analysis of survival rates among franchise and independent small business startups

8/2/2019 Analysis of Survival Rates Among Franchise and Independent Small Business Startups

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A N A L Y S I S O F S U R V I V A L R A T E S A M O N GF R A N C H I S E A N D IN D E P E N D E N T S M A L L

B U S I N E S S S T A R T U P S 'by Timothy Bates

ABSTRACTAnalysis of small firm formations over the 1984-1987 period reveals that franchisestartups exhibit both higher rates of firm discontinuance and lower mean profitabilitythan cohort independent business startups. The young franchising firms are heavilycon cen trate d in retaihng, and it is th e retail franchises t ha t most often fit th e high risk,low return profile. Popular franchising niches in retailing appear to be saturated,leaving diminished prospects for newco m ers.

A recent ad in Business Week suc-cinctly states the conventional wisdomon the risk involved in entering self-employment by purchasing a franchise:"A franchisee has a four times greaterchance to succeed than an entrepreneurwho launches a new independent busi-ness." The franchise, we are told, is asafe bet. However, findings of this studyindicate that young franchise startupsexhibit both hig her rat es of firm discon-tinuance and lower mean profitabilitythan cohort independent business star-tups. When owner and firm traits arecontrolled for statistically in logistic re-gression, the franchise characteristic isfound to be negatively related to firmsurvival prospects. These findings are

Dr. Bates is professor of labor and urban affairs at WayneState U niversity in D etroit, Michigan. His research interestsinclude small business formation, expansion, and survivalpatte rns, as well as the impacts governmen t economic devel-opme nt programs ha ve upon small business viability.

based upon analyses of approximately20,000 young small businesses, utilizingnationwide data compiled by the U.S.Bureau of the Census.The findings of this study are consist-ent with the hypothesis that popularfranchising niches have become satu-rated, leaving diminished prospects fornewcomers. Net income in 1987 amongfirms formed during the 1984 to 1987period, for example, averaged -$4,102for retailing franchises and $14,572 forcohort independent business startups.For these same retailing firms that wereoperating in 1987, 45.1 percent of theyoung franchises had gone out of busi-ness by 1991, versus 23.4 per cen t of t heindep end ent young retail firms. Relativeto aU small business sta rtu ps , franchisesare heavily concentrated in retailing,and it is the retail franchises that mostoften fit the high risk, low return pro-


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they continued to operate.Franchise d iscont inuance ra tes re -ported in this study differ dramaticallyfrom those cited by various franchisorsand franchisor associations. Accordingto research sponsored by the Interna-tional Franchise Association, for exam-ple, 96.9 percent of the franchised unitsopened nationwide within the past fiveyears are still in operation (Arthur An-derson and Co. 1992). Significantly, thissurvival rate information was compiledby surveying franchisors the corpora-tions that sell franchises ra ther thanthe actual franchisee owners of the op-erations whose survival is at issue. Incon trast, th e appr oach of this study is torely upon franchisee owners to self-report information about the continuityof operations in the small businessesthat they own and operate.Most evidence on franchise survivalrates comes from sources other thanscholarly journals, so that peer reviewmonitoring of research quality is notpre sen t. T he Febru ary 1994 issue of Mc-Galls magazine claims that 50.7 percentof Decorating Den's franchisees termi-nated operations during the three-yearperiod ending in December 1992, asc o m p a r e d t o t h e A n d e r s o n n u m b e rquoted above. Thus, claims about fran-chise survival rates have often t end ed toextrem es. The purpose of this study is toraise the debate to a higher plane by us-ing nation w ide da ta from th e Census Bu-reau on business survival and to con duc tappropriate statistical analyses on thesedata .CHARAC TERISTICS OF FRANCHISE AND

INDEPENDENT YOUNG FIRMSThe presence of a large new nation-wide small business database compiled

by the Census Bureau the Characteris-tics of Business Owners (CBO) database

described in detail in Bates (1990a),Nucci (1992), and in App end ix B: Natureof the Database. Of the roughly 90,000small businesses surveyed to create theCBO da t ab as e , ove r 72 pe rce n t r e -sponded. All of the reported statistics inthis study are weighted to adjust forboth survey non-response and the Cen-sus Bureau's non-random sampling inthe creation of the CBO. The firms de-scribed in this study are representativeof young firms that grossed at least$5,000 in total revenues in 1987 andfiled a small business income tax re tu rn .

