White Paper: The Best States for Franchising

How franchisors can make sense of economic outlooks for all 50 states.

How is your state performing? See for yourself

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What ALEC-Laffer’s State-Level Economic Index Report Means for Franchising

Franchisors can leverage state-level data to better predict financial outcomes of franchisees and create more strategic franchise-growth marketing plans.

In this whitepaper, 1851 provides an in-depth look at ALEC-Laffer’s latest “Rich States, Poor States” Economic Competitiveness Index and how it can be useful to franchisors as they expand their footprints. The projections in the report can help businesses determine which states have dynamic economies that can help brands thrive over the next 10 years. In a post-COVID-19 economy, reports like these are of the utmost importance to helping companies determine their greatest odds for survival and growth.

ALEC-Laffer’s report, which ranks the economic competitiveness of all 50 states using equally weighted policy variables, features two different rankings: Economic Performance — a retrospective measure based on a state’s performance over the past 10 years — and Economic Outlook — a forecast based on a state’s current standing in 15 state-policy variables. Broadly speaking, the report indicates that states that spend and tax less experience higher growth rates than states that spend and tax more. However, just because a state is ranked low on the outlook index does not mean that franchisors should not expand there — it does mean that the rate in which they expand should be more strategically planned.

The report is of equal importance to potential franchisees who are looking to make a career change in the COVID-19 environment. While these individual state findings are important for entrepreneurs who are looking to start their own business, it shouldn’t discourage them from investing in the franchise of their dreams. If the market is right and a brand solves a problem in that particular market, franchisees can still grow and scale their business with the brand. However, any entrepreneur in states that performed low for outlook should perhaps consider a brand with a low buy-in cost.

Jonathan Williams — ALEC’s Chief Economist and one of the authors of Rich States, Poor States — said the annual report is useful for entrepreneurs looking to start a business because it shows what states have the most competitive economies. A state’s ability to compete “directly affects the ability of individuals and businesses to succeed.” Williams told 1851 that while there are a number of ways to analyze states and their economies, Rich States, Poor States is popular because it considers variables that represent public policy choices that state lawmakers directly control. These variables are likely to continue to be critical for business owners to be aware of as state governments seek to overcome the COVID-19 crisis and the negative impact it has had on the United States economy as a whole.

“With COVID-19 and the government shutdowns of economic activity in many states, policymakers are navigating significant budget imbalances,” said Williams. “These budget debates will lead to discussions around potential tax increases. Already, lawmakers in states like California and New Jersey have introduced proposals to substantially increase tax burdens on businesses and individuals.”

Jonathan Williams — ALEC’s Chief Economist

The 25 Worst State Economies for Franchising

50. New York
49. Vermont
48. New Jersey
47. Illinois
46. California
45. Minnesota
44. Hawaii
43. Rhode Island
42. Oregon
41. Maine
40. Connecticut
39. Washington
38. Pennsylvania
37. Maryland
36. Nebraska
35. Massachusetts
34. New Mexico
33. Montana
32. South Carolina
31. Kentucky
30. Louisiana
29. Ohio
28. West Virginia
27. Iowa
26. Alaska

The 25 Best State Economies for Franchising

25. Kansas
24. Delaware
23. Alabama
22. Arkansas
21. Georgia
20. Mississippi
19. Missouri
18. Colorado
17. New Hampshire
16. Virginia
15. Texas
14. Michigan
13. South Dakota
12. Wisconsin
11. North Dakota
10. Arizona
9. Oklahoma
8. Tennessee
7. Florida
6. Nevada
5. North Carolina
4. Indiana
3. Idaho
2. Wyoming
1. Utah

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In the end, the right opportunity is the right opportunity. Just because a state is low on the index does not mean a particular brand cannot do well in that region. At the end of the day, it is important for franchisors to estimate all the risks and challenges involved in expansion. Franchisees should feel confident in their investments and decision to join the brand — when franchisors have all the information at hand, they can empower their franchisees to run the best business possible.

