In essence,the valueof a franchise is directlytied to the
capacitytogenerateexcessreturns.Anyactionoreventthat
affects these excess returns will affect the value of the
franchise.
Special Issues in Valuing Franchises
Buying a franchise is often a mixed blessing. While the
franchisee gets the backing of a well-known firm with
significantresourcestobackuphisorherefforts,thereare
somecoststhatmayaffectthevalueofthefranchise.Among
these costs are the following:
- Theproblemsofthefranchisorcanspilloverintothe
franchisee.Forinstance,whenDaewoo,theKorean
automaker,borrowedtoomuchandgotintofinancial
trouble, its dealers around the world felt the
repercussions. Similarly, McDonald’s franchisees
aroundtheworldwerepicketedbyantiglobalization
activists.Thus,anefficientand well-runfranchise’s
valuecanbe affectedbyactionsover which ithas
little or no control. - Sincefranchisors tendto be largecorporationsand
franchisees tend to be small businesspeople, the
formeroftenhavemuchmorebargainingpowerand
sometimestakeadvantageofittochangethetermsof
franchiseagreementsintheirfavor.Franchiseescan
increase their power by banding together and
bargaining as a collective unit. - Thevalueofafranchisederivesfromtheexclusive
rightsitgrantsthefranchisortoselltheproductsofa
firm. This value can be diluted if a franchise is
grantedtoacompetitor.Forinstance,thevalueofa