Business: Franchising and Financial Performance Essay examples

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DOES FRANCHISING CREATE VALUE? AN ANALYSIS OF THE FINANCIAL PERFORMANCE OF US PUBLIC RESTAURANT FIRMS* E. Hachemi Aliouche, Ph.D.
Assistant Professor, School of Business Southern New Hampshire University Senior Research Fellow, The William Rosenberg International Center of Franchising, University of New Hampshire

Udo Schlentrich, Ph.D.
Associate Professor, Whittemore School of Business and Economics University of New Hampshire Director, The William Rosenberg International Center of Franchising, University of New Hampshire

Working Paper No. 2005-02

*This paper has been selected as the winner of the 2005 International Franchise Association Educational Foundation’s Arthur Karp Research Award for “Best Applied Paper.”

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DOES FRANCHISING CREATE VALUE? AN ANALYSIS OF THE FINANCIAL PERFORMANCE OF US PUBLIC RESTAURANT FIRMS

Executive Summary: It is commonly believed that the franchising method of distribution provides strategic and operational benefits to the companies that adopt it. These benefits should result in superior financial performance as compared to that of firms that do not use franchising. Yet, the empirical evidence of the effects of franchising on financial performance is sparse and mixed. The purpose of this paper is to further examine the empirical evidence of the impact of franchising on a firm’s financial performance by using performance metrics (Economic Value Added and Market Value Added) that are extensively used in corporate finance. This study focuses on the US public restaurant sector. The results provide some evidence that franchising firms create more market and economic value than do non-franchising firms.

Key words: Franchising, Financial Performance, Restaurant Sector, Economic Value Added, Market Value Added.

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DOES FRANCHISING CREATE VALUE? AN ANALYSIS OF THE FINANCIAL PERFORMANCE OF US PUBLIC RESTAURANT FIRMS
INTRODUCTION Franchising has grown so fast since the 1950s that it is now pervasive in the US economy. In a recent study commissioned by the International Franchise Association, PriceWaterhouseCoopers estimated that in 2001 there were more than 767,000 business establishments in the United States engaged in franchising, providing directly or indirectly more than 18 million jobs, over $506 billion in payroll, and over $1.5 trillion of output (PriceWaterhouseCoopers, 2004). Franchising now dominates certain sectors of the US economy. For example, over 56 percent of quick service restaurants are franchises (PriceWaterhouseCoopers, 2004). Franchising is also one of the fastest growing US exports (House Committee on Small Business, 1990), and it is now estimated that franchising (in terms of number of franchised units) will grow 12 to 14 percent per year in the future (Justis and Judd, 2003). The US Department of Commerce has defined franchising as follows: “Franchising is a method of doing business by which a franchisee is granted the right to engage in offering, selling, or distributing goods or services under a marketing format which is designed by the franchisor. The franchisor permits the franchisee to use the franchisor’s trademark, name, and advertising” (Kostecka, 1987, p. 2). Franchising has evolved over time and we can now distinguish two broad categories of franchising: product distribution franchising and business format franchising. Business format franchising consists of a continuing commercial relationship between a firm with a proven business system (the franchisor) and a third party (the franchisee), whereby the franchisor grants rights to the 3

franchisee for a given period of time to operate their business system using a common brand and common format for promoting, managing, and administering this business. Examples of business format franchising are quick service restaurants (McDonalds, Burger King) and lodging (Marriott, Hilton). Product distribution franchising, on the other hand, is a more limited business relationship, whereby the franchisor…