Author
Jeffrey M. Goldstein
Introduction
The Balance of Power in Franchising examines more than 33,000 Franchise Disclosure Documents covering 4,371 franchise systems between 2009 and 2023 to measure how authority and decision-making power are distributed between franchisors and franchisees. Ulrich Atz, Blake Eliason, Peter Norlander, Sérgio Pinto & Marshall Steinbaum, The Balance of Power in Franchising (Dec. 3, 2024).
The authors find that franchisee autonomy generally declined over the study period, while franchisors expanded their control over important aspects of the business relationship, including territory, pricing, products, suppliers, information sharing, dispute resolution, and post-term restrictions. One of the paper’s most significant findings is the sharp decline in exclusive territorial protections and the corresponding rise in contractual provisions allowing franchisors to compete within a franchisee’s market.
The study argues that economic power should be understood not only as market power or concentration, but also as the ability to make business-relevant decisions on behalf of others, making authority itself an important object of empirical study. Across numerous contractual provisions, the authors find increasing use of restraints that limit franchisee discretion, including exclusive supply requirements, full-line forcing, pricing controls, and restrictions on business conduct. Survey evidence further suggests that many franchisees perceive themselves as having more autonomy than their contracts actually provide, indicating a gap between contractual reality and franchisee understanding. The paper also rejects the argument that franchisees are compensated for surrendering autonomy, finding that greater franchisor control tends to be associated with higher franchise fees rather than lower ones. Ultimately, the authors conclude that the balance of power in franchising shifted toward franchisors between 2009 and 2023, creating a system in which franchisees continue to bear substantial entrepreneurial risk while increasingly important business decisions are controlled at the franchisor level.
Franchise Risk and Authority Seem to be Moving in Opposite Directions
The article suggests that franchisee risk has not decreased as franchisor authority has increased. Instead, one of the paper’s most important findings is that risk and authority appear to be moving in opposite directions. Franchisees continue to invest their own capital, sign leases, guarantee obligations, hire employees, and absorb operating losses, while many important business decisions are increasingly controlled by franchisors.
Traditionally, business ownership combined three things: ownership, risk, and control. The owner both bore the risks and possessed the authority to respond to those risks. The article suggests that modern franchising increasingly separates those functions. Franchisees continue to bear the consequences of business decisions, but they may have less authority to alter prices, choose suppliers, modify products, adjust technology systems, or protect their territories.
This increases what might be called governance risk. A franchisee may correctly identify a business problem but lack the authority to implement the solution. For example, if labor costs rise, a franchisee may not be free to change pricing strategies. If input costs increase, a franchisee may not be able to switch suppliers. If demand changes in a local market, a franchisee may have limited flexibility to modify products or services. The financial consequences of those risks remain local even when key decisions become centralized.
The article also finds that personal guarantees remain extremely common, and many systems extend guarantees to spouses, partners, or other associated individuals. This means franchisees frequently remain personally exposed to business failure even as franchisor control expands. In other words, the franchisee’s downside risk remains substantial while decision-making autonomy declines.
Territorial risk appears to have increased as well. The paper documents a dramatic decline in exclusive territories and an increase in provisions reserving the franchisor’s right to compete. A franchisee may therefore invest heavily in developing a market only to face future competition from additional franchisees, corporate-owned locations, alternative channels, or digital sales initiatives authorized by the franchisor.
The article further suggests the emergence of data-related risk. As franchisors gain increasing access to transaction data, customer data, and operational information through required systems and reporting mechanisms, they acquire greater visibility into franchisee businesses. Information becomes a source of authority, allowing franchisors to monitor, compare, benchmark, and influence operations across the system. The franchisee remains responsible for local performance, but informational advantages increasingly reside at the franchisor level.
Perhaps most significantly, the authors test whether franchisees are compensated for accepting reduced autonomy. If greater franchisor control created benefits that were shared fairly, one might expect franchisees to pay lower fees in exchange for surrendering decision-making authority. Instead, the study finds that restrictions reducing franchisee autonomy are generally associated with higher franchise fees rather than lower ones. The authors interpret this as evidence that the shift in authority is not being offset by compensating economic concessions.