So which states fared better than others? For Economic Performance, Texas ranked highest at No. 1. Utah, however, took the lead for Economic Outlook. Though a state’s performance is certainly an important metric for franchisors to consider, outlook is the more important of the two rankings to consider.

Nick Powills reviews the impact on the frachising landscape

According to 1851 Franchise Publisher Nick Powills, when it comes to growth pursuits, franchisors often neglect the data when making their decisions. Instead, their decisions are based on interest from franchisees or general desire to simply grow for the sake of growth, which has the potential to be harmful to the success of their brand.

“Most franchisors spin the globe and put their finger on it, and wherever it stops is where they say they’re going to grow,” said Powills. “Or, franchisors take a shotgun approach — wherever the prospect is that inquires, they will entertain that marketplace.”

Powills goes on to explain that brand awareness is another important element that determines growth potential when it comes to certain brands — a factor that the report does not address. He cites Toppers Pizza as an example of a franchise with huge growth, but only at the regional level.

“For the Toppers Pizzas of the world that grew in concentric circles in Wisconsin and saw higher unit-level sales over other pizza brands nationwide, brand awareness was a main factor,” said Powills. “If that brand goes to Florida, they won’t have the same impact. When deciding where to grow, it is important to look at surrounding states within a car-ride’s distance that are performing well from an economic competitiveness, taxation, home value and consumer value standpoint. Evaluate each neighboring state and use it to decide where those franchise development dollars should be allocated. If Utah is number one, but you’re based in Wisconsin, you still need to consider brand awareness when deciding where to develop.”

“If you can find gaps in the marketplace and make the dollar more profitable, then yes, that should be a factor in how you consider your growth modeling,” said Powills. “As a franchise owner, you are already sending five percent of your income back to the franchisor in royalties, so if you can find areas of the country where business taxes are lower, you should take advantage of that knowledge. These are data points that should be taken into consideration by franchisors developing a growth model, as lower taxes can create a more attractive investment opportunity not only for prospects, but also for the franchisor.”

Nick Powills – 1851 Franchise Publisher

Looking at the report further, it’s clear that states that are spending less and those that are taxing less experience higher franchise growth rates than those that tax and spend more. For a state like New York, whose personal income tax progressivity is nearly four times higher than Utah’s — the state with the best prospective economic outlook — and top marginal corporate tax rates are 17.26% compared to Utah’s 4.95% it’s clear to see why an opportunity for franchise growth may not be the most promising.

“If you can find gaps in the marketplace and make the dollar more profitable, then yes, that should be a factor in how you consider your growth modeling,” said Powills. “As a franchise owner, you are already sending five percent of your income back to the franchisor in royalties, so if you can find areas of the country where business taxes are lower, you should take advantage of that knowledge. These are data points that should be taken into consideration by franchisors developing a growth model, as lower taxes can create a more attractive investment opportunity not only for prospects, but also for the franchisor.”

Furthermore, Powills points out that there are additional elements that determine what makes a brand more attractive and successful in one area more than in another, elements that when paired with the data from these reports can be a helpful tool in determining franchise growth; these include things like consumer happiness and a franchise candidate’s “hustle” and commitment to success at the brand level as well as at the personal level.

“Utah is No. 1 in the report year over year, over year. That means consumer happiness is higher, that means the dollar stretches farther. To me, that says that’s a state you should be developing in,” Powills said. “At the end of the day, it will always be about finding the right candidate. There are sometimes insights that may help a franchisor, but at the end of the day it’s up to the franchisee to be a hustler.”

For franchisors and their brand’s prospective franchisees who are looking to recover from and grow amid the economic devastations surrounding COVID-19, it’s about pinpointing the right area for growth that may be the most important element in success. Based on the data from the report, in states where the dollar doesn’t stretch quite as far as it does in others, the opportunity has much less appeal, especially now.

“In order to recover, franchisors can increase their state qualifications overall and increase the areas where they look for and evaluate prospects,” said Powills. “When it comes to markets where the dollar stretches more, brands should take this time to utilize this data to get the most out of their investment. When brands take these insights and combine them with other factors, such as consumer demand or support, they can cross-apply it to their growth model.”

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