The relationship between initial and ongoing fees in franchising: a meta-analysis
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Overview
Overview
abstract
Franchisors typically create and appropriate value through the growth of agent (franchisee)
networks and extraction of economic profits (for the rights granted to franchisees) through
revenue sharing contracts. Mechanisms and rationales for revenue sharing have been the subject
of many theoretical and empirical studies on contracting. Franchising is a popular form of
retailing in a wide range of product and service markets, plays a significant role in many
developed economies and is a rapidly growing form of retailing in a number of emerging
markets – therefore it is a suitable context for research on revenue sharing contracts. There is an
extensive body of research that examines factors influencing the fee structure of franchise
contracts and the relationship between the different components (fixed initial fees and ongoing
fees that are typically expressed as a percentage of franchisee revenues) of this fee structure.
There are two competing perspectives on the latter – one school of thought views the fixed and
ongoing fees as being negatively related, since they are considered as twin parts of a mechanism
deployed by a franchisor to share risk and extract franchisee profits, ensuring that franchisees
just receive a normal profit on their investment; the other school of thought (based on arguments
drawn from property rights theory, a combination of signaling, screening and transaction cost
theory, brand effects rationales, allocation of channel functions and the implementation of the
equity principle,and the existence of positive franchisee rents) posits that the two components are
not related or are positively related. The divergence in these perspectives calls for a
comprehensive empirical examination of the relationship between initial and ongoing fees in
franchise contracts. However, to the best of our knowledge, there is no integrative quantitative
review or meta-analysis on this topic. In this study, we conduct a meta-analysis to aggregate
results from empirical studies, synthesize insights from prior research and test our hypotheses.
Results from our meta-analysis (based on 26 studies with different samples and a total sample
size of 22,676) reveal a small but significant positive correlation between royalty rates and
franchise fees. Valuation Insight: Value creation facilitated by franchising. In retailing, franchises allow for efficient revenue sharing. The paper conducts a meta analysis of the relationship in franchising contracts between fixed and ongoing fees, finding that fixed and ongoing fees have a small, but significantly positive correlation.
