How the risk score works

The risk score runs from 1 to 10. A higher score means more for you to look into. It is a research score, not a recommendation to buy or not buy.

Starting point. Every report starts at a neutral 5. We add or subtract points only for checklist items that a cited source confirms. Halves round up. The score always stays between 1 and 10.

Items that add points

• More than 1 in 10 units closed over three years (Item 20): +2
• The earnings figures are based on fewer than 30 locations, or leave out units that failed (Item 19): +1.5
• Several franchisees have filed lawsuits with similar claims, shown in the disclosure document (Item 3) or in public court records: +2
• You get no protected territory, or the protection has broad exceptions (Item 12), or public reports show the franchisor putting units inside existing franchisees' territories: +1
• The royalty and ad fund together are more than 10% of sales (Items 6 and 11): +1
• SBA (U.S. Small Business Administration) loans to this brand default clearly more often than loans in its category, based on enough loans to compare: +1.5
• The disclosure document carries a state-required warning about the franchisor's financial condition, or the auditor flags doubt that it can keep operating (a going-concern note) (cover pages and Item 21): +2. When this applies, the −1 for clean financials can't apply.
• A government agency has taken action against the franchisor or its leaders in the last 5 years, such as a state consent order, a fine, or a lawsuit by a state attorney general or the FTC (Federal Trade Commission), even if it was settled: +1.5
• Reliable reports from the last 2 years show trouble at the company or among its leaders, such as a founder or officer bankruptcy, a headquarters closure, or mass layoffs: +1.5
• Several franchisees have made similar complaints, in the news, through a franchisee association, or to regulators (customer reviews don't count): +1

Items that lower the score

• Many units change hands while few close (Item 20): 0 or −0.5
• The franchisor's audited financials are clean, its revenue is growing, and there is no going-concern note (Item 21): −1

Two override rules

• If a state regulator has an active stop order, revocation or cease-and-desist against the franchisor, the score is at least 9.
• If public records show the franchisor has stopped operating, the score is 10.

Bands. 1–3 is low. 4–6 is moderate. 7–10 is high.

Quick Scan: why you see a possible range. A Quick Scan uses public records only. Many checklist items need the franchise's disclosure document (FDD), so they can't be tested yet. To show how far the score could still move, we work out two numbers. The low end assumes every untested item that lowers the score applies. The high end assumes every untested item that adds points applies. Both use the same starting point, rounding, limits and override rules. The size of the gap sets the confidence level:

• High confidence: the range spans 0–1 points.
• Medium confidence: the range spans 2–3 points.
• Low confidence: the range spans 4 or more points.

The final score comes with the Full Report, which reads the FDD and tests each item.

See a full sample report (fictional franchise) · FAQ