Paper to be presented at the EMNet - Conference on
“Economics and Management of Franchising Networks“
Vienna, Austria, June 26 – 28, 2003
www.univie.ac.at/EMNET
Franchise Survival Patterns in Austria
Michaela Müllner, Department of Retailing and Marketing / Vienna University of Economics
and Business Administration Tel: 0043 664-63 23 277
E-mail: michaelamuellner@hotmail.com
Dr. Erika Bernardi-Glatz, Franchise Consultant, Lecturer at the Department of Retailing and
Marketing / Vienna University of Economics and Business Administration
o. Univ. Prof. Dr. Peter Schnedlitz, Department of Retailing and Marketing / Vienna University
of Economics and Business Administration
Abstract
This paper summarizes the main results of the thesis “Franchise survival patterns and reasons for franchisee
closures compared to non-franchised businesses in Austria“. Despite the increasing importance of franchising in the
economy, especially in the field of franchise failures little empirical research has been done in Austria so far.
Not only American studies conclude that franchising is a low-risk route to business ownership, even some
others suggest that independent businesses are more likely to remain in operation than franchises. The paper
summarizes whether or not franchising constitutes a riskless alternative for franchisees compared to non-franchised
entrepreneurs in Austria. For this purpose a survey was carried out over a specified period (May to September
2002). The study is based on the following main questions:
1) Which annual survival rate of Austrian franchisees can be deduced from the answers of the franchisors?
2) Failures for financial reasons - do they constitute the main cause of a franchisee closure?
3) What are the main reasons for franchisees to give up their business and what recommendations can be
deduced for the franchise practice?
I. Background
Despite the increasing importance of franchising in the economy, especially in the field of
franchise failure rates little empirical research has been done in Austria so far. For this reason,
the Austrian chamber of commerce supported this survey to obtain new data about survival
patterns among franchisees in Austria.
Not only American studies conclude that franchising is a low-risk route to business
ownership, even some others1 suggest that independent businesses are more likely to remain in
operation than franchises. In contrast to optimistic franchise failure studies, an American survey,
which was carried out by Bates2, states that especially young franchise companies have a higher
failure rate compared to non-franchised businesses. Usually research perspectives are almost
always collected by stakeholders and, therefore, influenced by the authors. Furthermore
franchising literature includes numerous divergent figures and statistical estimates of franchise
failures and is therefore difficult to evaluate.
In Austria, on the one hand, the Austrian Franchise Association (ÖFV)3 states that
franchising has a clearly higher survival rate compared to non-franchised businesses. The ÖFV
has published an annual closure rate since 19994. This rate is continuously decreasing and
amounts to 3.9% in 20015. On the other hand, the Austrian Credit Protection Federation (KSV)
collects insolvency data of the general economy. They announced that 1.7% of all active
companies have become insolvent in 20026, respectively the same percentage in 2001
While the published figures of the KSV include only insolvent companies, the closure
rate announced by the ÖFV includes closures for non-financial reasons as well.
James Cross: “Improving the Relevance of Franchise Failure Studies” Society of Franchising Conference Paper,
1998.
2
Bates Timothy: “Survival Patterns among Newcomers to Franchising” Journal of Business Venturing, 13, p.113130, 1998.
3
Österreichischer Franchise-Verband: Basispressemappe 2003
4
Österreichischer Franchise-Verband: Statistik 1999-2001
5
Österreichischer Franchise-Verband: Basispressemappe 2003
6
Österreichischer Kreditschutzverband von 1870 (KSV) , Haendel Kurt: “Bilanzen erröten nicht aus Scham –
Insolvenzursachen 2002“
1
2
Therefore failure rates with a different background seems to be compared and it is
questionable whether franchisees really have a higher survival rate than general businesses in
Austria. Considering the publications of the ÖFV, the survival rate of franchised companies is
said to be six times higher than the one of general companies.
II. Actual Franchise Status in Austria
According to the statistical figures of the ÖFV7 320 franchise systems with 4.525
franchisees are established in Austria in 2001. Austrian franchise sales are estimated to achieve
around Euro 2.5 billion. Growth over the last few years has been remarkable: in 1991 there were
only around 70 franchise systems with 600 franchisees operating in Austria.
Today 57% of the franchise systems belong to the service sector, 41% are retailing firms.
The residuals belong to the manufacturing sector. 46% of the franchise systems currently
operating in Austria are of local origin. German systems are the second most important (26%)
and 9% of the established systems are of U.S. origin. The remaining 19% come from
Switzerland, Italy, France, Great Britain and some other countries.
According to the ÖFV, the average initial franchise fee amounts to around Euro 15,000.
Franchises of the manufacturing sector levy the highest fees. The current fee among Austrian
franchise systems averages 5.7% of sales, the marketing fee 2.7%. Both are highest in the service
sector.
7
Österreichischer Franchise-Verband: Basispressemappe 2003
3
III. Empirical study
In order to find out whether or not franchising constitutes a riskless alternative for
franchisees compared to non-franchised companies in Austria a survey was carried out over a
specified period (May to September 2002). The research priorities of the study were based on the
determination of actual franchisee closure rates as well as on the identification of the main
reasons for a franchisee closure.
The empirical study concentrates on the term “franchise closure” since not only franchise
failures for financial reasons but also closures for other reasons are included, such as

