Curbing franchisee failure: A systematic review of the empirical evidence

ABSTRACT

Franchisee failure is a major incidence that threatens the stability of franchise businesses globally. Yet there has been no synthesis of the empirical evidence in order to systematically understand the factors that increase the likelihood of franchisee failure. The diverse conceptualizations and discrepant causes of franchisee failure have resulted in a fragmented literature. Through a systematic review of the empirical literature, an all-inclusive model for curbing franchisee failure is developed – comprising the single and joint influencing factors. The evidence elucidates how to mitigate franchisee failure in order to optimize the prospects of franchisee survival.

KEYWORDS:

• Franchising
• franchisee failure
• franchisee survival

Disclosure statement

There is no conflict of interest.

Notes

1 Compiled from various sources (BFA/NatWest Franchise Survey, 2018; CFA Annual Accomplishments Report, 2019; Entrepreneur.com, 2020; Export.gov, 2019; Forbes.com, 2020; Franchise.org, 2020; Statista 2019a, 2019b; whichfranchise.co.za, 2019).

2 The starting year for selection of relevant studies was not restricted in order to identify when empirical research on franchisee failure began to attract scholarly attention in the academic literature. As seen in the findings section discussed later, the first empirical research on franchisee failure occurred in the early 70s, making the non-restriction of the starting year for selection of relevant studies vital, as this period coincides with when franchising research in general began to attract increasing attention in the academic literature.

3 In other words, the search consecutively involved a combination of the following:

franchis* AND fail*

franchis* AND demise

franchis* AND discontinu*

franchis* AND propensitytoleave

franchis* AND leave

franchis* AND left

franchis* AND exit*

franchis* AND prematuretermination

franchis* AND terminat*

franchis* AND non-renew*

franchis* AND nonrenew*

franchis* AND nonrenew*

franchis* AND turnover

franchis* AND clos*

franchis* AND conver*

franchis* AND re-sale

franchis* AND resale

franchis* AND resale

franchis* AND saleofoutlet

franchis* AND transferofoutlet

franchis* AND surviv*

franchis* AND cancel*

franchis* AND bankrupt*

franchis* AND loandefault*

franchis* AND dissol*

franchis* AND post-litigationrelationshipdissolution.

4 Although almost all the journals in JSTOR are peer-reviewed publications, there are some exceptions such as journal contents that are much older than the standard peer-review process of today; this implies that such exceptions might not be technically peer-reviewed, although all the information in JSTOR are of scholarly standard (JSTOR Support).

5 Except for one study in 1972.

6 One variable (average total investment) from Alon et al. (2015) was not included in the results of this systematic review because it is unknown whether this variable is referring to the average total investment of the franchisor and/ or franchisee. Also, the following variables (relating to franchisor characteristics) in Alon et al. (2015) were not included in the results of this systematic review because the direction, and nature, of the relationships to franchisee failure were not stated, even though the variables were found to influence the rate of franchisee failure: financial assistance, passive ownership, number of states in the U.S., terms of contract, royalty percentage and percentage distribution overseas.

7 The results incorporate the instigator of franchisee failure, where available.

8 “Independent franchisee associations are self-organized groups of franchisees belonging to the same franchise system that are not sponsored by the franchisor” (Argyres and Bercovitz,2015, p.811).

9 This supports the findings reported above (in the section under single influencing factors) where (i) Schell and McGillis (1995) found that franchisor inflexibility with their operating procedures is positively associated with franchisee failure; (ii) Frazer et al. (2007) found that franchisee desire for greater independence influences franchisee failure (but the direction of the influence — whether positive or negative — was not specified); and (iii) López-Fernández and López-Bayón (2018) found that franchisee empowerment, in terms of delegation of pricing to franchisees, reduces franchisee failure (initiated by the franchisee).

10 This supports earlier reported findings in the section under single influencing factors, where (i) Frazer et al. (2007) found that franchisee dissatisfaction with the franchisor is a (direct) influencing factor of franchisee failure (but the direction of the influence — whether positive or negative — was not specified); and (ii) Frazer et al. (2012) found that franchisor utilization of unilateral communication processes that focus on adherence to franchise system standards and restrictive directives will lead to higher rates of franchisee failure.

11 This supports the earlier findings from the same study on the negative relationship in terms of franchisor investments in strategic resources (that occur through the provision of long initial training period for franchisees) and franchisee failure.

12 Franchisees’ active moral hazard was measured as the sum of (i) property infringement — i.e. trademark, copyrights and proprietary information — by the franchisee and (ii) sale of unauthorized products by the franchisee (Grünhagen et al., 2017).

