The Failure Rate represents franchise unit terminations, non-renewals and franchises that ceased operations for other reasons in a given year relative to the total number of franchise units. A lower closure rate, overall terminations, and non-renewals indicate a more stable franchise system.
Franchise failures comprise franchise terminations, franchise non renewals and franchises that ceased operations for other reasons.
Franchise terminations occur when the franchisor cancels the agreement before the end of the term (generally 10 years). Due to the contractual nature of the franchisor/franchisee agreement, franchise terminations generally do not occur without an explicit outstanding reason, such as something as serious as fraud.
Franchise non-renewals, on the other hand, occur at the end of the franchise term and can occur for any number of reasons. The Franchisee might no longer see the value in the brand and prefer to run the location as an independent business.
The last metric of franchise failures is the number of franchises that ceased operations for other reasons. This is the broadest of the three categories, and a point of concern because it could be an indicator of franchise bankruptcy.
The failure rate is calculated by considering all franchise failures in a given year divided by the total number of franchises.
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