The franchisor-franchisee relationship is based on mutual support and trust. In this relational exchange, they share benefits and costs (Grunhagen & Dorsch, 2003). The franchisor provides support, technology and advice to the new franchisee and guarantees continued support. In exchange, the franchisee has to pay an entry fee and a continued royalty on sales and advertising fees for regular services (Inma, 2005). Franchising is different from other forms of business. The franchise owners try to assess the value they receive in exchange for the sum paid. They would remain in the relationship as long as they perceive that they receive a fair value for the payments made to the franchisor. In this relationship, the franchisor or the principal does not invest its own fund in the local service unit because the responsibility of maintenance, construction and management of the local operation lies with the franchisee (Fladmoe-Lindquist & Jacque, 1995; Welsh, Alon & Falbe, 2006).
The business format of franchising was based on two dominant theories – the agency theory and the resource scarcity theory (Inma, 2005). Based on the resource scarcity theory, as the company anted to expand and resources were scarce, franchising became a means of obtaining capital. In addition, it also eased managerial constraints upon the growth of the medium and small-sized firms. The agency theory viewed franchising as a means of efficiently controlling the problems that could arise due to the difference between the agent and the principal. Thus, these theories are based on the view that it eliminates the constraints that a firm could encounter in expansion.
Although franchising originated in France, today Australia is the most franchised nation per head of population in the world. A franchise organization is claimed to be a hybrid form and has complex contractual arrangements. However, the franchised system can have hybrid forms as well as hierarchy firms (Inma, 2005). This