Franchise management capabilities and franchisor performance under alternative franchise ownership strategies

Franchising is a key entrepreneurial growth strategy, but a well-known downside is franchisee free-riding. Drawing upon alliance capabilities research, we describe franchise management capabilities and suggest that they are one way franchisors reduce free-riding and thus enhance performance. We also submit that these capabilities are especially helpful for “plural form” franchisors who own outlets in parallel with franchisees. Using a sample of 229 franchisors, we show that franchise management capabilities relate positively to franchisor performance among plural form franchisors. For “turnkey” franchisors who franchise all, or almost all, outlets these capabilities relate indirectly to performance through lower opportunism and improved brand reputation. Franchise management capability is therefore an important new theoretical construct linking franchising to franchisor performance.     

Antecedents of early terminations in franchising: franchisor versus franchisee cancelations

Franchisors capitalize on franchisee entrepreneurial capacity to grow. However, enabling franchisees to develop their ventures may damage system consistency. This dilemma makes conflict particularly prevalent in the field of franchising. Nevertheless, prior research has reported an incomplete picture of factors leading to serious disagreement and premature termination in franchise partnerships. We address this gap, first, by adding the entrepreneurial autonomy of franchisees as a relevant but underexplored source of conflict and, second, by providing a more fine-grained analysis of franchisors’ versus franchisees’ drivers of termination. Specifically, we focus on the controversial issues of pricing and local advertising policies and analyze how expanding franchisees’ entrepreneurial autonomy in these decision areas is related to contract terminations depending on who ended the relationship (the franchisor or a franchisee). The study also highlights less controversial requirements and conditions (e.g., upfront investments, franchisor experience …) that may reduce early terminations. Our empirical objectives are met by using survey data from a sample of franchisor companies. The results show how the performance outcomes of entrepreneurial autonomy differ depending on the decision area in which it is exercised. Results also throw light on the consequences of various critical franchise policies that may be masked if both types of termination (franchisors vs. franchisees) are considered together.     

When the Music Stops Playing: Post-litigation Relationship Dissolution in Franchising

Franchise relationships engender franchisor–franchisee conflicts and are prone to premature dissolution. Building on agency theory and institutional theory, this study examines what specific reasons – from both franchisors’ and franchisees’ perspectives – may cause post-litigation relationship dissolution (PLRD) and how franchise regulations moderate these relationships. We argue that both franchisor and franchisee may misrepresent themselves before their relationship begins (adverse selection) and behave opportunistically after the contract is signed (moral hazard), that is, ‘dual agency’. Based on 20-year archival records of franchisor–franchisee relationship histories gleaned from multiple data sources, we found that PLRD is likely to be caused by franchisors’ passive moral hazard and by franchisees’ active moral hazard. In addition, franchisor adverse selection has a greater impact on PLRD than franchisee adverse selection. With regards to regulatory influences, the presence of relationship law weakens the impact of franchisees’ passive moral hazard, but not their active moral hazard, on PLRD. Contrary to what we hypothesize, the presence of registration law amplifies the impact of franchisee adverse selection on PLRD. Ultimately, this study creates a better understanding of the antecedents and curbing mechanisms of PLRD in franchising.     

“Conflict-performance assumption” or “performance-conflict assumption”: Insights from franchising

Franchising is an organizational governance form where relational and formal contracts complement each other and where franchisor and franchisees together may obtain better performance than working alone. Although relational contracts may adapt to changing environments, they are not as efficient in ambiguous settings. In franchised stores, liability for low performance is not always clear. Indeed, franchisor and franchisees work in close collaboration, and, therefore, this ambiguity on causes of low performance may lead to conflicts. The franchising literature, as far as we know, has addressed practitioners' concerns regarding performance on one side, and conflicts on the other side, but no study has exclusively focused on low performance and the emergence of conflicts. Our research contributes to the franchising literature by filling this relative gap and, contrary to “conflict-performance assumption” (Pearson, 1973; Duarte and Davies, 2003) held in the broader context of distribution channels, we consider low performance to be a cause, rather than a consequence, of franchisor/franchisee conflicts. This empirical study deals with franchising in France, the leading market in franchising in Europe and the third largest in the world. We used a qualitative approach based on 44 in-depth interviews with 27 franchisors and executives/high-level managers of franchise chains, as well as 17 franchisees from various industries to get a dual, and so more complete, assessment of franchising practitioners' views of performance-related conflicts. Our research findings show that franchisees, as independent small business owners, give priority to financial results compared to other goals and they are driven to continuously improve the performance of their store(s). When expectations are not met, franchisees sometimes blame franchisors because they are interdependent in their success and liability is not straightforward. As a collaborative team, franchisors and franchisees may benefit from minimizing conflicts and preventing them with the careful selection and management of franchisees that share franchisor's values and have internal locus of control.     