13 Non-standard products were measured as the percentage of revenue that franchise outlets generated from products that are not part of the original franchisor business model or product mix, i.e. not part of the franchisor template (Winter et al., 2012).

14 These violations include sanitation problems, service issues and other improprieties outlined in the franchise agreement (Manolis et al., 1995).

15 Franchisors’ passive moral hazard was measured as the sum of (i) franchisors’ failure to provide support to franchisees and (ii) franchisors’ refusal to renew a contract as obligated (Grünhagen et al., 2017).

16 Franchisor adverse selection was measured as an inappropriate franchisor being selected by the franchisee due to the sum of (i) franchisor information misrepresentation and (ii) franchisor information omission in the disclosure documents (Grünhagen et al., 2017).

17 Earnings claims (i.e., the revelation of information regarding potential profits) are a signal used by franchisors to attract franchisees (Michael, 2009).

18 Alon et al. (2015) found that industry type influences franchisee failure, i.e., by categorizing industry type into 3 groups, it was found that: (i) Group 1 is the riskiest. This comprises automotive, computer products and services, home décor and design, pet-related products and services, printing, retail food, and sports and recreation; (ii) Group 2 is the next risk group. This comprises baked goods, beauty-related products, building and construction, child-related, clothing and accessories, education-related, fast-food restaurants, frozen desserts, health and fitness, real estate, sit-down restaurants, retail stores, and general services; (iii) Group 3 is the lowest risk group. This comprises business-related services, lodging, and maintenance services.

19 State laws prohibit franchisor terminations unless the franchisor has ‘cause’ for the termination; some of the states that have these laws also give the franchisee a right to ‘cure’ any alleged non-performance that may be a cause for the proposed termination by the franchisor (1995).

20 The (Australian) Franchising Code of Conductis mandatory and was introduced in Australiaon July 1, 1998, toregulate the franchising sector; it is afranchising regulation where the implementation of the Code is expected to improve franchising relationships (Lim & Frazer, 2002). As Lim and Frazer (2002) note, the purpose of the Code is to provide assistance to franchisees and franchisors to make an informed decision before entering in to afranchise agreemen tand to offer a framework for disputere solution.

21 This suggests that franchisors can use the foregoing governance mechanisms effectively in combination with each other, to offset the negative effects on franchisee failure attributable to sole use of franchisor’s socialization of franchisees through provision of ongoing services, reported earlier in the section on single influencing factors (in Antia et al., 2017).

22 This suggests that franchisors can use both foregoing governance mechanisms simultaneously to counter the negative effect on franchisee failure, which can occur due to the single use of high royalty rate, reported earlier in the section on single influencing factors (in Michael & Combs, 2008).

23 The stage of the franchise lifecycle was measured by a set of indicators, namely: (1) number of franchised and company-owned outlets, and (2) number of years operating as a business and franchising.

24 This is consistent with the earlier findings reported earlier, where Michael and Combs (2008) show that franchisor investments in brand name is a single influencing factor that reduces franchisee failure.

25 Registration law was measured in terms of whether the state (in the U.S.) in which each litigation was filed was a state under a registration law regime (Grünhagen et al., 2017). Registration law is a franchise-related legislation, where each registration-law state requires franchisors to file franchise disclosure documents (FDDs) with the state’s regulatory authorities before they can sell franchises to prospective franchisees in the state (Grünhagen et al., 2017). Franchise disclosure documents (FDDs) were formerly known as uniform franchise offering circulars (UFOCs) (Antia et al., 2013).

26 Franchisee adverse selection was measured as inappropriate selection of franchisee (by the franchisor) due to (i) franchisee information misrepresentation before the contract was signed and (ii) franchisee incapability of maintaining daily operations 2017).

27 Relationship law was measured in terms of whether the state (in the U.S.) in which each litigation was filed was a state under a relationship law regime 2017). As noted by Grünhagen et al. (2017), relationship law is enforced in many states in the U.S. to protect a franchisee from falling victim to arbitrary or baseless termination of the franchise agreement (by the franchisor); relationship law requires franchisors to have sufficiently good cause before terminating franchisees.

28 Franchisees’ passive moral hazard was measured as franchisees avoiding responsibilities and not fulfilling their obligations, i.e. the sum of (i) franchisees avoiding to pay fees, and (ii) franchisees shirking responsibilities in operating franchise outlets (Grünhagen et al., 2017).