Chains that train new store owners help keep franchises afloat, study says (3/11/2008)

Fast-food restaurants and other chain outlets are less likely to fail when super-sized training programs prepare fledgling owners for the challenges ahead, according to a new study co-written by a University of Illinois business professor.

Advance, in-depth training on everything from bookkeeping to dealing with customers and suppliers is a key to survival for franchise outlets, said Steve Michael, a professor of business administration in the U. of I. College of Business.

But while some chains put aspiring entrepreneurs through months of schooling, others turn them loose in as little as two weeks, increasing the odds of failure, said Michael, whose study was published in January's Journal of Small Business Management.

"The notion of just watching while somebody else does the job for a while is a mistake," Michael said. "People need to realize these are sophisticated businesses that require extensive training. The more time you spend at Hamburger University or Dunkin' Donuts University, the lower the failure rates."

Michael and Florida State University business professor James Combs studied nearly 90 national restaurant chains to gauge whether franchisors contribute to the success or failure of franchisees, which number about 700,000 worldwide in industries ranging from lodging and office supplies to tax-preparation and cleaning services.

Along with training, franchisors can help keep franchisees afloat by pumping money into advertising that promotes the company brand, according to the study, "Entrepreneurial Failure: The Case of Franchises."

"Chains that are out there promoting themselves create value and drive up demand. When they don't, franchisees are more likely to fail," said Michael, who says the study is the most extensive look to date at how chains influence the fate of franchises.

The study also found that rules set down by some chains help franchise outlets succeed, such as offering exclusive territories that restrict intra-brand competition or requiring franchisees to be owner-operators.

"Franchisors could be viewed as bullies for forcing owners to actually manage the franchise, but it helps both of them survive for the obvious reason," Michael said. "If someone puts their full time and effort into an operation, they're more likely to be successful."

Michael compared his findings with those of previous studies on the keys to success for chains and found that overall what helps the franchisee survive also helps the franchisor survive. The lone difference, he said, is royalty fees, which tend to help franchisors but hurt franchisees.

"It's often billed as a symbiotic relationship in trade publications and the fact is that seems to be true," Michael said.

The study found that 13 percent of franchise restaurants in the survey failed - higher than results of some previous studies but far lower than failure rates for traditional start-up businesses that can approach 70 percent.

But driving franchise failure rates even lower would be welcome news for the nation's economy, with chains accounting for more than 40 percent of U.S. retail sales annually.

"It's a big chunk of the economy," Michael said. "And it's a growing part of the economy as more people seek self employment, either because of changes in the macro-economy or just because they don't want to work for someone else anymore."

Note: This story has been adapted from a news release issued by the University of Illinois

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