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This research effort represent a first formal investigation of the behavior and performance of public franchisors in the United States. Its aim was to gain an understanding of some of the factors determining not only systematic risk but also growth and market performance of this interesting subset of the franchisor universe. The representative sample of 83 public franchisors analyzed over the period going from January 1st 1987 to December 31st 1994, seems to have offered returns very much in line with the market as a whole and with very similar average risk levels.

The growth in number of outlets is positively related to the percentage of outlets directly owned by the franchisor. Higher levels of franchise fees and royalty payments tend to negatively influence growth rates. The explanatory power of the model for abnormal franchisor stock return performance is extremely high, with again the percentage of company-owned outlets a significant positive contributor. Higher royalty and advertising fees also positively affect franchisor returns, while the franchisee fee is negatively related. These findings are consistent with franchisors having the brightest prospects signaling (or taking advantage of) their quality by contractually favoring royalties and ad fees over fixed franchise fees. The systematic risk model for its part suffers from low overall explanatory power.

A number of interesting conclusions and implications for further research can be drawn from this analysis. First of all, the selection of franchise ownership structure (internal versus external) and the contractual mix of franchise fees, royalties and advertising expenses seems to provide information about the ultimate prospects of the franchise system. The evidence collected here seems to support the view that high-prospect franchisors would tend to prefer company-owned stores, generating in the process superior growth and financial performance. On the other hand, franchisee-owned stores and high levels of franchise fees relative to royalties and ad fees may be associated with sub-marginal concepts.

The paper calls for a better understanding of the contractual relationship between franchisor and franchisee. Even though there is no denying the fact that franchising is a tremendously powerful means to effect growth, the concept can also be used to create value for the franchisor at the expense of less-informed franchisees. In that respect, a better understanding of the implicit signals in the franchise contractual arrangements could serve as invaluable warning signals for prospective franchisees.


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