In short, the article’s central implication is that franchisee risk has not disappeared and may have become more difficult to manage. Franchisees still bear the entrepreneurial, financial, legal, and operational risks of ownership, but they increasingly do so within governance structures that grant greater authority to franchisors. The paper’s broader concern is not simply that franchisees face risk, but that they may face more risk relative to the authority they possess to control their own outcomes.
Franchisee Lessons
What Lessons Should Franchisees Take From the Article?
The biggest lesson from the article is that franchisees should stop thinking about franchising mainly as a question of ownership and start thinking about it as a question of governance.
The article’s main finding is not simply that franchisors have become more powerful. Rather, it shows that many important business decisions are increasingly being controlled at the franchisor level even though franchisees still own businesses, invest their own money, employ workers, and carry most of the economic risks. The authors conclude that franchisee autonomy generally declined between 2009 and 2023 while franchisor authority expanded across numerous dimensions of the franchise relationship.
Many prospective franchisees approach franchising with an entrepreneurial mindset. They picture themselves owning a business, making business decisions, building local value, and using their judgment to respond to changing market conditions. The article suggests that reality may be more complicated than that. In many franchise systems, franchisees increasingly face restrictions involving suppliers, products, pricing, territories, expansion opportunities, information systems, and data sharing. A franchisee is therefore not simply buying a business. A franchisee is buying a place within a governance system. One of the most important due-diligence questions becomes: “How much authority will I actually have after I sign?”
One helpful way to think about this distinction is to compare buying an independent business with buying a franchise. An independent restaurant owner who finds a supplier offering lower costs can usually switch suppliers whenever it makes business sense. An independent auto repair shop that discovers a profitable new service can often begin offering it immediately. An independent retailer can generally change prices, adjust promotions, alter inventory, or experiment with new products whenever local conditions justify it. A franchisee, on the other hand, may discover that many of those decisions are governed by the franchise agreement, operating manual, or franchisor approval process. The business may be locally owned, but many of the most important strategic decisions may not be entirely local. One of the article’s major contributions is showing how those governance relationships work in practice and how they have changed over time.
Historically, prospective franchisees have tended to focus on the financial side of the opportunity. They examine the initial investment, royalty fees, advertising assessments, financial performance representations, and the potential profitability of the business. All of those things remain critically important. However, the article suggests that governance provisions may be just as important because they determine what a franchisee will be allowed to do years after the investment is made. Territorial rights, supplier restrictions, technology requirements, transfer rights, renewal rights, data ownership provisions, pricing authority, and product requirements all play a major role in defining the practical limits of franchisee autonomy.
This becomes especially important because many governance restrictions do not seem significant when the agreement is first signed. A supplier restriction may appear harmless when costs are stable, but it becomes much more important when inflation increases costs and alternative suppliers offer lower prices. A transfer restriction may seem irrelevant on day one but become crucial when the franchisee wants to retire, sell the business, or bring in a family member. A technology requirement may sound routine until the franchisor requires expensive upgrades across the system. One of the article’s key messages is that future authority matters just as much as today’s economics.
Many franchisees also choose systems based on reputation. A brand may have built a strong reputation decades ago under a governance structure that looked very different from the one being offered today. The article documents significant changes between 2009 and 2023. Because of that, prospective franchisees should avoid assuming, “This brand has always operated this way.” Instead, they should ask, “What powers does the franchisor reserve for itself today?” The current contract may be very different from the franchise relationship that originally helped make the brand successful.
This point may be particularly important with long-established franchise systems. A brand that became famous during an era when franchisees enjoyed broad territorial protections and significant local discretion may no longer provide the same protections to new franchisees. The article’s data suggest that governance arrangements evolve even when the brand name remains exactly the same. As a result, franchisees should evaluate the current agreement and current governance structure rather than relying solely on stories about how the system operated in previous decades.