This study covers only firms formedover the 1984-87 period, and the unit ofanalysis is firms, not persons. Thus, theuniverse of firms covered in this study is4,005,562 sm all businesses, 3.36 pe rce ntof which are young franchise opera-t ions . Choice of the 1984-1987 timeframe of firm formation was dictated byboth the specific structure of the CBOdatabase (described at length in Appen-dix B: Nature of the Database), and theneed to generate a large enough fran-chise sample to permit analysis of sub-groups such as franchises in retailing.The actual sample of CBO firms ana-lyzed in this study includes unweightedfirm counts of 1,276 franchises and19,278 independent business s tartups(6.21 percent franchises). The higherfranchise proportion appearing in theraw sample data reflects the fact thatthe CBO sampling frame over-sampledfirms havin g paid employees, since fran-chises are more likely than inde pend entfirms to utilize paid employ ees. B ecauseof the nonrandom nature of the CBO'ssampling frame, only weighted statistics reflecting all young firms as definedabove are reported in this study.

The sample of franchise firms ana-lyzed here is not identical with the uni-verse of franchise units opened between


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units are owned by multi-unit firms tha tbegan operations before 1984. Third,multi-unit new firms included in thisstudy might own franchise operations atseveral locations, but such a firm is onlycounted once because the unit of analy-sis here is the firm. Thus, the failure ratefor all new franchise units operating in1987 that opened up between 1984 and1987 may differ from the closure rate re-ported in this study.Existing studies identify traits that arepositively correlated with firm longev-ity. Larger-scale, older small businesseshave higher survival rates over timethan smaller, younger firms (Evans1987, Bates and Nucci 1989). Amongvery young firms, owner traits associ-ated with greater likelihood of survival

include owners working fuU-time in th efirm, highly educated owners, and largeowner financial capital investment inthe firm a t star tup (Bates 1990b). Ikble 1indicates that franchisees are generallybe tter endowed with traits linked to sur-vival than non-franchise young firms.The young franchisees report $513,961in mean 1987 sales revenues, five timeslarger than the corresponding figure of$102,410 reported by the independentbusinesses (Tkble 1). Capitalization atstartup is similarly much greater with amean value of $86,493 for th e franchisefirms, almost three times greater thanthe non-franchise firm capitalization of$29,822. Only in the area of owner edu-cational background do the franchisefirms appear to be weaker than the inde-

Table 1YOUNG FIRMS OPERATING IN 1987: A COM PARISON O F OWNER AND FIRMTRAITS FOR FRANCHISE AND INDEPENDENT BUSINESS STARTUPS(Firms formed from 1984-1987 Only)A. Firm Traits1987 sales (mean)Number of employees (mean)1987 net income (mean)Percent of firms still operatingin ia te1991B. Owner Traits1. Owner education:less than high schoolhigh school graduatecollege: 1-3 yearscollege graduate

post graduate2. Firm capitalization at startup:total financial capital (mean)equity (mean)debt (mean)3. Other owner traits:owner gender (male = 1)owner age (mean)owner annual hours oflabor input (mean)

owner managementexperience (yes = 1)unweighted sample size

Franchises$513,9615.2$2,64965.3%

10.3%35.7%27.3%17.6%9 . 1%$86,493$38,355$48,138

73.3%38.92,01339.3%

1,276

Nonfranchise firms$102,4101.2$18,85072.0%

11.7%28.8%23.3%20.0%16.2%$29,822$13,591$16,231

74 .1%40.61,8703 0 .1 %19,278

Univariate F153.5*26.9*13.2*14.2*

1.115.1*4.4*2.323.7*81.6*46.7*53.1*

0.213.9*9.8*25.4*


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pen den ts: 9.1 perc ent of the former and16.2 percent of the latter had pursuedgraduate studies beyond the bachelor'sdegree. All of the above mean differ-ences are statistically significant. Yet,despi te the obvious s t rengths of theyoung franchise firms, they are dr am ati-cally less profitable than independentfirms of the sam e age (Tkble 1), and the yexhibit a lower survival r ate 65.3 per-cent (versus 72 .0 percent for non-franch ise firms) over th e 1987-late1991 time period; the se differences arestatistically significant at conventionallevels.

