Study Shows Franchise Agreements Reflect What Market Wants

Length of Franchise Agreements Favors Franchisees

ROCHESTER, New York (Blue MauMau) - A group of economists conclude that franchisees aren't naive rubes when compared to franchisors, but actually have tremendous economic influence — at least when it comes to franchise agreement duration. The study shows that franchisees tend to sign long-term contracts with experienced franchise systems rather than with new franchisors. In contrast, if franchisors had their way, the results would be the opposite. Well-known franchisors would want to have short-term contracts in order to renegotiate quickly, while new franchisors would want to lock in long-term contracts.

The study (pdf, 24 pgs.) researches some 1,861 firms in 54 sectors.

One of the researchers, Jim Brickley, professor of Business Administration and Economics at the University of Rochester, says, "A lot of my economic writing goes against the assumption that franchise contract provisions are determined by ruthless franchisors who take advantage of small franchisees doesn't make much economic sense. You can use economic models of contracting to show rational economic choices by franchisees."

The study argues that there is economic sense behind many of the contract provisions.

Brickley elaborates, "If as a franchisee, a franchisor asks me to invest in Taco shaped buildings that I will have a hard time reselling, I'm going to want a longer term agreement to recover my investment or I'm going to want to pay a lot less for the franchise."

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Special thanks to member Eugene Driga for providing a news tip on this study.