Application: Territorial Protection
Perhaps the most important practical lesson involves territorial protection. The article finds a dramatic decline in exclusive territories and a near-universal increase in provisions that preserve the franchisor’s right to compete. Exclusive territories fell from a majority of systems at the beginning of the study period to roughly 20 percent by the end, while franchisor rights to compete became nearly universal. Historically, many franchisees assumed, “This is my market,” “This is my territory,” and “The franchisor cannot compete with me.” The article suggests that those assumptions are becoming much less reliable. Franchisees should carefully examine encroachment rights, delivery rights, online sales rights, alternative distribution channels, company-owned competition, and the franchisor’s ability to grant future rights to other operators. Territorial protection may be much weaker than many franchisees expect.
The real-world implications can be substantial. Imagine a franchisee who spends years building local customer relationships, supporting community events, developing goodwill, and growing sales. Historically, that investment was often justified by a belief that the franchisee would receive meaningful protection within that territory. If the franchisor keeps broad rights to open competing locations, authorize delivery services, create online channels, or serve the same customers through alternative methods, the economics of the original investment may look very different. The article suggests that franchisees should focus not only on what rights they are receiving today but also on what rights the franchisor is keeping for future use.
The decline of exclusive territories is only one example of a broader pattern of franchise governance change. The article identifies numerous areas in which authority appears to have shifted toward franchisors. Product controls expanded as more systems reserved the right to change product mixes, prohibit particular products, or require franchisees to carry all products designated by the franchisor. Price restraints became more prevalent, including requirements that franchisees honor corporate discount programs and adhere to system-wide pricing policies. Speech restrictions, mandatory arbitration provisions, and disclosure limitations remained widespread. Viewed one at a time, these provisions may appear modest. Viewed together, however, they reveal a larger movement toward centralized governance.
Application: Data Sharing
One of the most forward-looking parts of the article involves data sharing. The authors document increasing requirements for franchisees to provide transaction data and financial information to franchisors. The article specifically identifies franchisor access to franchisee data as an important category of authority. Many franchisees still think about governance in traditional terms such as pricing, suppliers, and territory. Increasingly, however, data itself is becoming a powerful governance tool. Future franchise control is likely to operate through point-of-sale systems, performance dashboards, customer databases, real-time monitoring systems, and AI-driven analytics. The lesson is simple: the party that controls information increasingly controls the system.
The implications of this trend go far beyond reporting requirements. Data creates the ability to compare, benchmark, rank, evaluate, and intervene. A franchisor with access to extensive transaction information can quickly identify underperforming locations, compare operators across markets, standardize practices, monitor compliance, and identify expansion opportunities in ways that were impossible a generation ago. Information therefore becomes a source of organizational authority. The future of franchise governance may rely less on direct commands and more on constant visibility into operations. The article suggests that franchisees should pay close attention to data ownership, data access, data usage rights, customer-information rights, and the franchisor’s authority to implement future technology systems.
Data ownership deserves special attention because it may become one of the most important governance issues in future franchising. Historically, control often flowed from ownership of physical assets. Today, control increasingly flows from ownership of information. If a franchisor controls the customer database, loyalty platform, mobile application, transaction records, and performance analytics, it may possess strategic insight that individual franchisees cannot match. The franchisor can see patterns across hundreds or thousands of units while franchisees typically see only their own operations. That informational advantage can influence pricing decisions, marketing campaigns, operational standards, expansion strategies, and future contractual requirements. In many respects, information rights are becoming as important as territorial rights.
This may be the deepest lesson in the entire article. Many franchisees naturally assume, “I own the business, therefore I control the business.” The article challenges that assumption directly. Ownership and authority increasingly appear to be separate concepts. A franchisee may own the company, hold the lease, purchase the equipment, and own the inventory, while still having limited authority over major strategic decisions. The lesson is not that ownership lacks value. The lesson is that ownership and control are not necessarily the same thing and should be evaluated separately.
Historically, ownership and control were often closely linked. Owners typically controlled assets because they bore the risks associated with those assets. The article suggests that modern franchising increasingly separates these concepts. A franchisee may continue to own the business while operating within a governance framework that limits discretion over suppliers, products, pricing, technology systems, marketing programs, and strategic direction. Understanding the difference between legal ownership and practical authority may be one of the most important insights that franchisees can take away from the study.