NAFTA and franchising: A comparison of franchisor perceptions of characteristics associated with franchisee success and failure in Canada,Mexico, and the United States

Business-format franchising, which includes the product or service, the brand name or trademark, and the operating system developed by a franchisor, has experienced significant growth over the past few decades. International franchising also is growing at a rapid pace, in part, because of market opportunities that include new trade agreements. The debate over North American Free Trade Agreement (NAFTA) increased the focus on North American franchising. In spite of this attention, there are few, if any, comparative studies of franchising in Canada, Mexico, and the U.S.At the same time that international franchising growth is extolled, there is an argument over the extent to which franchising increases business success. A number of studies support the success thesis, however, recently critics claim that franchising does not significantly increase survival rates of franchisee-owned units.The objectives of this study are, first, to extend the study of franchisee success and failure by analyzing franchise executives' perceptions of the importance of a number of characteristics associated with franchisee success and failure, and second, to examine differences among the executives' perceptions of these characteristics based on the location of the franchisor—Canada, Mexico, or the United States. We also analyze the effects of franchise strategy, type of franchise business, and size of the franchise on executive perceptions of the characteristics associated with franchisee success and failure.Franchisor executives rated the relative importance of 39 statements, taken from previous research, that are associated with perceptions of success. Results from a factor analysis indicate that 30 of the variables load on 5 significant factors. Examination of the content of the factors indicates that the first factor (system quality), and the second factor (brand name) consist of variables that directly relate to the core of business-format franchising, the quality of the operating system and the brand name of the franchise. The third factor (local environment) consists of statements that represent general characteristics of the local franchise environment. The fourth factor (communication) consists of variables that link the franchisee with the franchisor and other franchisees. The fifth factor (franchise activities) consists of variables that represent idiosyncratic characteristics or activities of a franchisee. Franchise executives also rated the relative importance of 16 statements associated with franchisee failure. Of these, 6 statements, associated with franchisor activities, are combined to form a scale of franchisor failure, and 10 statements, associated with franchisee activities, are combined to form a scale of franchisee failure.The findings indicate that there are significant differences in most of the scales of success and failure among franchisor executives' perceptions based on country location. In addition, there is also a significant effect of franchise strategy on perceptions. There are no significant differences by type of franchise business or size of the franchisor.This research contributes to two important areas of research in franchising; the study of perceptions of the characteristics associated with franchisee success and failure, and international franchising research. The study also has practical applications. Knowledge about country differences in perceived characteristics of success and failure will help franchisors to identify aspects of the business system that require increased monitoring and investment. Awareness of country differences will also influence the selection of relevant training and development. Finally, knowledge of differences in perceptions may assist franchisors in adapting systems and policies that are likely to increase the success of their international sites.     

Does the Franchisor Provide Value to Franchisees? Past,Current, and Future Value Assessments of Two Franchisee Types

The degree to which a franchise system penetrates a target market over time often is influenced by the rate to which its individual franchisees expand. Yet a franchisee's decision to expand the business operation depends, in part, on the perception of value that the franchisee expects to receive from the franchisor in return for a variety of fees (for example, entry fee, advertising fees, royalties). Moreover, the franchisee's experience with its franchisor may strengthen or weaken his or her perception of franchisor value. The change in perception of franchisor value can influence franchisees' decisions to expand their franchise operations. To date, scant research exists on factors influencing a franchisee's decision to expand. In the reported study, a four-stage analysis was conducted to examine empirically whether franchisees' opinions about the value of their franchisors changes over time. The study findings reveal that franchisees had the strongest, positive opinions when asked to recall an earlier decision to expand their franchise operations. These opinions weakened when franchisees contemplating expansion of their operations were asked for their current and anticipated future opinions of franchisor value. Overall, franchisees were undecided when asked about their perceptions of current franchisor value and anticipated future franchisor value. Implications of these findings for theory and practice of franchising are discussed.     