transfers to the franchisor

transfers to a new franchisee

cancellations

non-renewals and

units which are no longer doing business for other reasons
It should be pointed out that due to a lack of addresses of insolvent/closed franchise
systems a well-funded statement regarding survival patterns and/or closure rates based on the
whole franchise sector was not possible. This problem of the data analysis could be eased
through analysis on a long-term basis in the future.
Therefore the findings of former franchisors, that have already closed their franchise
operations in Austria, are included in the qualitative results while they are not considered in the
calculation of the annual closure rates.
4
On the basis of a written questionnaire, franchise systems operating in Austria were asked
to participate in the survey. First of all the questionnaire was sent as a pre-test interview via email to 15 selected franchisors; 12 of them returned the questionnaire. After a brief adaptation
the questionnaire was sent to the available addresses of 326 franchise systems which had been
provided, on the one hand, by the ÖFV and, on the other hand, by the advisor of the diploma
theses with status 2001.
65 returned questionnaires were included in the analysis. According to the total number
of 320 franchise systems in Austria (published by the ÖFV), a response rate of 20% was
achieved in the case of active franchisors.
In the course of the inquiry it turned out that about 10% of the interviewed companies do
not operate as a franchise system neither in Austria nor in other countries, respectively that some
companies have already stopped their franchise activity and/or their business activity.
On this
account, a second survey was carried out. 7 out of the 28 addressed former
franchisors participated in the survey.
Furthermore 12 selected experts (franchise institutions and franchise consultants) were
interviewed by a written questionnaire. The opinions of eight experts are presented in chapter IV.
5
1. Demographic and further characteristics of the surveyed franchise systems
The demographic characteristics of the franchise systems included in the survey
correspond substantially to those of the total franchise population in Austria. Therefore the
results of the investigation can be considered representative.
While 44% of the active franchise systems are also represented abroad, about 80% of the
former systems acted abroad, most of them in Germany, but also in Hungary, Switzerland, Italy,
the Czech Republic and other countries. About half of them are doing their business abroad with
franchisees only.
12% of the active systems are established as a master franchisee in Austria. 21% of them
occupy between 1-5 employees while the same percentage of active systems occupies between
21-50 employees.
While respectively 31% of the active franchisors reach an annual turnover of Euro
1,000,000 – 4,999,999 or Euro 10,000,000 and more, 70% of the franchisees achieve an annual
turnover of Euro 500,000 or less from the franchisors point of view.
The franchisors also were asked which concrete specifications they require from their
franchisees at the time of the system entry. According to them about 62% of the franchisors have
no concrete specifications concerning the education of their franchisees. 77% expect
entrepreneurial initiative and motivation as well as a concrete franchise contract period.
Furthermore the criteria ‘commercial knowledge’ and ‘selling experiences’ are counted among
the most important concrete specifications. Additionally 45% of the franchisors prefer
franchisees with experience in the concerning industry, 42% favour existing entrepreneurs.
6
2. Qualitative and quantitative results of the franchisors survey
In order to provide an answer to the main questions already presented in the abstract of the
paper, a closure rate was calculated on the basis of the utilizable responses of the 65 active
systems. However it should be pointed out that the closure rate would be higher if the franchisees
from the former franchise systems would be included in the calculation.
Furthermore the qualitative statements of the franchisors regarding the reasons of
franchisee closures are summarized. Subsequently the active systems were analyzed whether or
not selected variables have a special influence on the closure rate.
2.1. Which annual survival rate of the Austrian franchisees can be deduced from the
answers of the franchisors?
