Study Shows 91 Percent Of Successful Franchisees Have Defined Territory

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Linthicum, Maryland-According to the results of a study published in a journal of the Institute for Operations and Research Management Sciences (INFORMS), if you're thinking of opening a new burger franchise and want it to be a success, you'd better make sure your contract gives franchisees an exclusive territory.

In a study sampling franchise systems, the authors found that 91 percent of successful new franchises were granted exclusive territory in their contracts. For that same period, a revealing 31 percent of failed franchises had no contractual exclusivity.

"There is a pre-conceived notion that a franchise is a guaranteed form of entrepreneurship," explains Scott Shane of the Smith School of Business at the University of Maryland, College Park. "In fact, lots of things contribute to the failure of franchises. One is territory. If you're thinking of opening a franchise outlet, be on guard for the danger of encroachment. Those purchasing a franchise outlet often stay away from franchisors who won't protect their territory in writing."

New franchise chains that adopt exclusive territories are more likely to survive over time than chains that do not, say the authors, based on a statistical analysis of 170 new franchise contracts and interviews with the founders of 16 new franchise systems.

The study, "Entrepreneurs, Contracts and the Failure of Young Firms," is by Pierre Azoulay of the Sloan School of Management at MIT, and Scott Shane. It appears in the current issue of Management Science. -EurekAlert