Franchising is characterized as an inter-organizational form which utilizes a share contract to create entrepreneurial incentives (Michael, 1993; Spinelli and Birley, 1996). Inherent in this definition is that prospective wealth creation is a major motivation for both franchisor and franchisee. A number of franchisors have elected to operate as public companies, getting access to the financial resources of the market at large while bearing the costs associated with public disclosures and scrutiny. Both the franchising and the going-public decisions are rationally assumed to have been made in an effort to maximize franchisor value.
In this paper, we review the theoretical rationale underlying the franchise choice and examine the empirical implications of that choise, 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 (such as franchise fees and royalties) as explanatory variables. This study focuses on business format franchising, defined as a long term, contractually based arrangement which prescribes operational and marketing criteria, embodied in a trade mark, in exchange for a franchisee fee and on-going royalties. Caves and Murphy (1976) define the central feature of business format franchising to be the "rental of an intangible proprietary asset and the operation of a decentralized production or distribution process" (p.6).
The evidence presented in the analysis tends to support 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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Last Updated 06/08/98