Studies Show Registration Benefits Franchisors and Franchise Buyers

In a recent article about Australia's franchise law, the IFA wrote that they consider "mandatory registration to be archaic, costly and burdensome for both franchisors and government while providing no measurable public policy benefit to prospective franchisees."  In the following sentence, they added, "We are aware of no data in the United States that shows that franchise investors in states with registrations requirements are more adequately protected from sales fraud than investors in state without registration."

The quote made me wonder if anyone at the IFA has read my book, From Ice Cream to the Internet: Using Franchising to Drive the Growth and Profits of Your Company (link to the book on Amazon) or any of the scholarly papers I and my colleagues wrote that the book draws upon. 

Perhaps the IFA is not aware of information about the benefits of registration, but it exists.  For instance, in Chapter 10 of my book (specifically, pages 179-192), I summarize some of the benefits that registration provides.  While most of the information there is qualitative, based on interviews and observations of franchisors and franchisees, I do summarize some of my empirical work on the effects of registration.  In a variety of studies summarized in the book, I show that franchisors operating in registration states are more likely to survive over time than franchisors that do not. In fact, survivors are 22 percent more likely than failures to operate in a registration state.  Moreover, the benefits of operating in registration states increase with system size.  

These patterns strongly suggest that operating in a registration state makes it easier to attract franchisees because adherence to the registration requirements shows that you are not a fly-by-night operation.

As long as franchisees benefit from buying franchises from franchisors who manage to stay around to support them in future years, registration requirements help protect franchisees.  While it's possible that no one conducted a precise test of whether "franchise investors in states with registration requirements are more adequately protected from sales fraud than investors in state without registration," the research on the topic shows that registration benefits franchisees.

Scott Shane is the A. Malachi Mixon III Professor of Entrepreneurial Studies at Case Western Reserve University and author of The Illusions of Entrepreneurship: The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By (listed on Blue MauMau's book stack).  

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Relating reading:

Washington Trade Lobbyist Warns Against Changing Australian Franchise Law