Franchise system investment disclosure: signaling value to prospective franchisees

Abstract

Purpose - The divergent interests of franchisor and franchisee give rise to significant ex-post conflict following the purchase of a franchise. Australian regulators have sought to assist transparency in franchising decision making by legislating for disclosure documents that expose key variables that theoretically determine choice on the part of prospective franchisees. The purpose of this paper is to explore the value proposition of the disclosure document and tests its normative effectiveness using a signal-theoretic perspective. Design/methodology/approach - Potential investors were asked to consider selected attributes through a choice-based survey, consistent with consumer theory, and focussing on an attribute-based determination of value. However, complex decision making in general and choice modeling can place severe cognitive burdens on respondents and induce satisficing rather than maximizing behavioral patterns. Best-worst scaling (BWS) provided a means for potential purchasers to respond coherently. Findings - Findings indicate limited capacity for potential investors to rationalize the simplistic choices presented, suggesting that franchise choice is determined to a large degree by non-rational factors. Research limitations/implications - This research is embryonic (exploratory) in nature with the findings providing an imperative for further investigation into workable attributes of franchise systems. Analysis is limited to prospective franchisees' perceptions and needs to be triangulated with franchisor and policy-makers perspectives. Practical implications - Both franchisors and policy makers can utilize this research to improve transparency in the disclosure document. Prospective franchisees should then be able to make more effective decisions about the franchise systems of choice. Social implications - A reduction in conflict within the franchising sector (no matter how trivial) will improve the business operations, franchisee and employee welfare throughout the sector. Progress on this topic will improve the sustainability and overall attractiveness of the sector. Originality/value - Conjoint analysis has not been used previously in franchising research. The use of BWS on prospective franchisee perceptions is innovative providing a basis for much research to be done in this field of research.