Timothy Bates: Survival Patterns Among Newcomers to Franchising

Professor Bates is currently a distinguished professor of urban economic studies at Wayne State University. In his 1996 paper, Survival Patterns Among Newcomers to Franchising (pdf, 51 pgs), Bates concluded that restaurant franchises tended towards multi-unit ownership and that new restaurants of long-term multi-unit franchise owners had a better chance of survival than independent startup restaurants who largely tended to have just one unit.

Bates observes:

Envision a corporation in operation for 15 years that owns 20 McDonalds’ restaurants; in 1987 they opened their 21st unit. The findings of this study indicate that this 21st unit has excellent survival prospects, more so than either an independent startup or a franchisee opening a restaurant for the first time. New franchised restaurant units, overall, may be a safe investment, while simultaneously, the newcomer opening a franchise may face a high risk situation. (pg. 7)

He then observes that young, single-unit franchised restaurants "are found to have lower survival rates than independent startups." (pg. 8). Bates goes on to observe franchises in all sectors, and concludes:

The findings of this study indicate, on balance, that purchase of a franchise is unlikely to reduce the risks facing a new business startup. This does not imply that the multiestablishment franchisee adding another new franchise unit to its existing chain of operations faces a high-risk situation. Rather, the high risk facing the franchisee newcomer is partially rooted in the fact that so many of the newly-opened units in mature franchising niches are owned by multi-unit franchisees that have greater experience and resources than newcomers who are attempting to enter the industry.

His paper on the survival rate of young franchises and their survival patterns was commissioned by the U.S. Small Business Administration, and research was conducted by the U.S. Bureau of the Census, Center for Economic Studies.