United States Small Business Administration
Office of Advocacy
RS 158
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Purpose
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.
Highlights
Ordering Information
The complete report is available from:
National Technical Information Service
U.S. Department of Commerce
5285 Port Royal Road
Springfield VA 22161
(703) 487-4650
(703) 487-4639 (TDD)
Order number: PB96 113162
Cost: A03/$17.50; A01/$9.00 Microf.
*Last Modified 6-11-01