Aspiring entrepreneurs choosing tobecome franchisees certainly expect toimprove their odds of survival over theturbulent early years of business star-t up . This expectation of lower risk forfranchise as opposed to independentbusiness startups is certainly portrayedin existing industry and academic stud-ies (see, for example, Castrogiovanni,Justis, and Julian 1993).Overall, many of the traits typifyingyoung franchises app ear to be co nsistentwith enhanced viability and improvedsurvival prospects. Relative to similarlyaged independent firms, they are muchlarger, better capitalized, and generatehigher sales pe r employee and pe r dollarof financial capital. Their only seemingdisadv antage as a group is their low er in-cidence of very highly educated owners.Could this lower incidence of graduate-educated owners account for the factthat the franchise group exhibited alower rate of survival than indep ende ntbusiness startups? Impacts of owner ed-ucation, firm size and capitalization, thefranchise trait, and other factors uponsurvival and discontinuance are furtherinves tigated in Tkble 2.

Over the p eriod from 1987 to late 1991,over 28 percent of the young firms de-

longevity, greater owner investments ofhuman and financial capital are ex-pected to be related positively to thesurvival chances of young small busi-nesses (Bates 1990a, Bates 1994; Holtz-Eakin, Joulfaian, and Rosen 1994). InTkble 2's logistic regression analysis off i r m s u r v i v a l p a t t e r n s o v e r t h e1987-1991 period, financial capital ismeasured by the log of the sum of debtand eq uity capital invested in the firm atthe point of startup. Labor input quan-ti ty is measured by owner hours spentworking in the business, as well as m ari-tal status and number of paid employ-ees. Married persons living with theirspouses are expected to benefit from theavailability of family labor, wh ich po ten-t ia l ly increases labor input quant i ty .Quality of owner human capital is mea-sured by two variables: level of formaleducat ion and manageria l experienceprior to sm all business entry. Applicabledemographic trai ts include owner age,racial grouping, and gender. Greaterow ner age, a broad proxy for work expe-rience , is expe cted to benefit firms untildiminishing effort associated with oldage sets in. In an im por tant sense, all ofthe above factors can be thought of ascontrol variables, since the major pointof Table 2's logistic regression analysis isto observe the impact of the franchisetrai t , other things being equal, uponfirm survival.In Ikb le 2's analysis of young firms th atwere operating in 1987, positive coeffi-cient values ar e associated w ith firms stillopera ting in late 1991, and vice ve rsa.The franchise characteristic, other fac-tors constant, is a highly significant de-terminant of firm survival: franchiseesare m uch m ore likely to go out of businessthan cohort independent firms. OtherTkble 2 findings reinforce results of paststudies explaining firm survival patterns.


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Table 2LOGISTIC REGRE SSION: EXPLAINING FIRM SURVIVAL OVER TH E 1987-LATE 1991 P ERIOD(Firms formed from 1984-1987 only)

ConstantEducation:less than high schooihigh school graduatecollege graduatepost-graduateManagement experience/no management experienceOwner ageOwner age^Owner genderOwner labor inputNumber of employeesMarried/unmarriedLog financial capitalLeverageFranchise/nonfranchiseFirm entered 1986Firm entered 1987Minority-owned f irm/nonminority-owned firm

RegressionCoefficient-1.474*

.171*-.037.400*.654*.038.079*

-.001 *-.034.025*.088*-.030.086*.014*-.523*-.218*-.819*.101

StandardError.212.063.046.052.059.042.010.0001.039.002.010.042.004.003.094.046.043.060

VariabieMean

.112.284.205.159

.31240.5551,766.1.73818.7641.373.7796.8462.516.033.307.373

.092Note: precise variable d efinitions for the above explanatory variables are detailed inAppendix A.Sample size =19,46 3-2 log likelihood = 20,610.3Chi-square =2,335.3*Statistically significant at the 5 percent significance level.

