INTRODUCTION

The franchise relationship is based on the belief that the alliance will generate efficiencies which result in increased value to the participants. The franchisor and franchisee share a common trade mark, which is the embodiment of the value of franchise relationship. Generally accepted accounting practices define trade mark value in two ways. The balance sheet accounts for the value of the trade mark as an intangible long term asset. This is established as a matter of accounting convention. A second method of defining trade mark value is to estimate the price the market would pay for a franchisee firm, above the value of the tangible assets. This is not listed in the financial statements of the company but can be realized in the sale of the company. A number of valuation models are available but ultimately market value is determined by the actions of a buyer and seller agreeing on a price. This study is concerned with asking for what price and when would a franchisee sell the firm and would that price exceed the value of the tangible assets? Also, does the franchisee’s valuation correlate with satisfaction in the franchise relationship?

 

 

 

EXIT COSTS, TRADE MARK VALUATION AND CONFLICT IN FRANCHISING

The literature regarding the antecedents and effects of exiting a channel relationship clearly point to dissatisfaction as the principle motivation to exit a channel relationship when structural alternatives are available (Dwyer, Schurr, and Oh, 1987; Duck, 1982; Ping and Dwyer, 1988; Richins, 1987; Diener and Grayser, 1978; Ping, 1990; Baxter, 1986; Mcneil, 1980; Johnson, 1982). This body of knowledge argues that satisfaction and structural alternatives to the present relational arrangement are major determinants of a firm's propensity to maintain the current relationship. Probing the attitudes of a channel player regarding the costs of exiting a current relationship ultimately establishes an assessment of the channel member's evaluation of the value of the relationship (Dwyer, Schurr and Oh, 1987; Johnson, 1982). In the case of franchising, the franchisee is tied to a franchise system vis vis the license agreement and thus maintains the business format in a effort to build value. This is consistent with Mcneil's (1983) discussion of relational exchange. Important to exit/switching costs is their association with the distribution of the productive benefits of the relationship in franchising. A relational exchange equates preservation of the relationship with the fair distribution of the productive benefits generated by the relationship (Mcneil, 1980; Kaufmann and Stern, 1988). Fairness, however, is subjectively assessed by a franchisee. If fairness is perceived to be absent in the distribution, then the franchisee will assess alternatives to the current relationship. That assessment ultimately values the trade mark as the trade mark embodies the brand value which produces the productive benefits (Mundstock, 1991).

 

The decision to exit the relationship, if taken, carries with it both direct and indirect costs (Ping and Dwyer, 1988). Understanding these costs is essential to making a sound decision about the viability of continuing the relationship (Barney, 1991). Previous research has shown that dissatisfaction may manifest in a conflictual situation when the cost of remaining in the relationship exceeds the perceived cost of exit (Stern and Kaufmann, 1988; Ping, 1991; Pondy, 1967,1992).

Main Page

 

METHODOLOGY

The pilot study was conducted in the United Kingdom. Because of the availability of dual mailing lists in the United States (from participating franchise systems and from the governmentally mandated Uniform Franchise Offering Circular) it was decided to conduct the main study in the United States.

 

Selection of franchise systems to participate in the study was done by speaking to the American Franchisee Association (AFA) at their national conference. The AFA is an organizational primarily consisting of franchise systems franchisee associations, such as the Jiffy Lube Association of Franchisees and the Supercuts Franchisee Association. The AFA membership represents about 15,000 franchisees. Six companies agreed to participate. Two additional companies were randomly asked to be a part of the study. Including the pilot study company, a total of nine franchise inter-organizational forms participated in this study. The procedure followed in the pilot study was used in implementing the mail survey. Mailing lists were checked against United States Federal Trade Commission required "Uniform Franchise Offering Circular" for accuracy to improve list quality.

 

Questionnaires were sent out to 2912 franchisees by company in intervals of two weeks. A post card reminder was sent out ten days following the initial mailing. The number of undeliverable surveys was 96 of the 2,912 mailed, or, 3.3%. The response rate was 22% or 621 franchisees.

 

TABLE 1

Perceived Exit Costs

 

Variable Description 1 2 3 4 5 Mean Std Dev N
Exiting will increase training cost 231 142 82 85 76 2.40 1.42 616
Exiting costly finding alternative suppliers 225 122 77 104 90 2.53 1.48 618
Exiting costly in store conversion 176 120 108 96 105 2.73 1.46 605
Exit will require operating changes 151 117 77 131 140 2.99 1.52 616
Exit will increase marketing budget 156 107 90 107 153 2.99 1.52 613
Exit will be costly in legal expense 146 83 106 127 154 3.10 1.51 616
Company investment is unique to the relationship 64 83 212 156 93 3.22 1.18 608
Overall costs of exit would be high 89 95 119 146 169 3.34 1.40 618
Company has invested time and energy into the relationship 42 93 173 198 110 3.39 1.14 616
Exiting costly in lost customer goodwill 73 74 108 161 201 3.36 1.36 617
I have personally invested in the relationship 13 42 96 207 259 4.06 1.02 617

 

The potential problems inherent in a mail survey make the tabulation and analysis of non-respondents a critical activity in order to avoid non response bias (Keats and Bracker, 1988). Response can be examined by looking at differences between early and late waves (Kanuk and Berenson, 1975). A Chi-square analysis was performed to see whether there was a relationship between firms fitting sample criteria and early (1st mailing) versus late respondents (those responding to the post card reminder and later mailings). No such differences were found (X2 =.1572, D.f.=1, p=.778). There was no response bias within or among companies. Similarities between early and late responders can be interpreted as suggesting the absence of response bias, under the assumption that those firms that responded to the reminder would not have responded had the reminder not been sent (Kanuk and Berenson, 1975; Covin and Covin 1990).

 

The potential for an individual industry affecting the results is mitigated by the representation of nine different industries in the study.

Previous Page | Top of Page | Next Page

Return to Babson College
Main Home Page
CES Home Page Under-
graduate
Education
Graduate
Education
Executive
Education
Alumni
Relations

1997 Babson College All Rights Reserved
Last Updated 2/9/97 by Geoff Goldman

To sign-up for the Center for Entrepreneurial Studies' publication lists,
please register with the
Entrepreneurship WebTeam.