The annual closure rate of the franchisees was calculated on the basis of the active systems,
as no well-funded data of the number of insolvent/closed franchise systems and therefore of the
franchisees that stopped their franchise activity is available.
Therefore the annual general franchisee closure rate projected to the franchisee population
in Austria has been continuously increasing since 1997 and turn out to be 7.7%8 in 2001 (see
table 1).
About 50% of the franchisees that gave up their franchise business stopped for financial
reasons, while 25% of them closed only to some extent because of financial reasons. According
to the answers of the franchisors the annual failure rate for financial reasons amounts to 3.9% in
2001.
Calculated on the basis closures opposite startups the franchisee closure rate amounts to
32.5% in 2001, while the closure rate for financial reasons equals 16.3%.
8
Calculated on the basis: amount of franchisees that gave up their business versus number of franchisees of the year
in question according to the statistics of the ÖFV
7
Considering the five-year period 1997-2001, the annual closure rate averages to 4.9%,
while the average closure rate for financial reasons amounts to 2.5% in the period in question.
The active franchisors were asked about the development of their franchisees before 1997.
According to their answers 21% of the franchisees that started their franchise business before
1997, have already closed their business before 1997. However, neither an annual closure rate
before 1997 nor a closure rate for financial reasons can be calculated on the basis of the figures
indicated by the franchisors.
2.2. Failures for financial reasons, do they constitute the main cause for a franchisee
closure?
Among the franchisees of the active systems that gave up their business 27% stopped their
franchise activity for personal reasons. 50% went out of business for financial reasons, while
25% of them stopped merely partly for financial reasons. Another 10% gave up their business
because of an early contract termination due to conflicts, while 6% have not renewed the
franchise contract after the expiration.
Within half of all franchisees that went out of business, financial reasons had no influence
on the closure from the franchisors point of view. (see table 2)
In contrast to the active systems 71% of the franchisees of the former systems stopped their
activity during the active time of the system for financial reasons, 29% because of an early
contract termination due to conflicts.
While in the case of 24% of the dismissed franchisees of the active systems the business
had been continued by a new franchisee and in the case of 6% by the franchisor, none of the
franchisee units of the former systems has been continued.
8
How do these survival quotas differ from the whole of Austrian enterprises according to
the statements of the Austrian Credit Protection Federation (KSV)?
According to the KSV, the insolvency quota of all Austrian enterprises amounts to 1.7% in
2002, respectively the same rate in 2001.
The figures of the present survey show a franchisee closure rate of 7.7% in 2001 and a
closure rate for financial reasons of 3.9%. At this point it should be mentioned once more that
only active systems are included in the calculations and therefore the closure rate would be
higher if franchisees of former systems would be considered as well.
Moreover the closure rate (calculated on the basis closures opposite startups) for general
businesses in Austria amounts to 19% in 2001, while the present franchise study shows a closure
rate for financial reasons (franchisee closures opposite franchisee startups) in 2001 of 16.3%.
9
2.3. What are the main reasons for the franchisees to give up their business according to
the franchisors point of view ?
The active as well as the former franchisors ascribe the reasons for a franchisee closure
mainly to the behavior but also to financial problems of the franchisees while external reasons
have little influence.
According to the opinions of the active franchisors, their former franchisees think that the
closure was partly their own fault. The former franchisors however believe that the franchisees
that have stopped their business during the active period of the former systems are of the opinion
that it was mainly the fault of the franchisor.
2.3.1. Reasons for a franchisee closure
According to the opinions of the active franchisors the following criteria are
predominantly responsible for a franchisee closure:

