Ongoing payments by franchisees is important to franchise system in many ways

Ongoing payments by franchisees is important to

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Ongoing payments by franchisees is important to franchise system in many ways. It motivates franchisors and enhances their capacity to exercise effective monitoring and enforcement of standards for the protection of the franchise brand (Shane, 2001). It helps in the general effective management and promotion of franchise network (Fadairo, 2013). In some instances, ongoing fees enhance the survival (Kosova & Lafontaine, 2010) and growth (Frazer, 1998) of the chain. Some of the variables that franchisors consider in fixing the percentage ongoing fees include the franchisor-franchisee value trade off, legislation (termination or registration states), the rate of demand from franchisees, prospects of the business, industry type, the competitive strategy of the franchisor (Brickley, 2002; Shane, 2001; Shane et al ., 2006) and of course pure hunches (Shane, 2005). As is the case with other terms of franchise contract, there is a presumption that ongoing payments have performance implications for franchise business units. Most empirical
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findings are unequivocal that ongoing payments have a significant negative effects for franchisees’s business performance (Abdullah et al ., 2008; Akremi et al ., 2015; Benjamin, Chinloy, Jud, & Winkler, 2006; Benjamin et al ., 2007; Frazer, Merrilees, & Wright, 2007;Michael & Combs, 2008). In a study of entrepreneurial failures among franchisees involving 88 franchised restaurants chains in the US, Michael & Combs (2008) found that high ongoing fees, especially royalty rate is significantly associated with franchisees’ failure. Ongoing payments are first line charge on franchisees’ gross revenues and thus increasing their rates automatically reduces franchisees’ profit margins thereby heightening the possibility of failures among them (Michael & Combs, 2008). More so, increased rates of ongoing payment has been noted to be an extraction of excess rent by franchisor (Benjamin et al ., 2006), and it constitutes a major source of dissatisfaction among franchisees as it reduces perception of franchisor’s value (Abdullah et al ., 2008; Frazer et al ., 2007; Tuunanen & Hyrisky, 2001). It could ultimately lead to a
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