Terminating Franchisees: Does It Improve Franchisor Performance?

Abstract

Terminating franchisees is a challenging decision every franchisor faces, yet its effect on franchisor performance remains unknown. We examine the effect of franchisee termination on a franchisor’s profitability (i.e., return on asset) in this study. Applying agency theory to franchisee termination, we posit that termination enables a franchisor to uphold a chain’s uniformity among stores through the dual functions of enforcement and deterrence. Weighing the benefits against the costs of termination, we predict a contemporaneous effect and a long-term effect of franchisee termination on franchisor profitability. We then contextualize the contemporaneous effect of termination. We postulate the alleviating or exacerbating influences of three conditions—new franchisee addition, customer mobility, and chain maturity—that may change the importance of benefits or costs of termination. We test our predictions with multiyear census data on franchising in South Korea. The results support our predictions except for the moderating effect of customer mobility. We discuss limitations and further research directions as well as implications of the study results.