The Choice of Organizational Form: The Case of Franchising

Abstract

Evaluates the agency problems associated with company owned versus franchised units in order to determine whether these agency considerations affect the own/franchise decision. Information on the ownership characteristics of franchise firms were gathered from 112 responses to queries sent to franchise companies listed in the 1982 Norback and Norback and the 1983 Siegel franchise directories. Monitoring problems and costs and franchising contract provisions are discussed. Results support the prediction that the owned units, which presumably entail more on-site monitoring, are located closer to central or regional headquarters than franchised units. In addition, the likelihood of franchising increases with higher monitoring costs, low initial investment costs per unit, and higher frequency of repeat customers. (SFL)

Keywords: Agency problems, Monitoring, Franchises, Costs, Operator ownership, Firm ownership, Firm control, Contracts & agreements, Organizational structures