we can’t collect the disclosure documents for, we look for other ways to gather the same information. If there is not another way, we eliminate them from the suggestions.
Note: Some of the suggestions aren’t actually franchises, but manufacturers with franchise-level support. These are mostly in the vending machine, ATM, and photobooth industries. The benefits of these companies are there are no ongoing franchise fees, but you get ongoing support.
Step #3: Analyze each franchise disclosure document
Each franchise disclosure document has 23 items, but we primarily review the sections regarding financial information. These sections include:
- Item 5: Initial Fees
- Item 6: Other Fees
- Item 7: Estimated Initial Investment
- Item 19: Financial Performance Representations
Step #4: Categorize each franchise as disclosive or non-disclosive
First, we review Item 19, Financial Performance Representations, because some franchisors choose to opt out of providing this information.
When a company doesn’t provide financial disclosures, we view it as a red flag. There are several reasons a company might refrain from providing this information, including:
1: There aren’t any franchises.
2: The franchises aren’t performing well.
3: There is so much variation in performance that they’re concerned that any representations may be misleading.
4: They’re protecting a competitive advantage and wish to keep that hidden.
5: Other reasons unknown to the creator of this process.
Just because a company opts to not give information doesn’t mean they aren’t investment-grade companies. It just means we will not put our reputations on the line by recommending them. Thus, we categorize them as non-disclosive and disqualify them.
Assuming Item 19 is disclosive, we continue to the next step.
Step #5: Gather financial information for disclosive franchises
We gather as much of the following financial information as we can:
1: Revenue: We use the median revenue when it is available, but we will use the average revenue in its absence. In most scenarios, the median revenue the most adequate representation of what you can expect to earn.
2: Gross Profit Margin: When the franchise provides revenue and gross profit, we use the values provided. In some scenarios, we use the formula: (Revenue - Cost of Goods Sold - Labor (Optional)) / Revenue
3: Profitability After Fees: We deduct the percentage of profit after ongoing fees from the gross profit.
4: Initial Franchise Fee: This is the amount the franchisor collects from the franchisee to open a single franchise.
5: Other Fees: We use an approximation of the ongoing fees as a percentage or dollar amount. Most franchises have a royalty fee, a marketing fee, a technology fee, and other regular fees. We do not include irregular fees, taxes, penalties, or other unpredictable fees in our calculations.
6: Estimated Initial Investment: Estimated Initial Investment: This is the amount the franchisor expects most new franchisees to spend to open the doors and cover (typically) three months of ongoing expenses.
Step #6: Rank franchises based on the search query
After we’ve gathered all the information, we rank them based on the blog topic. For instance, a blog about the most profitable franchises would be ranked by multiplying revenue by profitability after fees. Meanwhile, a blog about franchises to open for under $100K would use the figures for estimated initial investment or initial franchise fee.