Abstract
For over 40 years, the franchise ownership redirection hypothesis has attracted the attention of many scholars. This study, differing from previous ones, proposes an alternative approach for this hypothesis using a real options framework with the extension of agency theory. The real options model is built using the least square Monte Carlo method, where the franchisor’s decision to franchise is perceived as a deferred investment while maintaining the right of future acquisition. Tested using monte carlo simulation based hypothetical case, the model shows a different result from classical real options call model. This is mainly due to franchise contractual arrangement, where royalty fee lower the threshold of acquisition cost in converting the franchise outlet to company owned. The aim of this study is to create an analytical framework that helps a franchisor decide whether or not toacquire and convert a franchise unit to a company-owned unit at a certain point in time, analyzing the choice as a deferment of investment. The franchisors that faces the opportunity to optimize profit by converting the franchise unit to a company-owned unit should acknowledge it as real options thus negotiate the terms with their franchisees.
Highlights
For over 40 years, the franchise ownership redirection hypothesis has attracted the attention of many scholars
The franchisors that faces the opportunity to optimize profit by converting the franchise unit to a company-owned unit should acknowledge it as real options negotiate the terms with their franchisees
The uniqueness of the franchise acquisition model compared to a classical real options call model is that the franchisor receives income as royalty fee even before the option is exercised
Summary
For over 40 years, the franchise ownership redirection hypothesis has attracted the attention of many scholars. Building on the concept of resource scarcity, this theory argues that as an organization matures, the franchisor, as part of a strategic plan, will reacquire a franchised unit, converting it to a company-owned unit (Dant & Kaufmann, 2003) This reacquisition has been shown to worry the franchisees, as their businesses could be selfishly taken over by the franchisor, especially if they are performing well (Windsperger & Dant, 2006). Law protects the franchisees and unless they breach the contract, it is difficult to acquire a profitable franchised business unit without resistance It would be different if the franchisor negotiated such terms of acquisition within the contract negotiation process, as the franchisor could include a real options clause in Nugroho Financial Innovation (2016) 2:11 the franchise contract (Gorovaia & Windsperger, 2013). The franchisor could exercise the option to acquire the unit at a later date when conditions are favorable to do so
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
