The use of initial fees and royalties in business‐format franchising

This paper provides an explanation of franchising's fee structure, drawing on principal agency and labor economics theory. The predictive framework includes constructs such as channel control, franchisor services, franchisee risk and the franchisor's capital constraints. The empirical investigation of a representative sample of franchise chains indicates that channel control is the major factor influencing the payment design. The results are used to test managerial implications about the use of an optimal fee structure in the growth of chains.