Franchising growth and franchisor entry and exit in the U.S. market: Myth and reality

Franchising has been and continues to be a very popular way to do business for a number of retailers and service businesses. However, the type of franchising that has been growing the most, namely business-format franchising, has not grown at the kind of phenomenal rates that the trade press often suggests. Since the Department of Commerce (DOC) canceled its publication Franchising in the Economy, we no longer have access to census-type data on franchising in the U.S. However, looking at the period during which the DOC did publish these data, one finds that the number of business-format franchisors is highly correlated with the number of units in these chains. Thus, we use data from recent issues of various franchisor directories to assess the number of franchisors in the U.S., and infer from this how business-format franchising has grown in the U.S. We find that business-format franchising has been growing over the last decade at a rate that is, at best, commensurate with the growth of the economy as a whole.We believe that the confusion about the extent of growth in franchising arises, in part, from the fact that many new firms enter into franchising each year, leading to the notion that this way of doing business is growing tremendously. However, we show that many firms also exit from franchising each year, for a net growth rate much below the entry rate.This paper shows that franchising is not a panacea for entrepreneurs, whether franchisor or franchisee. From the franchisor's viewpoint, the high rate of exits suggests that many firms fail despite franchising, and many others choose to stop franchising after trying it for a few years. Clearly, these firms have found that franchising is not right for them. Furthermore, the results show that the characteristics of the chain at the time it becomes involved in franchising, as described in the main franchisor directories—such as the royalty rate, the advertising fee, the franchise fee, the amount of capital required, and the sector of operation—have little capacity to explain “survival.” The main variable that affects “survival” among those that are typically reported in franchisor listings is the number of years that the franchisor has been in business before starting to franchise. Hence our results suggest this is one dimension in which franchisors can make decisions that affect the probability that they will be successful in franchising. Although we are unable to explain most of the variance in outcome, the results mostly imply that other, less easily observed or quantified characteristics of the chain and the franchisor, such as maybe the “innovativeness” of the product, the amount of support provided to franchisees, the financial backing of the franchisor, etc., likely influence “success” the most, and thus, are worth investigating further.From the perspective of franchisees, the amount of exit found here suggests that in the majority of systems, franchisees cannot expect that their franchisor will be around for the whole duration of their contract—which averages about 15 years according to the Department of Commerce. This does not mean that the majority of franchised businesses will find themselves in an “exiting” system—a small minority of very well-established franchisors accounts for the majority of franchised businesses, and these are likely to remain successful for years to come. But entrepreneurs buying franchises from less established systems are likely to face franchisor exit, either failure or departure. This paper confirms that franchisees should thoroughly investigate the franchise system they want to invest in, going beyond the information about royalty rates, advertising rates, rankings, etc., found in franchisor directories, and toward more product, market, and other less easily accessible information about the chain.     

Crossing mother: Entrepreneur-franchisees' attempts to reduce franchisor influence

Contractual terms guide many entrepreneur-franchisees' actions with the franchisor. However, it is impossible for franchisors to completely specify all future actions. They compensate by continually attempting to influence franchisees, using what franchisees perceive as suasion in their ongoing interactions. We develop a theoretical framework for understanding the informal interaction dynamics between franchisors and franchisees.Most franchise arrangements include the payment of royalties based on sales. This encourages a growth-oriented strategy, usually appropriate for the franchisees during the initial stages of their operations. Whereas a franchising strategy can reduce entreprenerial risk for franchisees, it does not eliminate it. Thus, as sales of the franchisees increase, profit-oriented strategies will be favored because they represent the payoffs that accrue to continuing entrepreneurial effort and risk-taking. These strategies may be in opposition to franchisors' sales orientation when market conditions do not allow continual growth without margin penalties. A research model is developed, depicting the relationship between franchisees' strategies and performance, and the moderating effect that contractual goals and franchisees' perception of franchisors' attempts at suasion have on this relationship. A set of research hypotheses was then empirically tested using a large sample of franchisees from the commercial truck retailing industry.The results indicate that sales-growth and profit-growth goals are not always congruent. Balancing the goals of the franchisor and franchisee did not appear to be a popular option; either one or the other was emphasized. More importantly, the results indicate that when franchisees perceive attempts by franchisors to use suasion, lower levels of profits result, but there is no corresponding increase in the level of sales.In the long-term, franchisors are likely to determine that current contractual arrangements are not protecting their longer term interests. Thus, they will be expected to attempt to modify franchise contracts in ways that force franchisees to implement sales-gain strategies. This will require that entrepreneur-franchisees anticipate future events more carefully at the time they are examining the original franchise contract. Because most entrepreneurs are concerned with immediate survival at the start-up stage, this makes examination of the contract less likely to happen; the franchise option is attractive because it reduces such risks.We recommend that entrepreneurs write ex ante contingent claims contracts that ensure a gradual reduction of franchisor influence. Although this would assume a power or knowledge balance that favors the franchisees, which is unlikely during the start-up phase, it will change over time as franchisees gain a better understanding of the local competitive dynamics. Thus, it may well serve the franchisees to take a defensive posture or push a royalty arrangement that decreases the emphasis on sales over time. This is most likely to be effective where the entrepreneur is considering several competing franchises at the time of the signing of the contract.Finally, we recommend that entrepreneur-franchisees should not assume that the expert advice offered by their franchisor is always in their best interests. Although technical advice is more likely to be unbiased and should be fully exploited, as this is what makes the franchise valuable, strategic advice, or that which relates to goal setting may well be colored by the financial interests of the franchisor. Franchisors are unlikely to consider the possibility that franchisees would be better served by formulating their own strategies, nor are they likely to consider that the franchise network would be better off, in the longer term, by the collective impact associated with numerous franchisees independently formulating their own strategies. In short, although we do not suggest that franchisees should always assume that “crossing mother” is the best response to all perceived franchisor-suasion efforts, they should carefully examine all strategic advice.     

