Franchisee Discontinuance and Failure Empirical Findings from Finland

Abstract

The present study focuses on franchisee discontinuances and failures during 1999–2001. The paper deals with notions relating to discontinuance and failure. Franchising is approached from entrepreneurs hip viewpoint and taken as a form of starting and conducting entrepreneurship and business. The study was carried out in 2002 in Finland. The 46 member franchisors of the Finnish Franchising Association (FFA) were surveyed. Altogether 33 responses were received, adding up to a response rate of 72%. The results were parallel with the findings of the previous international studies. The results indicate that the average annual franchisee turnover rate was 11% in 1999–2001 in the studied franchises. In proportion to the average number of franchisee owned outlets (1,027) per year in 1999–2001 the figures gave an average annual franchisee failure rate of 1.66%. The risk of bankruptcy for franchised businesses (0.78%) seemed to be around half of the risk for stand-alone businesses (1.32%). Every fourth (24%) franchisor reported facing unexpected franchisee turnover where franchisee ceased operations before his/her franchise contract expired. Furthermore, every third (32%) franchisor saw unexpected franchisee turnover as detrimental to the franchise. It is worth mentioning that only part of the failure and turnover related disadvantages and problems cause evident and easily measurable expenses. If the whole extent of direct and indirect expenses and financial losses resulting from franchisee turnover and failures were known, franchisors might pay more attention to the issue and try to prevent and control it vigorously. Franchisee discontinuances and failures can be and should be prevented, since they erode the earnings of both franchisees and franchisors.