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Chapter 3. The Wealth-Creating Power of ... > Public Capitalization: An Expanded V...

Public Capitalization: An Expanded View of the Franchise Company

Because rapid growth is the goal, most franchise systems are continually seeking additional capital. When scale is achieved, the amount of acquired capital becomes increasingly important. Accessing capital through the public stock markets is a faster, if not the fastest, means of obtaining large amounts of capital. Some franchisors have not limited their capital to franchise fees and royalties. Many have used private equity, and approximately 250 of the total 4,200 franchisors have acquired public capital.

Our research compared the total shareholder return for public franchisors to the S&P 500 index for an 11-year period from January 1990 through December 2001. For 10 of those years, excluding 1999’s “irrational Internet exuberance,” public franchisors outperformed the S&P 500 in total return to shareholders.[12] The wealth created by these “public” franchisors makes it apparent they’re doing something right. It is also clear that the public markets are an additional source of capital that can enable the explosive launch and growth that franchise entrepreneurs crave.

Public capital might allow the franchisor to lower the franchise fee. The effect is to accelerate growth because lower startup costs attract more franchisees. The franchisor can then back-load her income stream with a higher royalty. Royalties on sales directly tie success of the franchisor to the success of the franchisee. While this seems obvious to most of us, franchisors can lose sight of it. Boston Chicken got so caught up in growth that it forgot about its franchisees’ success. It actually derived more of its income from financing franchisee development and receiving interest on the loans than from royalties.

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