Entrepreneurs or Investors: Do Multi‐unit Franchisees Have Different Philosophical Orientations?

Although multi-unit ownership has become the dominant form of franchising in the United States, the motivations for either franchisor or franchisee to participate in these agreements continue to be the subject of debate. This study looks at the issue from the perspective of the franchisee. It is argued that some multi-unit franchisees, especially those operating as area developers, are likely to enter the field viewing their franchise as an investment, while others, especially those operating as sequential multi-unit operators, are likely to view their franchise as an opportunity to fulfill more personal, entrepreneurial ambitions. A study of multi-unit franchisees of both types found that both were equally investment-oriented but that the sequential multi-unit operators were more likely to seek fulfillment of entrepreneurial goals. Implications for practitioners and for future research are discussed.     

Franchisee Selection for Social Franchising Success

Franchisee selection is a major input for franchising success. In this article, we argue that franchisee selection criteria do not differ between social and commercial franchising. They may be even more relevant for obtaining social franchising success. We discuss criteria for franchisee selection and present details of our multiple case study research to support the argument. Our study finds that evolved social franchisors do adopt similar selection criteria as commercial franchisees. In addition, constraints faced with franchisee selection among commercial franchisors are reflected also among social franchisors. We contribute to franchising literature by extending commercial franchisee selection criteria to social franchisee selection. A major managerial implication of this research is that existing franchising professionals could easily assist new social franchisors in developing their social franchisees. Future research could be study criteria weights and methodology adopted for making final selection. A new research direction could involve studying if selection criteria would differ based on (a) social cause and (b) franchisee location.     

Antecedents and effects of free riding in the franchisor–franchisee relationship

This field study investigated contextual antecedents of free riding by franchisees on franchisor brand reputation and effects of free riding on performance in a multinational corporation's franchising network. Structural elements (increased formalization, decentralized decision-making), interactions between franchisor representatives and franchisee dealers, and market-related factors (external competition) were associated with lower levels of franchisee free riding. The findings also indicated that free riding has deleterious effects on franchisee performance. The results support theoretical arguments that both economic and social exchange perspectives are valuable in examining free riding and provide important practical guidance in designing and managing franchise systems.     

Antecedents leading to perceived franchise support

Abstract

Franchising is an important part of the U.S. economy. According to the International Franchise Association (IFA), franchising provides 9.0 million jobs and pays out 351 billion dollars in wages and benefits annually (2016). This study examines franchise relationships in the context of building franchisees’ perceptions of support from the franchisor. The literature was examined to determine if and what support provided by the franchisor has a positive impact on the franchisee. We examine four dimensions of organizational climate (i.e., initiating structure, leadership consideration, autonomy, and reward orientation), brand value/recognition and franchisee’s perception of the quality of the franchisor’s advertising as predictors of perceived franchise support. This study indicates there is a positive and significant impact between three types of organizational climate (i.e., leadership consideration, autonomy, and reward orientation). In addition, a positive impact to brand value recognition on perceived franchise support and a negative effect on initiating structure.     

