Dr. Winslow Sargeant is the sixth Chief Counsel for Advocacy of the U.S. Small Business Administration’s Office of Advocacy, appointed by President Obama August 19, 2010. The Office of...
Differences Between Successful and Unsuccessful Franchisors
United States Small Business Administration
Office of Advocacy
by Dr. Scott Shane
Atlanta, GA 30332-0520
under contract no. SBA-95-0404
As a form of business organization, franchising has grown rapidly during the past decade. For example, between 1983 and 1993, the number of business format franchisors (organizations that sell others the right to use a brand name and proprietary system to deliver a product or service to customers) grew from 1,877 to 2,900, while employment for this type of franchisor increased from 5.2 million to 8.0 million (54 percent).
Little careful research exists on the survivability of businesses that start franchise systems. This study provides the first investigation of the performance of a cohort of new franchisors. Based on a rigorous research design and high quality longitudinal data, the study seeks to determine the factors that differentiate surviving franchise systems from those that cease operations.
The findings of this research effort have implications for franchisors, franchisees, and policymakers. Potential franchisees, too, will want to pay attention to the factors predicting system survival before they make decisions about investment in a franchise system.
Scope and Methodology
Franchisors are required by law to provide potential franchisees with a copy of a disclosure document, the Uniform Franchise Offering Circular (UFOC), prior to the sale of a franchised outlet. The UFOC provides detailed information on the franchisor's business and the identity and background of its principals; the fees that franchisees must pay; terms and conditions imposed on the franchisee, such as approval of suppliers, audits and inspections, and rules regarding the operation, sale or transfer of the franchise; estimates of the initial investment; obligations of the franchisor, including such items as training, operating plans, outlet specifications, advisory assistance, and advertising and promotional programs; expansion opportunities, territorial rights, renewals, and conditions for termination; and the franchisor's financial statements.
A factor analysis was used to construct six variables from all the data in the UFOC. These variables were then used as independent variables in logistic regression equations to predict the survival or non-survival of the franchise systems. Interacting effects were also examined.
The study examined the cohort of 138 firms that started new franchise systems in 1983. Data on each franchisor's performance was collected for the period 1983 - 1993.
- Surviving franchise systems tended to be older and larger (that is, they had more company-owned outlets) than nonsurviving systems when they began to franchise. The survivors also had higher franchise fees and required a higher level of initial investment.
- By the end of the 10-year period studied, less than one- quarter of the initial cohort of franchisors was still franchising.
- The decade can be divided into two discrete periods. During the first four years of system life, a high death rate (14.4 percent per year) was found. This rate slowed considerably (to 3.0 percent per year) during the next six years.
- System survival was associated with the franchisor's emphases on expansion through franchising and on transferring knowledge to franchisees, and growth in the number of company-owned outlets during the first two years of the life of the franchise system.
- Two factors were ruled out as predictors of survival -- the growth rate of the industry and the price of the franchised outlet.
The complete report is available from:
National Technical Information Service
U.S. Department of Commerce
5285 Port Royal Road
Springfield VA 22161
(703) 487-4639 (TDD)
Order number: PB96 113162
Cost: A03/$17.50; A01/$9.00 Microf.
*Last Modified 6-11-01