FUND Performance Metric: Scoring a Franchise’s Historical Performance

July 24th, 2019 by Jeremy Smith

Over  9,000 lenders subscribe to the Franchise Registry, many of whom rely on FRANdata’s FUND Scoring system as the primary consideration to determine which franchise brands to work with and what loan terms to offer. Lenders with over a trillion dollars of assets rely on the FUND Score to assess credit risks.

To understand how we can protect you from exposure let’s dive into one of the driving statistics incorporated into our FUND scoring algorithm, Historic Unit Success Rate or HUSR. This metric, which is based on 8 years of information, has strong negative correlation with SBA loan default rates. We carefully construct this score taking into account everything from non-renewals and acquisitions, to proprietary verified information supplied directly by franchisors.

We can’t overstate the importance of such a long timetable, and the resources required to make that a possibility. Franchisors tend to have significant fluctuations in unit closures over time which makes historical context key to understanding a franchise’s performance strength. Looking only at the most current years unit success rate can give a false sense of security.

For example, a brand that has 95% annual unit success rate in 2018 seems like a good bet right? Over a 10-year loan term that is 0.9510=0.598 or 60% success rate. The implication is that there is a 40% chance that any given unit in the system for 10 years might close, which is likely to result in a franchisee defaulting.

However, the true value of the metric is not just the Historic Unit Success Rate percent communicated in the report. To give a complete picture – we contextualize Historic Unit Success Rate’s within quintiles across all the other brands in franchising. We look at hundreds of brands each year and score each brand according to where they are in relation to their peers. No one else can aggregate franchise information on this level to supply insights.

To find out more about FRANdata’s FUND scores, click here.

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