On the Go

Secret Formula

By Janean Chun

Since we last visited Scott Shane, assistant professor of entrepreneurship at the Massachusetts Institute of Technology in Cambridge ("Opportunity Insider," September), he has broken new ground in his quest to uncover the factors that determine franchise survival. Whereas he previously studied individual factors, Shane has now determined that unexpected combinations provide new franchise systems with advantages. "This is the first time I've ever examined the interaction of these different factors," says Shane. His latest study found that new franchise systems are more likely to survive if they meet this criteria:

  • They are ranked highly in Entrepreneur magazine's Franchise 500 and are founded in states that require franchise registration. "State regulators aren't necessarily looking for the quality of the system--they're looking for full disclosure. And Entrepreneur is looking for indications of quality, geared heavily toward growth," says Shane. "These are two different, and yet complementary, kinds of investigation. Franchisors who are both disclosing properly and growing rapidly offer many advantages."
  • They have a higher percentage of franchised outlets and are located in states with laws restricting termination of franchisees. "A new franchisor can grow faster through franchised outlets, so a higher ratio of franchised outlets to company-owned outlets is beneficial. Without termination laws, franchisees aren't protected against opportunistic franchisors. It becomes easier for franchisees to be terminated and harder to build a system of mostly franchisees with relatively few company-owned outlets."
  • They require comparatively high capitalization and have a higher percentage of franchised outlets. "When the amount of capitalization needed for a franchised outlet is higher, you need more resources, so it's better to have a system that's more heavily franchised rather than company-owned," says Shane. "Otherwise, you can't grow quickly enough."

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This article was originally published in the November 1997 print edition of Entrepreneur with the headline: On the Go.

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