a lack of entrepreneurial initiative of the franchisee

a lack of entrepreneurial responsibility of the franchisee

a lack of capital resources from part of the franchisee

a lack of commercial knowledge

a non-compliance with the quality standards,

as well as negligent behavior.
For a detailed illustration see table 3; included are also the opinions of those franchise systems
where no franchisee has stopped its activity up to the time of the survey.
The former franchise systems basically mentioned the same reasons. Additionally, the
criteria

insufficient preparations during establishment

selling conditions and competitors

as well as insufficient piloting
were mainly responsible for a franchisee closure.
10
More than half of the active franchisors think that their former franchisees are of the
opinion that other reasons were responsible for the closure of their business. They ascribe their
failure to the following reasons:

false estimation of the situation by the franchisee (24%)

reasons that are due to the franchise system or franchisor (21%)

wrong conduct of the franchisee (21%)

franchise fees are too high (12%)

a lack of support (10%)

a lack of cooperation between the franchisor and the franchisee (7%)

other reasons (5%)
The former franchisors are of the opinion that their franchisees mainly make the
following reasons responsible for their closure:

a lack of support by the franchisor

a lack of flexibility of the franchise system
2.3.2. Main problems in franchise relationships
The main problems that active franchisors face are: (see table 4)

the franchisees misconception

financial problems of the franchisees

a lack of adaptation to the system guidelines

a lack of initiative of the franchisees

as well as a wrong choice of the franchise partner
11
The former franchisors state the following main problems:

franchisees do not comply with the contractual agreed guidelines

a poorly conceived franchise concept

a wrong choice of location

a lack of support of the franchisee

low financial resources

a lack of employees

as well as non regular payment of the franchise fees
2.3.3. Strengths and weaknesses
The franchisors also were asked about the strengths and weaknesses that characterize their
system and what makes their franchisees successful. While the active systems announced
preliminary their strengths, the former systems mentioned mainly their weaknesses.
Table 5 shows the results of the active systems. The following five strengths were mentioned
most commonly:

the franchise concept

a well proven and successful system

support and know-how

the brand

the product range.
Concrete weaknesses were not mentioned by the active franchisors.
The strengths that characterize the former franchise systems are:
 quality of the leisure
 newness to the market - no competitors and cost reductions for the franchisees.
12
Weaknesses called by the former franchisors are:

a lack of loyalty of the employees

an oversized franchise system

the franchise concept

a wrong target group

different perceptions of franchisee and franchisor

a lack of capacity for teamwork

a lack of adaptation to the system guidelines as well as a wrong evaluation of the market
situation.
13
3. Further statistical results
In the case of the active franchise systems certain variables were tested concerning their
influence on the closure rate, independently of a certain period of time, including the industry
sector, method of internationalization, activity abroad, age of the franchise system, size of the
franchise system (number of franchisees, number of employees), franchise fees and turnover.
The correlation analysis and alternatively the analysis of variance were applied.
The correlation analysis measures the degree of linear association between two variables
and was therefore applied for the variables with a linear character. The correlation is indicated by
the correlation coefficient r, which can take on any value from -1, through 0, to 1. A value of r
near or equal to 0 implies little or no linear relationship between the variable. In contrast, the
closer r comes to 1 or -1, the stronger the linear relationship between the variables. For the
examination of the logical value of the correlations within the sample, the level of significance is
consulted. It indicates, with which probability of error a correlation applies to the population.9
The analysis of variance is a tool to understand the statistical differences between the
means of different populations. Statistical differences of means are assessed through an ANOVA
analysis, where the relationship between measurements of the mean and the variance or “random
error” of each group provides the information needed to determine if the difference between the
variables is significant.10
Significant influence:

The variable age of the franchise system shows a significant influence on the closure
rate. According to the results, older franchise systems have a higher closure rate than
younger ones.
9
Aczel Amir D.: „Complete Business Statistics” p.459, 1999.
Diehl Joerg M./Staufenbiel Thomas: Statistik mit SPSS Version 10+11 p.251, 2002
10
14
No significant influence on the closure rate derives from the variables

