The Decision to Purchase a Franchise: A Study of Prospective Franchisees

Franchising is an important source of retail business development, both in the U.S. (U.S. Department of Commerce 1988), and in other industrialized nations (Stanworth and Purdy 1994). For the would-be entrepreneur, becoming a franchisee has emerged as a popular alternative to opening a fully independent retail outlet. Some of the systems these franchisees join have become large publicly-traded companies with thousands of franchises and billions of dollars in sales, and some individual franchisees ultimately become the operators of large multi-unit franchises. For the most part, however, individual franchise units are still typically small, family-owned and family-run businesses. Most business format retail franchises are slim-margin, cash-based operations, and are often staffed by family members for both cost saving and shrinkage control. As one franchising researcher put it, many franchises rely on the casual use of family labor for business administration" (Felstead 1993). Given franchising's relevance to the development of small family-owned businesses, it is curious why so little attention has been paid to the decision of would-be retailers to eschew independent operation and become franchisees. Because the ultimate decision whether to franchise a product or service concept rests with the franchisor, research into the motivation underlying the creation of a franchise relationship has focused almost entirely on the franchisor. An impressive amount of theoretical and empirical economic research has been conducted to explain why firms choose to distribute their products or service offerings through franchise channels (see for example, Oxenfeldt and Kelly 1968; Caves and-Murphy 1976; Rubin 1978; Williamson 1979; Brickley and Dark 1987; Martin 1988; Norton 1988; Lal 1990; Lafontaine 1992; Kaufmann and Lafontaine 1994; Lafontaine and Kaufmann 1994). On the other hand, the reasons why individuals join franchise systems and the characteristics that predict which individuals are likely to be interested in becoming franchisees have received little attention (Peterson and Dant, 1990; but see Bradach and Kaufmann 1988; Stanworth, et al. 1989; and Stanworth and Purdy 1994). In this article, we explore some of the reasons why individuals become franchisees instead of employees or independent operators. We examine the characteristics that typify franchisees, and attempt to formulate a method for identifying likely prospects. We begin by discussing some of the theoretical bases which have been offered as a rationale for the creation of franchise relationships. We then report the results of an empirical study of prospective franchisees. THE RATIONALE FOR BECOMING A FRANCHISEE Franchising takes two distinct forms: product franchising, where a manufacturer creates a contractual channel of distribution for one or more of its products; and business format franchising, where a retailer licenses the right to replicate its business concept in another location. In each case, the manufacturer's or retailer's decision to franchise is derived from its desire to distribute its product or trademarked service concept more broadly. In the economic literature, the decision of the franchisee to purchase a franchise has been assumed to be a rational response to an attractive investment opportunity. Unfortunately, this ignores a number of interesting personal characteristics. Peterson and Dant (1990, 48) describe franchisees as being subject to a "large number of situational, personality and economic correlates . likely to influence (their) perceptions" about franchising. This is not to say that an effort to understand the franchisees' economic motives is not critical; it is merely to suggest that such an inquiry should be augmented by considering individually specific characteristics such as personal history Because the decision to become a franchisee has both economic and social implications, the personal characteristics that influence that decision can be expected to have both economic and social roots. …