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This chapter is from the book

Key Factors in the Franchise Relationship

These franchise dimensions are taken from 91 publicly traded franchisors that, as a cohort, have outperformed the S&P 500 over 10 of the last 11 years. They help us understand what to look for from existing franchisors and also provide a template for aspiring franchisors to reshape their opportunities. Some important interpretations include the following:

  • The top-performing franchisors have a mix of company-owned and franchised outlets. Some franchisors expand their store ownership through accessing public capital. These franchisors have the best of both worlds: rapid growth and store ownership. Owning company stores also signals the franchisor’s ability to do point-of-sale research and development.

  • The calculation of the franchise fee and royalty is affected by what other franchisors are charging. Table 3-3 establishes the high-performer standards for the fees paid to the franchisor.

  • The average marketing fee, in combination with the total number of outlets, explains the firm’s marketing power.

  • The term of the contract not only helps in the PDV calculation but also establishes the time frame required to provide a return on investment in line with the top-performing franchises.

Franchisor wealth creation results from an intricate combination of key characteristics. Traditionally, this combination has centered on rich unit economics, an ability to transfer excellence, and the potential for economies of scale. However, the bond between franchisors and franchisees, as embodied in the license agreement and in the parties’ informal relationship, is of equal importance. Potential franchisors should understand that the details in the license agreement will shape the relationship with the franchisees. Franchisees in turn should use these details as a clear pathway to choosing a potential franchise.

Our general assumption has been growth through internally funded sources or through the introduction of franchisee capital. But public capital can serve as a supercharged catalyst for systemwide growth. Let’s explore the notion of public capitalization in further detail.

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