time in the business. The surviving firms,further, were the larger firms in the sensethat they began operations with greaterowner financial capital investments, andlabor input measured by number ofemployees was also higher among thesurvivors (Tkble 2). The very youngestfirms those started in 1987 weremost likely to discontinue operations,which is consistent with past findings(Evans 1987, Bates 1990b, Jovanovic1982). Other than the franchise survivalrelationship finding, the results of Tkble2's logistic regression analysis are highlyconsistent with past empirical studies ofsmall business discontinuance patterns.

WHY ARE YOUNG FRANCHISESDOING POORLY?

that sector; firm exit will presumablycure this overcrowding. Although thisstudy examines young firms only, it istrue that franchises of aUages are veryheavily concentrated in certain retailmarkets, and this retailing concentra-tion also typifies the franchises de-scribed inTkble 1. A comparison of Tkblel's firms by major industry group high-lights the particular industry distribu-tion of franchises:

YoungFranchises All Young

Only Small FirmsPercent in retailPercent in services*Percent in FIRE**Percent in otherindustries

42.8%10.7%16.2%30.3%

17.3%42.0%

7 70/

33.0%


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If franchises have saturated particularmarkets, the above numbers suggestthat retailing, rather than services, isthe leading candidate. Although testsfor market saturation are not definitive,this phenomenon, if present, is expectedto coexist with both reduced profitabil-ity and heightened firm closure rates,relative to firms operating in all lines ofsmall business. All of the retailing firmsinitially described within Table l'sbroader groupings are isolated and ex-amined in Tkble 3, which reveals lowprofitability and survival rates for: (1)retail franchises as opposed to retail in-dependent startups, and (2) retail fran-chises, versus all other young franchisefirms.

Considering franchising only, applica-

ble profit and survival figures for retailand nonretaU young firms are as shownbelow:

Young Retail All OtherFranchises Young

Only Franchises1987 net income(mean) -$4,102 $7,762Percent of firmsstill operatingin late 1991 54.9% 73.1%T h e a b o v e d i f f e r e n c e s are s t a t i s t i c a l l y

h i gh l y s i g n i f i c a n t : y o u n g r e t a i l f i r m s arem u c h l e s s p r o f i t a b l e and m u c h m o r el ike ly to go out of b u s i n e s s t h a n f r a n -c h i s e s o p e r a t i n g in n o n r e t a i l i n g f i e ld s .T h i s p a t t e r n is c o n s i s t e n t w i t h th e hy-p o t h e s i s t h a t s a t u r a t i o n e x i s t s a m o n gf r a n c h i s e s in the r e t a i l in g i n d u s t r y .

Table 3YOUNG RETAIL FIRMS OPERATING IN 1987: ACOMPARISON OF OWNER AND FIRMTRAITS FOR FRANCHISE AND INDEPENDENT BUSINESS STARTUPS(Firms formed from 1984-1987 Only)A. Firm Traits1987 sales (mean)Number of employees (mean)1987 net income (mean)Percent of firms still operatingin late 1991B. Owner Traits1. Owner education:less than high schoolhigh school graduatecollege: 1-3 yearscollege graduate

post graduate2 . Firm capitalization at startup:total financial capital (mean)equity (mean)debt (mean)3. Other owner traits:owner gender (male = 1)owner age (mean)owner annual hours oflabor input (mean)

