RESULTS

We propose that perceived exit costs correlate with trade mark valuation and to conflict in the franchisee-franchisor relationship. Ultimately, the alliance and resulting productivity of the franchisees and the franchisor should become embodied in the trade name (Macneil, 1985). This brand capital would be lost to the franchisee upon exit from the franchise relationship. The extent of the loss is the value of the brand capital. Therefore, we asked the question; what are the perceived exit costs? It is posited that the extent of perceived exit costs will correlate to conflict in the franchisee-franchisor relationship. The list of exit costs is taken from the literature (Ping, 1990). Below is table 1 of the mean values on the 1-5 scale of agreement regarding franchisee perceived exit costs.

 

The expectation is that all exit costs will be scored above the neutral if the franchise is providing value in a specified area of concern and that the more specific a cost is to the enhancement of the trade mark, the higher the exit cost. However, franchisees’ mean scores regarding exit range from 2.4 (clearly not costly) to 4.06 (clearly costly).

 

Franchisees score their personal investment in the relationship as the highest of all perceived exit cost with over 73% scoring 4 or 5 and only 8% viewing personal investment as low. There is also a clear understanding that exiting the relationship will negatively impact customer goodwill (59% score 4 or 5) and that the overall cost of exit will be high (51% scored 4 or 5. These exit costs are very specific to the existing franchise relationship and cannot be transferred to another relationship.

 

There is a counter-intuitive overall neutrality regarding the increase in marketing costs upon exit, even with the recognition of the potential loss of customer goodwill. However, there is an almost perfect inverted bell curve for the scoring of an increased marketing budget upon exit, representing equality in difference of perspective on the issue and a smaller but significant degree of neutrality. Also, surprisingly, there is little indication that business format franchisees see much value, as expressed by perceived exit costs, in the operating system (2.99), training programs (2.4), and store conversion (2.73). The franchisees might see these operating realities as transferable. In essence, they have been paid for and are now transportable. The same is true for finding alternative sources of supply with a mean score of 2.53 and 56% of franchisees scoring 1 or 2. The more personal and more subjective costs score higher than the direct costs of doing business.

 

The overall assessment of the costs of exiting the relationship is surprisingly low at a mean value of 3.34. While franchisees perceive a value in the relationship, it is somewhat tentative. This is an important issue. If franchisees view the costs of exit as relatively low, they are less constrained and therefore more free to exit. Also, the literature is clear that when the costs of remaining in the relationship exceed the value, the parties are more likely to move to manifest conflict.

Main Page

 

FACTOR ANALYSIS OF EXIT COST VARIABLES

Although these variables are taken from a study by Ping (1990), he did not subject them to factor analysis in the same fashion as performed here. Ping (1990) combined variables in a different manner and therefore results are not comparable. However, it is edifying to perform factor analysis because the results reveal latent variables which can be related to theory.

 

Four factors emerge for exit costs. The first factor has been labeled the "Expense" factor, so named to reflect what appears to be the direct expenses associated with exit, the largest of which is legal expense. This indicates a belief that the license agreement is of a binding nature. Interestingly, an increased marketing budget is included in this factor. Marketing has been a function performed primarily by the franchisor, based on an advertising fee paid by the franchisees. Franchisees see marketing as an expense and not as an investment.

 

The second factor is labeled "Business Format" because the variables deal with the specific elements of delivering goods and services to the customer that make up the format of the operating system. Not inconsequentially, the variable with the largest factor loading is "exit will require operating changes."

 

The third factor is labeled the "Psychic" factor, borrowing the term from Ping and Dwyer's (1988) work on the personal psychological expenses involved in exiting an exchange relationship.

The fourth factor deals with only one variable, cost of store conversion upon exit, and is labeled the "Asset" factor because it deals with the role of converting physical assets upon exit.

 

The perceived exit cost factors impact on trade mark valuation is subjectively judged by the extent of each factors asset specificity. That is, the extent to which the asset is not transferable out of the franchise relationship. The Expense factors are not specific assets as they are related to the specific action of exit and not transactions undertaken to support the trade mark. Greater agreement with high expense factor exit costs should therefore produce greater anger. The Business Format factor consists of assets which are to a moderate extent specific to the relationship (for example, knowledge of the operations procedures cannot be expunged from the franchisee's mind even if the operating manual is returned to the franchisor, but the franchisee's ability to exactly duplicate operating procedures is questionable). Therefore, moderate levels of anger should be produced by high business format exit costs. The Psychic factor is clearly specific to the relationship, as the psychological response of the franchisee is to a specific franchisor. High costs in the psychic factor should not produce high levels of conflict. The Asset factor is again moderately asset specific in that signage, and possibly colors and proprietary equipment in a store might have to be changed. But it is unlikely that the physical structure would be dramatically changed, and certainly the location would not be moved. Moderate levels of conflict should arise from high asset factor exit costs.

 

Main Page

 

 

PERCEIVED BALANCE SHEET AND MARKET VALUES OF THE TRADE MARK

301 of the 621 respondents, or 48%, stated that they did not know the balance sheet value of their trade mark. More importantly, 315 respondents, or 51%, stated they did not know the market value of the trade mark. Additionally, 113 franchisees simply did not answer the question about the balance sheet (no affirmative value listed and the "unknown" box not ticked). Likewise, 116 franchisees did not answer the question regarding market value. A majority of franchisees do not quantitatively link their business activity and alliance with the franchisor to the value of the trade mark.

 

TABLE 2

Factor Analysis of Perceived Exit Variables (4 factors extracted)

 

Factor

Name

Variables Loadings Factor Eigenvalues Cum Pct Var
           
Expense Exit will be costly in legal expense 0.88 1 2.87 26.10
           
  Overall costs of exit would be high 0.84      
           
  Exit will increase marketing budget 0.52      
           
Business Format Exit will require operating changes 0.78 2 1.62 40.80
           
  Exit costly finding alternate suppliers 0.72      
           
  Exit will increase training cost 0.66      
           
  Exit costly in lost customer goodwill 0.50      
           
Psychic Company has invested time and energy into the relationship 0.87 3 1.47 54.10
           
  I have personally invested in the relationship 0.74      
           
  Company investment is unique to the relationship 0.70      
           
Asset Exiting costly in store conversion 0.89 4 1.00 63.20

 

The large standard deviations in both balance sheet and market valuations of the trademark are due to both industry effect and individual franchisee firm size in terms of number of outlets owned. However, market value is higher than balance sheet value, thus suggesting that amortization of the cost of the franchise yields a positive return to the franchisee. That is, presumably the mean franchisee believes the franchisee firm can be sold at a value exceeding the amortized cost of the trade mark (the cost of the franchise fee and the present discounted value of the royalties), yielding a gain on the transaction. Although this is a positive indication of financial return, it is still troublesome that only 31% of the franchisees offered any opinion about trade mark value. Although only one third of the respondents (n=190) offered a perspective of the market value of the trade mark, this study proposes that trade mark value is linked to perception of exit costs. Therefore, we subject the data to Chi Square Automatic Interaction Detector (CHAID) analysis to investigate the correlation between market value of the trade mark and exit costs. All exit cost independent variables were used in the CHAID analysis. Scoring of market value of the trade mark was used as the dependent variable. Likewise, 182 franchisees offered a balance sheet value of the trade mark and a CHAID analysis of the balance sheet value as the dependent variable and all exit costs as the independent variable was run.

Top of Page
Previous Page | Main 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.