Are franchises really more viable? Evidence from loan defaults

This study examines whether franchisees are less likely to default on loans compared to counterpart independent SMEs. Findings from analyses of SME loan defaults between 2001 and 2015 suggest that franchisees, young and old, were just as likely to default than non-franchisee counterparts. The likelihood of loan default is higher for franchisees than for non-franchisees for those with high debt burdens. While default rates vary by sector, these findings are robust to sector-specific estimations and alternative time horizons of default. Findings suggest that the benefits of the franchising model, such as new firms acquiring the franchisors' brand name, do not necessarily lead to lower default rates for franchisees. Overall, this study finds evidence questioning the proposition that franchising is a relatively less risky form of business organization for prospective entrepreneurs.