owner managementexperience (yes =1)unweighted sample size

Franchises$993,1529.3$-4,10254.9%

3.5%40 .0%30.9%20.3%5.3%

$118,643$50,103$68,53981.6%41.82,03062.5%645

Nonfranchise firms$145,9562.1$14,57276.6%

13.7%3 1 .1 %26.3%20.0%8.9%

$43,593$18,637$24,95569 .1%40.92,02433.0%3,798

Univariate F149.5*169.7*20.3*82.7*

30.3*11,7*4 .9*0,25,5*

81.8*56.1*57,5*23,9*2,2,01

125.5*


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Analyzing young retail firms only, Tk-ble 4 replicates the logistic regressionanalysis of firm survival presented inTk-ble 2. The resulting analysis of survivalover the 1987-1991 period for young re-tail small businesses reveals that thefranchise characteristic is the strongestpredictor of firm discontinuance: the re-tail franchise firms are much more likelyto go out of business, other factors con-stant, than independent young retailbusinesses. Note that the franchise vari-able regression coefficient jumps from-.523 (Tkble 2) to -1.298 {Table 4) whenthe focus is narrowed from small busi-nesses generally to retail operations spe-cifically. These findings, like Table 3'ssummary statistics, are consistent withthe hypothesis that overcrowding in re-tail franchise niches is generating lower

profitability and higher discontinuancerates for these specific franchises, as op-posed to cohort young small businesses.Other traits attributed to franchiseesmay contribute to their observed highfailure ra tes and low profitability. Entre-preneurs' risk preferences may influ-ence their decision to enterself-employment by buying a franchise.Williams (1994) argues that the morerisk-averse person wiU prefer franchisesbecause services offered by the franchi-sor an established product, for exam-ple presumably facilitate spreadingthe risk between the franchisor and thefranchisee. Risk aversion is not obvi-ously captured by any of the variablesavailable in the CBO database, and istherefore not captured in the Tkble 2and 4 regression analyses. If, indeed.

Table 4LOGISTIC REGRESS ION: EXPLAINING RETAIL FIRM S URVIVALOVER THE 1987-LATE 1991 PERIOD(Firms formed from 1984-1987 only)

ConstantEducation:less than high schooihigh schooi graduatecoilege graduatepost-graduateManagement experience/no management experienceOwner ageOwner age=Owner genderOwner labor inputNumber of employeesMarried/unmarriedLog financiai capitaiLeverageFranchise/nonfranchiseFirm entered 1986Firm entered 1987Minority-owned f irm/

nonminority-owned firm

RegressionCoefficient-3,049*

-,444*-,145-.056.982*-.330*.163*-.002*.429*,012*,072*,138,116*,003-1,298*-,203*-,648*,076

StandardError,553,152,112,125,216,110.026,0003.095.004.014.107,013,007,151,119,107,138

VariabieiUlean

,110,320,205,089,358

40.9711,798,9.70220,1632.745.7958.5103.637.082,281,392

,114Note: precise variable definitions for the above expianatory variables are detailed in App endix A.


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franchisees are particularly risk-averseas a group, and risk aversion tends tocause higher firm discontinuance ratesand lower profitability, this unobservedphenomenon may partially explain thepatterns of laggard franchisee perform-ance observed in this study. The riskaversion hypothesis is suspect, however,because it logically implies poorer fran-chisee performance across the board; itdoes not explain why franchises in re-tailing would be a particularly laggardgroup.

Non etheless, research on franchise be-havior is properly viewed as being at an

early stage. Future research is likely toextend our understanding of the under-lying causes of the lower survival ratesthat typify the young franchise smallbusinesses. One possible cause of poorfranchise performance is the costs spe-cific to this org anizational form up-front fees to the franchisor, royalty fees,marketing fees, and the like. Do thesecosts exceed the benefits accruing toyoung f irms choosing the franchiseroute? Are low margin lines of retailingparticularly burdened by such fees? Thepotential research agenda is jus t begin-ning to em erge.

APPEN DIX A: LOGISTIC REGR ESSION - VARIABLE DEFINITIONSThe dependent variable in the logistic regression exercises of Tables 2 and 4 isw he the r or no t th e business th at w as operating in 1987 is still functioning in late 1991.Businesses still operating are considered active firms; those that have closed down areconsidered discontinued. In depen dent variables are defined below:Less tha n high schoolHigh school gradSome college

