Factors for New Franchise Success

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While franchising has become the dominant mode of retailing in the United States, three-quarters of new franchise systems fail within twelve years. This high failure rate makes it important for potential franchisees to identify new franchisors that are likely to succeed and for franchisors to be aware of policies and practices that enhance long-term survival. To meet these needs, the authors present a model, based on a twelve-year study of 157 companies in 27 industries, of what makes new franchise systems succeed.

The story of Newfran, a fictional composite of the successful new franchisors in the study, illustrates the key characteristics of success and their relationships to one another. For potential franchisees, the example of Newfran offers six criteria for selecting a new franchise system:

1. Seek franchisors that are expanding rapidly. Establishing brand name is crucial to success. A slowly growing franchise system may not be able to promote its brand name cost-competitively.

2. Do not seek a franchise system that promises a lot of field support. Field support is costly. New franchisors are better off devoting scarce resources to growing the franchise system.

3. Do not be dismayed by the lean headquarters of a new franchise system. A lean operation enhances growth and brand-name development.

4. Seek franchisors that are developing strong brand names. Indicators of brand-name value include a large system size relative to the industry average and the system's ranking in Entrepreneur Magazine.

5. Look for membership in the International Franchise Association and registration with state authorities. These associations provide a quality check on the franchise system and signal the franchisor's reliability.

6. Be wary of new franchisors that offer masterfranchising. Selling the responsibility to recruit and manage franchisees to another party allows the franchisor to grow more quickly but increases the probability of system failure.

For new franchisors, these criteria highlight the need to develop the brand name, expand rapidly, and show a trustworthy nature to potential franchisees. Following the policies identified in the study does not guarantee success but significantly increases a franchise system's prospects. 

Scott Shane is the Leghorn Career Development Assistant Professor of Entrepreneurship, MIT Sloan School of Management. Chester Spell is Senior lecturer, University of Waikato, New Zealand.

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