The topic of this Master thesis is motivated by the perceived inefficiencies with regards to the traditional risk allocation between the parties to a franchise agreement. The aim of the thesis is to transfer more risk to the franchisor through the use of real options, especially given that the franchisee is the weaker and more risk averse party to the contract. Extending the existing, albeit limited, real option theory to the context of franchising, is a pragmatic attempt to align the incentives of the franchisee with the franchisor, the goal of which is to create effective strategic contracting. Franchising is not explicitly regulated, and the examination of the default rules as well as relevant case law practically delimits the franchisee from remuneration for goodwill and, by analogy, investments. As such, the employment of real options provide the franchisor and franchisee with a call- and put-option, respectively, which act as exit-options that ensure a two-tiered compensation for the franchisee. Enhancing the position of the franchisee in relation to the cessation of the contract will prompt the franchisee to increase the level of initial investments as well as effort, thereby improving long-term profitability and brand value to the benefit of the both parties. As a consequence to this, the franchisor may consider requiring a higher royalty rate by the franchisee which may balance out the increased compensation expense. The thesis will include both technical and practical considerations for implementing a real option clause, with agency- and game theory being the main drivers for the economic reasoning. A solution is proposed where the franchisor grants the franchisee a compensation for a variable degree of the investments held, as well as a percentage-based remuneration based on the generated level of procurement from the franchisor. In conclusion, a draft template for a potential realoption clause including adjustable mechanisms is introduced, as the very nature and profiles of the parties to a franchise agreement precludes a onesize-fits-all arrangement.
|Educations||MSc in Commercial Law, (Graduate Programme) Final Thesis|
|Number of pages||91|
|Supervisors||Kim Østergaard & Bent Petersen|