The 25 Worst State Economies for Franchising

See the 25 best state economies for franchising.

The decision of where to expand is one of the biggest questions for both prospective franchisees and franchisors when considering franchise growth. Earlier this month, The American Legislative Exchange Council (ALEC) released its thirteenth edition of Rich States, Poor States, a series that ranks states’ economic competitiveness and outlook within 15 state policy variables. To determine what this data means for the franchising industry, 1851 Franchise analyzed the report to share the 25 worst states for franchising.

The report features two different rankings: Economic Outlook and Economic Performance. Both examine the policy choices made across the U.S. from 2008 through 2018 and whether those choices have improved economic competitiveness in each state. Additionally, the rankings are based on 15 criteria including factors like Gross Domestic Product (GDP) 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 outlines which policy choices encourage economic opportunity and which create difficulty for growth in certain states.

In the latest edition of Rich States, Poor States New York is ranked as the state with the worst economic outlook in 2020 based on the state’s standing in the assessment's state policy variables, followed by its neighbors Vermont and New Jersey. Here’s the full bottom 25:

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

In an analysis of the report, 1851 Franchise Publisher Nick Powills points out that 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.” 

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 percent compared to Utah’s 4.95 percent, 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.”