The 25 Best State Economies for Franchising

See the 25 worst state economies for franchising.

Deciding where to franchise is one of the biggest questions that both prospective franchisees and franchisors need to consider when trying to grow. Recently, ALEC-Laffer released the thirteenth edition of Rich States, Poor States — its newest publication in an annual series illustrating each states' competitiveness and economic outlook using 15 equally weighted policy variables and examining trends from past decades. This publication examines the policy choices made across the 50 states between 2008 and 2018 and whether those choices have improved economic competitiveness. 1851 Franchise took a deep dive into the report to analyze what the data means for the franchising industry.

“When it comes to establishing growth markets, the analogy I often use is that most franchisors really just spin the globe and point to a random spot,” said 1851 Franchise publisher Nick Powills in an interview about the report. “Or, they take a shotgun approach and only entertain the markets where a prospect shows interest. Analyzing state economic competitiveness can show franchisors where their development dollar can stretch the farthest.”

In the newest edition of this publication, Utah again earns the top spot for states with the best economic outlook in 2020, followed by Wyoming, Idaho and Indiana. Here’s the full top 25:

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

ALEC-Laffer’s annual ranking of states is based on 15 economic criteria, including factors like Gross Domestic Product growth, population migration, payroll employment, personal income tax rate, corporate tax rate, property tax burden, sales tax burden and state minimum wage. The report also reveals the policy choices that have proven to encourage economic opportunity and which policies have proven to be obstacles to state growth. 

Generally speaking, states that spend less (especially on income transfer programs) and states that tax less (particularly on productive activities such as working or investing in business) experience higher growth rates than states that tax and spend more. For example, this report shows that big tax reforms have significantly helped Wyoming, Oklahoma, Wisconsin, Delaware and Montana improve their national rankings this year. 

“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,” said Powills. “These are data points that should be taken into considerations by franchisors developing a growth model, as lower taxes can not only create a more attractive investment opportunity for prospects, but also for the franchisor. The value of a dollar is vastly different depending on the state.”

Now, as businesses look to recover from COVID-19, finding the right areas for growth can be a key way to bounce back during a shaky economy. “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.”

Still, Powills notes that the state economy can’t do all the work: While prospects in high-ranking states may be better positioned for the future, the individual franchisee and the support they receive are still the most important factors. Even if Utah is number one year-over-year, the franchisor still needs to be able to provide the support and proven business model in that area if they want to succeed.  

“At the end of the day, it will always be about finding the right candidate,” he said. “For example, we had one client who wasn’t sure a prospect would fit into a system, but they ended up being wildly successful. There are sometimes insights that may help the franchisor, but at the end of the day it is up to the franchisee to be a hustler.”

In terms of franchising, the report certainly doesn’t show everything. For example, it doesn’t take into consideration factors such as regional brand awareness. “For the Toppers Pizza*s 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.” 

Moving forward, the most important factor in franchise development is going to be showing that franchisees were supported during COVID-19. If a franchisor can show that its franchisees were successful and supported during the pandemic, they will offer valuable validation when other prospects start asking about the opportunity. For franchisees, it is important to remember that not everything is the franchisor's responsibility — you are still a business owner and need to handle your own business. Due diligence is more important than ever when deciding whether or not to franchise, and prospects shouldn’t be afraid to ask the tough questions of the franchisor. 

Whether you are a franchisor establishing a growth market or a prospective franchisee evaluating a brand, the state competitiveness rankings can be another tool in your arsenal to ensure that you are making the best decisions possible.