Industry sector

method of internationalization

foreign activity

number of franchisees

number of full-time employees

franchise fee

as well as franchise system turnover and franchisee turnover
15
IV. Summary and Recommendations
The annual closure rate of franchisees was calculated on the basis of active systems, as no
well-funded data of the number of insolvent/closed franchise systems and therefore of the
franchisees that stopped their franchise activity is available in Austria.
As a result of the present study the annual franchisee closure rate projected to the franchisee
population in Austria has been continuously increasing since 1997 and turn out to be 7.7% in
2001.
According to the franchisors point of view about 50% of the franchisees that gave up their
franchise business stopped for financial reasons, so the failure rate for financial reasons amounts
to 3.9% in 2001.
Considering the five-year period 1997-2001, the annual closure rate averages to 4.9%,
while the average closure rate for financial reasons amounts to 2.5% in the period in question.
It has to be mentioned that the closure rate would be higher if the franchisees from former
franchise systems would be included in the calculation.
Among the tested variables, only the age of a franchise system has a significant influence
on the closure rate. Thus older systems have a higher failure rate compared to younger ones.
According to the opinions of the franchise experts, the main reasons for a franchisee
failure lie, among other causes, in a weak franchise concept, a lack of piloting as well as in the
behavior of the franchisee himself (e.g. financial problems, wrong choice of location). While
some experts think that the failure rate will rise, others are of the opinion that it will fall, again
other experts believe that the failure rate will be the same in near future. Furthermore some
experts think that master franchisees have a higher survival rate compared to franchise systems
of Austrian origin because expanding systems from abroad usually have a well-proven knowhow as well as an established and successful system.
According to the franchisors point of view 27% of the franchisees stopped their business
for personal reasons, about 50% for financial reasons; in the remaining cases other reasons were
responsible.
16
Furthermore the franchisors are basically of the same opinion than the experts; they think
that the reasons for a franchisee closure mainly lie in the behavior, but also in financial problems
of the franchisees, while external reasons have little influence.
Based on the present research results, the following recommendations for the franchise practice
can be deduced:
In order to increase the survival rate of franchisees a thorough franchisee recruiting is
considered as an inevitable process. The former career as well as the implementation of
personality tests might facilitate an early estimation for the franchisor whether or not a candidate
fulfills the necessary entrepreneurial requirements.
Furthermore an early statement about the quality standards and system guidelines, which have to
be followed by the franchisee, should prevent the franchisee from disappointed expectations at a
later point of time of the relationship. For the current system management controlling measures
should be taken both at the time of setting up the franchisee business, and day-to-day, to identify
possible wrong developments in order to counteract as long as it is possible.
Franchising is a vertical form of distribution that is based on the cooperation of self-employed
entrepreneurs. Therefore soft facts such as mutual respect, a permanent flow of information and
communication seem to be at least as important as financial success in order to support a long
term franchise relationship.
17
References

Aczel, Amir D. (1999): Complete Business Statistics, Boston, Irwin/McGraw-Hill

Bates, Timothy (1998): Survival Patterns among Newcomers to Franchising, Journal of
Business Venturing 13, p.113-130

Cross, James (1998): Improving the Relevance of Franchise Failure Studies, International
Society of Franchising, Conference Paper

Diehl Joerg M./Staufenbiel Thomas (2002): Statistik mit SPSS Version 10+11, Eschborn,
Klotz

Österreichischer Franchise-Verband (2003): Basispressemappe 2003

Österreichischer Franchise-Verband (2002): Statistik 1999-2001

Österreichischer Kreditschutzverband von 1870, Haendel Kurt (2002): Bilanzen erröten
nicht aus Scham – Insolvenzursachen 2002

