Why is franchising increasingly being used by franchisees as a form of business start-up?
Franchising has been tremendously growing as a business form, and has become extensive as it spans a variety of sectors ranging from automobiles to fast food. The importance of franchising has been widely analysed in the entrepreneurship literature, as it is considered to be an entrepreneurial partnership between two types of entrepreneurs, the franchisor and franchisees (Kaufmann & Dant, 1998). Moreover, Carter & Jones-Evans (2006) argue that franchising provides a route to growth for the franchisor and business opportunities with limited risk for the franchisee. The aim of this paper is to determine and examine the reasons behind entrepreneurs’ decision to enter a franchise agreement as a form of business start-up, as well as discuss the benefits and drawbacks of franchising from a franchisee’s perspective. Franchise systems have a distinctive entrepreneurial structure, according to Lussier et al. (2014), and have remarkably grown over the past few decades as well as contributed to global growth. Lussier et al. (2014) describe franchising as “a legal relationship in which the franchisor grants the franchisee the rights to sell its products or services, use its trade-name, or business format for an initial fee and ongoing royalties” (p.39 in Lussier et al. 2014). Similarly, Carter & Jones-Evans (2006) suggest that franchising is a “contractual relationship” (p.442) between a franchisor and a franchisee, where the franchisee agrees to produce and market a product or service according to the franchisor’s rules and principles. There two types of franchising, first, is product and trade-name franchising, where the franchisee buys the right to produce and distribute the franchisor’s products or services and use its brand name and logo, but must adhere to the franchisor’s rules and regulations. Ford motor company is commonly known to use this type of franchising. The second type is business-format franchising, where the franchisee purchases the right to the product or service, the trade-name, as well as training and support. The franchisee under this type of franchising must stand by the business model and systems of operation (Lussier et al., 2014). Furthermore, a large body of literature has investigated a variety of approaches to understand franchising, and two perspectives that are relevant to entrepreneurship have been proposed to explain it. Kaufmann & Dant (1998) published a paper in which they describe the connection between franchising and entrepreneurship, and what makes franchising adequate as an entrepreneurial activity. First they propose the capital acquisition model, which views franchisees as financial capital sources for companies that seek to expand. Kaufmann & Dant (1998) argue that from this perspective, franchisors risk resources in order to develop the brand, whereas franchisees risk their resources to develop local markets as they are more familiar with them compared to franchisors. Despite the fact that franchisees’ risk may be reduced due to this familiarity, they take financial risks to introduce the franchisor’s concept in an untried market, which supports their roles as entrepreneurial partners. Moreover, the franchisor depends on the franchisees’ local knowledge to develop appropriate marketing strategies in order to adapt the concept to their environment. Alternatively, many scholars have relied on the agency theory, which is the second perspective Kaufmann & Dant (1998) propose in their paper, to provide an understanding of franchising and analyse a range of its issues. Kaufmann & Dant (1998) suggest that franchising is able to solve the problem of “shirking” which refers to the franchisees’ tendency to put less effort than what has been agreed, and this problem occurs because the franchisor is not capable of directly monitoring the dispersed outlets efficiently and adequately. The agency theory