College g radPost-graduateManagement experience

Owner ageOw ner age^Owner genderMinority-owned firmOwner labor input

For ow ners not completing high school, this variable = 1;(otherwise = 0).For ow ners com pleting four years of high school, this vari-able = 1; (otherw ise = 0).For ow ners com pleting at least one year of college but notattaining a bachelor's degree, this variable = 1; (other-wise = 0). This variable is excluded from the logit equa-t ion.For ow ners awarded a bachelor's degree, this variable =1; (otherw ise = 0).For own ers that at tend gradu ate school beyond the bach e-lor's degr ee, this variable = 1; (otherw ise = 0).For those working in a managerial capacity prior to own-ing the business they ow ned in 1987, m anagem ent experi-ence = 1; (otherw ise = 0).A continuous variable measured in years.Owner age squared.For male ow ners, gender = 1; (otherw ise = 0).For African American, Asian, Native American and His-panic ow ners , mino rity-owned firm = 1; (otherw ise = 0).Num ber of hours during the 1987 calendar y ear spent bythe owner working in the relevant small business, dividedby 100.


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EmployeesMarriedLog financial capitalLeverageFranchiseFirm entered 1986Firm entered 1987

APPENDIX A (Continued)Average number of paid workers reported to the federalgovernment on 1987 quarterly payroll forms.For m arried ow ners living w ith the ir spouse, married = 1;(otherwise = 0).The log of th e sum of debt and equity capital used to s tartor become own er of the business.The ratio of debt to equity capital invested in the firm atthe point of entry.For franchises, franchise = 1; (otherwise = 0).If the business was started or ownership was acquired in1986, th en this variable = 1; (otherwise = 0).If the business was started or ownership was acquiredduring 1987, then this variable = 1; (otherwise = 0).

APPENDIX B:NATURE OF THE DATABASEThe version of the Characteristics ofBusiness Owners (CBO) database uti-lized in this study was compiled by theU.S. Bureau of the Census in 1992. A de-scription of the CBO appears in Bates(1990a). The CBO was drawn from theuniverse of persons who filed a smallbusiness federal income tax re tu rn in1987, including: (1) Schedule C, Form1040, (2) Form 1065, and (3) Form 1120s.According to Census Bureau procedure,a small business is defined as existing incases w he re: (1) one of these income taxfo rms was filed, and (2) gross self-employment revenues l i s ted on t h a t

form for 1987 were at least $500. Thisstudy utilizes a more rigorous definitionregarding what constitutes a small busi-ness: fihng of the requisite tax re tu rn isr e q u i r e d and 1987 gros s self-employment revenues must be at least$5,000.The CBO over-samples wo men and mi-nority business owners, as well as own-ers of firms that utilize paid employees.All of the re por ted statistics in this studyare weighted to acljust for the Census

tive of firms nationwide that grossed atleast $5,000 in total revenues in 1987and filed one of the above income tax re-tu rns . In the case of multi-owner firms,all owners (up to the ten largest) weresurveyed in the creation of the CBO.Owner characteristics, when reported inthis study, reflect the traits of the ownerwho w orked the largest numb er of hoursin the applicable firm during 1987 (the" d o m i n a n t " o w n e r ) . Of the roughly26,000 nonminority male and 26,000nonminority female firm owners sur-veyed in the construction of the CBO, re-sponse rates were 73.8 perc ent for malesand 75.4 perce nt for females. Due to thetax return sampling frame, informationavailable on nonrespondents includedfirm sales, location, and industry; thisinformation was used to weigh the re-spondent sample so tha t it is representa-t ive of the universe of re levan t taxreturn filers/business owners, and notjus t the respondents. This study coversonly firms formed over the 1984-1987period; the unit of analysis is firms, notpersons. Thus, the universe of firms cov-ered in this study is 4,005,562 small busi-nesses. In cases where persons entered