Retailer use of a professional social media network: Insights from franchising

The adoption and use of a professional social media network by franchise chains is the focus of this paper. We draw on resource-based theory, institutional economic theories of incentives and externalities and multidisciplinary literatures on franchising, innovation adoption and interorganizational communication to link (i) franchisor characteristics and partnering strategies to the adoption and use of a professional social media network and (ii) the extent of use of this network by a franchisor to the number of followers of its network page. Hypotheses are empirically assessed using data on 500 US franchise chains from Entrepreneur’s Annual Franchise 500 for 2011, content analysis of LinkedIn pages for 317 franchise chains in 2011 and number of followers in 2015. One key finding is that franchisor adoption of LinkedIn is positively influenced by franchise chain size, franchising fees and franchisor marketing communications and negatively affected by franchise concept complexity. A second important finding is that, among franchisors who adopt LinkedIn, the extent of use of LinkedIn is positively impacted by franchise chain size, franchising fees and negatively affected by franchise chain age. A third notable finding is that the number of followers of a franchisor’s LinkedIn page in the short term is positively impacted by the extent of information about franchise chain and recruitment. A fourth key finding is that the number of followers in the longer term (2015) is positively impacted by whether the franchisor had a presence on LinkedIn in 2011 and, for these franchisors, by the number of followers in 2011.     

Exploring the Role of Ownership Structures in the Results of Professional Health Care Franchises from a Multi-Actor Perspective

This paper explores how the ownership structure of professional health care franchises contributes to the achievement of positive results with franchising for the franchisor, the franchisee, professional service provider, and clients. We conducted a comparative embedded case study with three health care franchises in the Netherlands using data from 101 interviews, observations, and document analyses. We show that different ownership structures at the system-level (i.e., plural form, pure franchise, cooperative franchise) and the unit-level (i.e., stand-alone versus fractional, active versus passive, single versus multi-unit) have different effects as perceived by franchisors, franchisees, and professionals. Moreover, we reveal how this variation in experienced effects can be explained by differences in dynamics in regard to management, decision making, control, steering, support, interests, learning, and adaptation. Based on these analyses, we develop new typologies of ownership structures and show how combinations of system-level and unit-level structures can have mutually weakening or strengthening effects.     

Brand and performance signals in the choice of franchise opportunities

When choosing a franchise chain, potential franchisees must incorporate into their decision process the signals of franchise chain quality being sent to the market by the franchisor. Some of these signals along with potential franchisees' choices of franchise chain are analyzed. The results show that brand value and franchisee performance were the key signals used by Spanish franchisees during the period 2002 through 2008, when deciding to open a franchise outlet. The aim of this study was to contribute to strengthening the relationship between entrepreneurship and franchising in Spain from an empirical viewpoint.     

Toward a theory of conflict in the franchise system

A focused review of the literature is presented in support of a definition of franchising as an interorganizational form examined from the entrepreneurship perspective. Then, microeconomic and relational exchange theories provide guidance within a transaction-cost economics theoretical framework to begin the formulation of a theory of conflict in franchising. The analysis provided in this article involves business format franchising.We submit that the essential core and uniqueness of business format franchising is the relationship between the franchisee and franchisor. Our definition of franchising requires a review of individual franchisee and franchisor organizational structures. Therefore, our theoretical analysis begins with a fundamental look at the economic structural differences of the average franchisor and franchisee firms, using microeconomic theory. This review points to the potential for conflict in profit-maximizing behavior between franchisee and franchisor. The likelihood is that the differences in behavior will manifest in pricing, promotion, and new store development.Next, because most business format franchising is contractually based and long-term, we investigate the theoretical support for establishing and continuing a relationship with fundamental areas of conflict. Relational exchange theory is used for this analysis.Transaction-cost economics provides a perspective on the governance of the interorganizational form and guides us in the investigation of the ongoing state of the relationship. A key to transaction-cost analysis is shared assets in the relationship and the degree of transferability of those assets. Therefore, building and maintaining the franchise trademark becomes the theoretical focus for governance of the relationship. We propose that franchisor-provided services is the principal method of franchisor contract fulfillment and is the framework for informal governance of the relationship. The importance and adequacy of the transactions between the franchisee and franchisor affect the perceived value of the trademark and are key to continuing the franchise relationship.Finally, the conflict literature is briefly reviewed to provide a context for the discussion of conflict in franchising and to illustrate that conflict can have a positive or negative effect on the relationship.     

