What does "A good example is the best sermon." - Benjamin Franklin mean?

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It means that letting people SEE the bad consequences of not behaving well is more effective than just TELLING them about the bad consequences.

Show by example. No use if parents just tell their children to be good, if they, themselves are not so.

People, especially children, often don't listen. 

It means that it is fine to tell someone to be good, but if they actually see you doing so rather than telling someone to, they will be a better example for others. 

I think he is meaning deeds rather than words are the best way of getting your point across.

Rather than someone telling you all about how good something might be (sermon) - a concrete demonstration that it actually is (example)  will be more convincing.