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time period, and in the case of multipleowner firms, the new owner is the domi-nant owner. In cases where personsbought into ongoing firms that werestarted before 1984, the firm is excludedin all cases of nondominant owners en-tering between 1984 and 1987.Variables describing firms and theirowners were actually compiled fromthree different sources when the CBOdatabase was created. Most of the firmand owner information was collectedfrom the survey questionnaire filled outby the smaU business owners. Of thevariables examined in th is study, th e fol-lowing derive from owner survey re-sponses: (1) net income in 1987; (2)whether or not the firm is still operatingin 1991; (3) whether or not the firm is afranchisee or an independent startup;(4) owner years of education and degreestatus; (5) firm capitalization variables,including leverage and total s tartup cap-ital; (6) owner age; (7) owner managerialexperience; (8) hours of owner labor in-put; and (9) owner race and ethnicity in-formation.Variables collected from tax returndata include: (1) 1987 sales; (2) number ofemployees in 1987; and (3) industry inwhich the firm is operating. Additionalinformation on owner gender, race, andethnicity, finally, was collected from so-cial security records. Note that ownersoccasionally run more than one smallfirm. In such cases involving sole proprie-torships, the applicable firms are consoli-dated and treated as one small business.Note, further, that many firm ownershave wage income in addition to self-employment income many are part-timers in the small business world. Theyare included if they meet the criteria of(1) filing one of the applicable small busi-ness income tax returns, and (2) grossingrevenues of $5,000 plus in 1987.

as S corporations (Form 1120s not used).Excluding these corporations from ananalysis of young franchisee survival in-troduces a potential selection bias. As-suming tha t the excluded small businesscorporations tend to be larger scale op-erations than the average firm coveredby the CBO database, an analysis basedsolely upon CBO data would underrepre-sent the larger franchise small busi-nesses. If the larger-scale franchiseshave higher survival rates than theirsmaller counterparts, then an analysisrelying solely upon CBO data would un-derstate the actual survival rate of fran-chise operations.In sample observations where itemnonresponse was a problem, my rule hasbeen to try to keep the applicable firm inthe sample. Item nonresponse was pro-nounced for only one of the variablesanalyzed in this study 1987 net in-come. The Table 1 sample size of 20,554firms falls to 19,463 firms in Tkble 2 be-cause of item nonresponse. Firms fromIkble 1 are included in the Tkble 2 re-gression analysis only if they providedinformation on all of the variables in-cluded in this statistical analysis.Interested researchers may access theCBO database at the Center for Eco-nomic Studies, U.S. Bureau of the Cen-sus in Suitland, M aryland.

REFERENCESArthur Anderson and Co. (1992), Fran-chising in the Economy: 1989-1992.Washington, D.C.: InternationalFranchise Education Association.Bates, Timothy (1990a), "New Data Ba-ses in the Social Sciences: The Char-acteristics of Business Owners DataBase," Journal of Human Resources25 (F ^ ), 752-756.(1990b), "Entrepreneur Hu-man Capital Inputs and Small Busi-


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(1994), "Social Resources Gen-erated by Group Support NetworksMay Not Be Benef ic ia l to As ianImm igrant-Ow ned Small Businesses,"Social Forces 72 (March), 671-689.Ba tes, Timothy, and Alfred Nucci (1989),"An Analysis of Small Business Sizeand Rate of Discontinuance," Jour-nal of Small Business M anagement27 (October), 1-7.Castrogiovanni, Gary, Robert Justis, andScott Julian (1993), "Franchise Fail-ure Rates: An Assessment of Magni-t u d e a n d I n f l u e n c i n g F a c t o r s , "

Journal of Small Bu siness M anage-ment 31 (April), 105-114.Evans, David (1987), "The RelationshipBetween Fi rm Size , Growth , and

Age," The Journal of Industrial Eco-nomics 35 (June), 567-582.

Ho ltz-Eakin, D., D. Joulfa ian, and H. Ro-sen (1994), "Sticking It Out: Entre-preneuria l Survival and Liquidi tyCons t ra in t s , " Journal of PoliticalEconomy 102 (February), 53-75 .Nucci, Alfred (1992), "The Characteris-tics of Business Owners Data Base,"

U.S. Bureau of the Census Center forEconom ic Studies discussion paper.Jovanovic, Boyan (1982), "Selection an dEvolution in Industry," Econometrica50 (May), 649-670.Washer, Louise (1994), "Inside Story,"McCaii's (February), 113.Williams, Darreli (1994), "Why Do En-t repreneurs Become Franchisees? :An Empirical Analysis of Organiza-tional Choice," (unpublished).

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analysis of survival rates among franchise and independent small business startups

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