Why franchise companies expand overseas

Business format franchising is becoming an increasingly international activity. From 1971 to 1985, U.S. franchisors added foreign outlets at a rate of 17% per year, almost twice as fast as they added domestic outlets (Aydin and Kacker 1990). As a result, by 1990 more than 350 U.S. companies had more than 32,000 franchised outlets overseas. By 2000, 60% of all franchisors in the United States are expected to have outlets overseas (Hoffman and Preble 1993).This study examines the 815 largest U.S. franchisors to understand what capabilities encourage them to expand overseas. It finds that the key capability that predicts the intent to expand overseas is superior capability to reduce franchisee opportunism. Franchisors who seek foreign franchisees have developed a greater capability to bond against and monitor potential franchisee opportunism. The data show that these differences are consistent across all industries in which franchising takes place.The results of this study indicate that foreign entrepreneurs can identify the American franchisors most likely to expand overseas by looking at their pricing structure and their monitoring capabilities. The easy identification of characteristics from which to find American franchisors will help to reduce the search costs of potential foreign franchisees. This reduction in search costs will make the establishment of international franchise relationships less expensive.This study also provides guidance to franchisors interested in expanding overseas. The results show how franchisors can structure their franchise relationships to reduce potential franchisee opportunism. This ability to reduce franchisee opportunism will make it easier for franchisors to enter high-growth foreign markets using the franchising business mode.This study also has implications for researchers. It suggests that international business research examine further the mechanisms by which firms make contractual modes of international business work. Whereas many firms may internalize international market transactions under conditions likely to lead to market failure, the large number of franchisors who use franchising as an international expansion mode despite conditions of market failure suggests that more attention be paid to mechanisms that companies can use to reduce the probability of failure of international contractual transactions. By helping to explain how franchisors monitor foreign franchisees or bond them against opportunistic behavior, this study suggests that the international business literature develop a more complex understanding of the workings of international business transactions than the simple choice of internalization or contractual entry modes.     

Identity in Franchise Systems: The Role of Franchisee Associations

Utilizing theories of identity this article presents findings from a qualitative study regarding the significant role independent franchisee associations play within franchise systems. The data reveal that successful franchisee associations help manage the inherent tension that exists between cooperation and conflict in franchise relationships. A distinctive adaptive organizational identity provides an association the capability necessary to reframe its relationship with the franchisor as either combative or cooperative in response to changes in a franchisor's identity. Challenging the views of both franchisor stability and the dyadic form that franchisee–franchisor relationships assume, behavioral insight is provided into the actual functioning of franchise systems and new avenues are suggested for theory building in franchising.     

Multi-unit franchising: Growth and management issues

Entrepreneurs in a number of retailing sectors have eschewed the creation of company-owned chains and have embraced franchising as a preferred method for growing their businesses. There have been two leading reasons proposed for this preference. First, that franchisees provide the financial capital necessary for expansion, and second that franchisees manage the outlets better than company employees would if the unit were company owned. Interestingly, although many entrepreneur/franchisors confirm the relevance of the capital acquisition argument in their decision-making, theoretical analysis has discounted its importance. Instead, researchers have focused on the incentives of employee store-managers to misrepresent their ability and their effort as the dominant impetus behind franchising. Misrepresentation by employees as to ability and effort imposes costs and inefficiencies on the entrepreneur's chain. Arguing that franchising solves these problems by having the stores managed by persons with claims to the profits, these researchers have, by and large, rejected the capital acquisition argument for franchising in favor of this incentive-based rationale.Within this view, multi-unit franchising presents a curious anomaly. Multi-unit franchising, either through the incremental expansion by the franchisee one unit at a time or through the rights to open multiple units contained in an area development agreement, creates a collection of mini-chains within the franchise system. These mini-chains are operated by employee store-managers. Of course, they are employees of the franchisee, but they are employees nonetheless, and as franchise researchers have traditionally argued regarding the entrepreneur's employees, they will have incentives to misrepresent their ability and effort. Moreover, multi-unit franchising is ubiquitous.If multi-unit franchising is at odds with the incentive rationale for franchising, and it has a positive association with the growth of franchise systems, it must be providing the entrepreneur with some other benefit. In this study, we argue that the benefit it provides is access to capital. Through a study of fast-food franchise systems, we demonstrate that the more a chain engages in multi-unit franchising (i.e., the greater the proportion of multi-unit franchisees it has), the faster it grows, even faster than franchise systems generally. Moreover, we show that the level of commitment franchisors feel toward continuing to franchise is negatively related to the average number of units per franchisee and negatively related to their ability to obtain financial capital elsewhere. In other words, although multi-unit franchising helps an entrepreneur grow his or her business by providing increased access to capital, store level incentive problems get increasingly troublesome as franchisees get more and more units. It would appear, therefore, that capital acquisition is a relevant reason for engaging in franchising after all.