Österreichischer Kreditschutzverband von 1870, Haendel Kurt (2001): Pleiten unter der
Lupe – Insolvenzursachen 2001
18
Appendix
Tables
Table 1:
Annual Franchisee Closure Rates
Table 2:
Reasons for Franchisee Closures from the Franchisors Point of View
Table 3:
Reasons for Franchisee Closures from the Franchisors Point of View (a more
detailed listing)
Table 4:
Problems in Franchise Relations from the Franchisors Point of View
Table 5:
Strengths of the Active Franchise Systems from the Franchisors Point of View
19
Table 1 : Annual Franchisee Closure Rates
Year
Closure rate
1997
1998
1999
2000
2001
2.9%
3.7%
5.0%
5.2%
7.7%
Closure rate for financial
reasons
1.5%
1.9%
2.5%
2.6%
3.9%
Table 2: Reasons for franchisee closures from the franchisors point of view
Reasons for franchisee closures
Percentage
Personal reasons of the franchisee
27%
Financial reasons of the franchisee
25%
Partly for financial reasons, partly for personal reasons, partly because of conflicts
14%
Early contract termination because of conflicts
10%
Half for financial, half for personal reasons
8%
Other reasons
6%
Contract expiry without extension
5%
Half for personal reasons, half because of conflicts
5%
Total
100%
20
Table 3: Reasons for franchisee closures from the franchisors point of view - a more detailed listing
very important /
rather not important
important
/ not important
0.7
91.3%
6.5%
2.2%
1.7
0.7
84.1%
13.6%
2.3%
A non-compliance with the quality standards
2.2
1.0
69.0%
16.2%
4.8%
A lack of capital resources of the franchisee
2.2
1.0
65.1%
20.3%
4.7%
A lack of commercial knowledge
2.2
0.9
59.5%
38.1%
2.4%
Negligent behavior
2.3
1.0
51.1%
37.2%
11.6%
Wrong location
2.7
1.0
44.2%
53.5%
2.3%
Insufficient preparations during establishment of the franchisee
2.7
1.0
40.5%
52.4%
7.1%
Selling conditions and competitors
2.7
0.9
37.2%
58.1%
4.7%
A lack of brand awareness
2.8
1.0
38.5%
51.3%
10.3%
3.2
0.8
22.5%
67.5%
10.0%
External losses (insolvency of clients, loss of suppliers)
3.2
1.0
20.0%
67.5%
12.5%
Illness, misfortune due to force majeure
3.4
0.9
17.5%
72.5%
10.0%
3.4
0.8
15.4%
79.5%
5.1%
Poorly conceived franchise-concept
3.4
0.8
15.0%
70.0%
15.0%
Insufficient basic and advanced training
3.4
0.8
15.0%
80.0%
5.0%
Insufficient piloting
3.5
0.9
15.4%
69.3%
15.4%
Size of the system
3.6
0.7
7.7%
84.6%
7.7%
A lack of capital resources of the franchisor
3.8
0.7
5.4%
78.4%
16.2%
mean
deviation
A lack of entrepreneurial initiative of the franchisee
1.5
A lack of entrepreneurial responsibility of the franchisee
Rapid growth without accompanying internal structural measures
of the franchisor
Missing and/or insufficient know-how documentation by the
franchisor
do not know
21
Table 4: Problems in Franchise Relations from the franchisors point of view
Problems in Franchise-Relations
Percentage
A misconception of the franchisee
15%
Financial problems of the franchisee
14%
A lack of adaptation to the system guidelines by the franchisee
13%
A lack of initiative of the franchisees
12%
A wrong choice of the franchise partner
9%
A lack of necessary skills of the franchisee
8%
A lack of control by the franchisor
6%
A lack of communication
6%
Non-compliance with the system guidelines
5%
Weak ability to work in a team of the franchisee
4%
A lack in the franchise-concept
4%
Wrong location
3%
Enticement by other franchise systems
2%
Total (117 answers)
100%
Table 5: Strengths of the active franchise systems from the franchisors point of view
Strengths of the active Franchise Systems
Percentage
Franchise concept
12%
A well proven and successful system
10%
Information and support for the franchisee
10%
Brand
10%
Intensive contact and cooperation between franchisor and
7%
franchisee
Training
4%
Quality
4%
Focus on the client
4%
Marketing
4%
Synergy effect for the franchisor and the franchisee
4%
Engagement
4%
Central planning of purchase and commodities
3%
Professional market launch
3%
Others
21%
Total (185 answers)
100%
22