Frontiers of Entrepreneurship Research
1997 Edition

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FRANCHISING YOUR WAY TO RICHES?
AN ANALYSIS OF VALUE CREATION IN PUBLIC FRANCHISORS

Sue Birley, Imperial College
Benoit Leleux, Babson College
Stephen Spinelli, Babson College


INTRODUCTION

THEORETICAL FOUNDATION FOR FRANCHISING

Administrative Efficiency
Risk Management
Resource Constraints
Summary

DATA AND METHODOLOGY

RESEARCH RESULTS

Franchisor Index Performance
System Growth, Franchise Format and Contractual Terms of Agreement
Franchisor Performance
Franchisor Systematic Risk

RESEARCH CONCLUSIONS AND DISCUSSIONS

REFERENCES

EXHIBIT 1 Franchisor Market Performance, 1987-1994

EXHIBIT 2 Franchisors Systematic Risk (Beta) Distribution, 1987-1994

EXHIBIT 3 Franchisors Abnormal Performance (Alpha) Distribution, 1987-1994

EXHIBIT 4 Correlation Between Outlet Growth Explanatory Variables

EXHIBIT 5 Outlet Growth Model

EXHIBIT 6 Correlation Between Abnormal Performance Explanatory Variables

EXHIBIT 7 Abnormal Performance (Alpha) Explanatory Model

EXHIBIT 8 Systematic Risk (Beta) Explanatory Model

ABSTRACT

This paper reviews the theoretical rationale underlying the franchise choice and its empirical implications, including 1) the historical return performance of public franchisors, 2) their level of market risk (beta) exposure, and 3) various models of franchise growth, returns and risk focusing especially on system ownership and contractual parameters. The evidence presented supports the view that corporate-funded growth is preferred for superior performing concepts while independently-owned franchisees are resorted to for sub-optimal circumstances, indicating a possible source of conflicts at the franchisee level. The study also highlights possible screening mechanisms to be used as a potential franchisee.

 

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