How Do You Score a Franchise System?
"Scoring" is a broad term... compared to what? What does "good" mean? It can get quite philosophical when evaluating an unlimited set of paths forward.
Any score is only as meaningful as the data that goes into it, and by having a clear relationship between the score and the ultimate outcome.
The below is a 5 minute read (and 15 second video) on scoring a franchise system and is intended for the following audiences to answer questions such as:
- Prospective Franchisees: are you considering a franchise system? How do you setup your diligence process and evaluate a brand?
- Current Franchisees: how is your system changing year-over-year, specifically with respect to growth, churn, and financial performance?
- Franchisors: what is my competition disclosing each year in Item 19?
- Lenders: how much of a given brand am I looking at when reviewing Item 19 and Item 20?
- U.S. Small Business Administration, Federal Trade Commission, NASAA - what is an additional heuristic we can use when evaluating a given franchise system? And how can we access the aggregated Item 19 data and stats for hundreds of brands for benchmarking purposes?
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The Franchise Signal Disclosure Score
The franchise signal disclosure score is one "simple" measure:
Of all of the franchised outlets that operated at any point during a brand's filing year, how many were included in a revenue per outlet measure (median and/or average) in a brand's Item 19 financial performance representations?
This seems like it would be easy...
"Surely a brand has a table of anonymized revenue by outlet? They do charge royalties to every franchisee outlet based on percentage of revenue after all?"
Take for example Crumbl with a 2026 Franchise Signal disclosure score of 70%.
776 of their units 1,112 franchise units open at one point during FY 2025 are disclosed in their Item 19 financial performance representations.
What happened to the other 336 units that were open at one point during the year? Why are they not included in the numerator?
How do you Compare Apples and Oranges in the Franchise World?
With thousands of brands across restaurants, fitness concepts, or home services - the only real denominator tying all of these together under one umbrella is the franchise business model and the legal entities and relationships between franchisor and franchisee.
So any score created that tries to "judge" a bakery, a gym, and a plumbing business with one number is inherently limited as they all have very different operations and economics.
Location and market also play a large role. The same business could perform well in a specific region or local area, but struggle nationally. An FDD will not tell you how saturated your local market is.
Operator Profile - who is running this business and what is their (ideally related industry) background?
What are all of the other "signals" that go into a score?
- Royalty rate
- Initial Investment
- Ongoing Fees
- Unit Economics
- Year-over-year changes in contractual terms
- Growth and churn in a system
- Ownership tenure and changes
The list goes on and on as to factors that are helpful to consider.
There Are "Known" Considerations in Diligence
The factors that are important to evaluate for any franchise system are well tracked and highlighted:
- In 2024, the Federal Trade Commission published an issue spotlight, highlighting the top 12 franchisee concerns. The article is worth a read for anyone considering a franchise, and number #9 on the list is specific to FDD disclosure. This article also highlights U.S. Small Business Administration lending research in the franchise space: https://www.ftc.gov/system/files/ftc_gov/pdf/Franchise-Issue-Spotlight.pdf
- NASAA published commentary for Item 19: https://www.nasaa.org/wp-content/uploads/2017/05/Financial-Performance-Representation-Commentary.pdf
- Franchise Reality Check™ provides in-depth diligence considerations wholistically and on a per item FDD basis.
The Franchise Signal Disclosure score offers an additional metric for diligence and financial review consideration of any given franchise system.
The Scoring System and Next Steps
The specifics of the score and several examples are published in detail on the Franchise Signal site. https://www.franchisesignal.com/disclosure-score
Edge cases (affiliate vs franchisee, fast growth and high churn considerations, no Item 19 FPR, non-revenue metrics, operator to unit ambiguity) are outlined and reviewed in detail.
One important consideration is that the score is reproducible by anyone with the FDD for that brand and filing year. The mechanics and edge cases of the numerator get complex, but the rules are repeatable across FDDs.
If you would like to see a specific score or the aggregated stats and data from hundreds of brands, please get in touch. https://www.franchisesignal.com/