Contractual provisions, governance, and maintaining sales leadership: Evidence from franchise systems

Abstract

Annual sales revenue is one of the most critical indicators of franchise performance not only for the business stakeholders but also for prospective franchisees who are exploring their investment opportunities. Accordingly, Franchise Times ranks and reports the 200 top franchisors annually based on sales performance. Historically, some franchisors have successfully maintained their position among top-ranking firms for years in this credible ranking. Understanding factors associated with such achievement is pivotal for the success and improvement of franchise firms. Despite its importance, the impact of franchise contract provisions on maintaining their sales leadership remains unexplored. In this research, we examine various contract provisions, including cost structure, incentives, and governance, among top franchise firms over time to shed light on factors affecting their sales leadership and continued presence among top-ranking firms. Using the survival analysis, we empirically address this gap by analyzing an unbalanced panel dataset of 153 franchise firms from 2013 to 2020 (1172 firm-year observations). We find that franchisors with contract provisions specifying higher royalty rates, financing support for franchisees, multi-unit or master-franchise-only options, and a primary focus on franchising for expansion are more likely to maintain sales leadership within the industry.