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IFA Study Provides Comprehensive View of Franchising

© Michele Marrinan

If you want to invest in a franchise with low turnover rates, you may want to stick with one that has few company-owned units. A recent study by the International Franchise Association (www.franchise.org) reveals that those franchise systems have the best luck keeping franchisees.

Profile of Franchising: a Statistical Abstract of 1997 UFOC (Uniform Franchise Offering Circular) Data found that the median turnover rate decreased as the number of company-owned units decreased (except for franchises with 101 to 500 units). In terms of industries, the study found that the median rate of turnover with transfer to another owner was highest in the service industry, with 14.4 percent. The travel industry came in second, with a 12.4 percent turnover rate. Without transfers, travel franchises come out on top, with a turnover rate of 10.2 percent. Building and construction franchises come in second with a 8.7 percent rate. Service business franchises drop down to 7.3 percent without transfers.

The IFA is quick to point out that turnover rate is not necessarily synonymous with success or failure. It notes two reasons:

1. Franchised units are often canceled and reacquired by the franchisor within the same year. In addition, canceled or non-renewed franchise is often transferred by the franchisor during the same year. Both these scenarios can lead to "double counting" of events, or a higher turnover rate than is actually the case.

2. There's no way of ensuring that a turnover is the result of failure.

Profile of Franchising examined UFOCs filed by 1,178 companies between January 1 and December 31, 1997. Unlike previous franchise studies, which drew conclusions from surveys, Profile of Franchising relies on raw data from UFOCs. Conducted by the IFA, Frandata, a franchise research company, and the University of Missouri-Columbia, this study is considered by some to be more objective and accurate than earlier studies.

This three-part study does have its shortcomings. It only surveyed companies that registered and filed UFOCs in one of the 12 states requiring such registration. That excludes a large number of systems. Still, the study did collect 1,232 - 88 percent - UFOCs. Since some franchises were excluded because of incomplete data and missed deadlines, the final count was 1,178. That figure represents 320,000 units - 260,000 franchised units and 60,000 company-owned units.

A wide range of criteria has been examined in this study, ranging from the composition of franchise companies to the ratio of franchise units to total size. The information provides an