An analysis of franchisor failure risk: evidence from Spain

Abstract

PurposeResearch on franchise system survival has focused on analyzing organizational failure. However, there are two types of market exit: organizational failure and franchise discontinuance, but little research has distinguished between the two. The purpose of this study is to examine whether different factors explain these types of exit. Apart from the common factors included in previous research (age, size, upfront fee, royalty rate and ownership structure), this paper aims to add system growth and its interaction with age and size.Design/methodology/approachThe paper uses data about franchise systems in Spain from 1986 to 2004 from the catering and fashion sectors and applies the Cox survival model to test the hypotheses.FindingsThe paper finds that system growth rates and system size only influence franchise discontinuance. Both the youngest and the oldest firms show the lowest risk of discontinuing franchising. The results are similar to those found in previous research that uses the two types of market exit as synonymous.Research limitations/implicationsThe article findings suggest that it is important to define franchise survival.Practical implicationsThis research identifies what franchisors can do to continue in the market. An important result is that young and small franchisors should grow at a moderate rate. They should learn first how to manage a few units before becoming a large network.Originality/valueThis research examines the differences between two types of market exit (organizational failure and franchise discontinuance) and their drivers from the franchisor's perspective. This research contributes to the franchising literature by analyzing the effect of growth on survival. Additionally, the moderating effect of size and age on growth on the two types of market exits is included.