The Link Between Authority, Control and Franchisee Risk
Another major lesson is that franchisees continue to carry substantial financial risk while authority increasingly becomes centralized. The article finds widespread use of personal guarantees, additional guarantor requirements, and other mechanisms that maintain franchisee financial exposure. At the same time, franchisor authority expands across multiple governance dimensions. This means prospective franchisees should ask not only, “What risks am I taking?” but also, “What authority will I have to manage those risks?” That may be one of the most important questions in all of franchising.
This issue becomes especially important during difficult economic periods. When labor shortages develop, supply costs increase, interest rates rise, or local demand weakens, franchisees usually remain financially responsible for the consequences. Yet their ability to respond may be limited by governance provisions. A franchisee may be expected to solve a financial problem while having only limited authority to change the policies contributing to that problem. Throughout the article, this theme appears repeatedly: risk remains local while authority becomes more centralized.
The article implicitly raises another important issue that every franchisee should consider: what are the risks that come with increasingly centralized authority?
The first risk is that local knowledge can become undervalued. Franchisees live in their markets every day. They understand local customers, local competitors, local labor conditions, local real estate conditions, and local economic realities. As more authority moves to the franchisor level, there is a risk that system-wide decisions will increasingly reflect national priorities while missing important local differences. What may make sense when viewed across an entire franchise network may not always make sense in a specific town, city, or region.
The second risk is reduced adaptability. Independent business owners can often respond quickly to changing conditions. They can alter promotions, change suppliers, experiment with new offerings, or pursue creative solutions when markets shift. When authority becomes centralized, responsiveness may slow because decisions must move through larger approval processes. In highly dynamic markets, that delay can create competitive disadvantages.
The third risk is that franchisees may become increasingly dependent upon decisions over which they have little influence. If franchisors control technology systems, pricing policies, suppliers, customer data, marketing platforms, and future business initiatives, franchisees may find that their financial outcomes depend heavily upon decisions made elsewhere. When those decisions succeed, both parties may benefit. However, when those decisions fail, franchisees may still bear substantial local consequences despite having limited participation in the decision-making process.
The fourth risk concerns innovation. Some of the most successful ideas in franchising have historically come from franchisees rather than headquarters. Local operators are often the first people to spot changing consumer preferences, identify operational improvements, or discover new market opportunities. As authority becomes more centralized, there is a risk that entrepreneurial experimentation becomes more difficult. The article does not claim that this is happening everywhere, but its findings suggest that authority is increasingly concentrated at the top of franchise systems.
Another risk is that centralized authority can create distance between decision-makers and those who bear the consequences of those decisions. A franchise executive overseeing hundreds or thousands of locations naturally views problems differently than an owner whose personal savings are invested in a single location. Neither perspective is necessarily wrong, but the farther authority moves from local ownership, the greater the potential for conflicts over priorities.
Finally, there is a risk that the gap between ownership and authority becomes so large that franchisees begin questioning whether they remain entrepreneurs in the traditional sense. The article repeatedly emphasizes that ownership, authority, risk, and control are becoming increasingly separate concepts. When individuals bear risks without possessing corresponding authority, tensions naturally arise regarding fairness, accountability, and expectations.
One way to understand these risks is through illustrative examples of centralized control.
Imagine a franchisee operating under a traditional franchise model several decades ago. The franchisee may have enjoyed a protected territory, significant influence over local promotions, flexibility in responding to local conditions, and meaningful discretion in day-to-day operations. Compare that with a modern governance system in which suppliers are approved centrally, products are mandated centrally, technology systems are selected centrally, data is collected centrally, and marketing decisions increasingly originate from headquarters. The franchisee still owns the business, but authority is exercised within a much more centralized framework.
A similar example arises in service businesses. A franchisee may identify local market conditions that justify a different pricing strategy, staffing model, promotional campaign, or customerservice approach. Under a more decentralized model, those adjustments may occur quickly. Under a more centralized governance structure, however, each proposed change may be subject to approval processes, system-wide consistency requirements, or technology constraints. None of these individual requirements may seem unreasonable, but collectively they shift decisionmaking authority upward.
The rise of online commerce provides another illustration. Historically, customer relationships were primarily local. Increasingly, customer interactions occur through franchisor-controlled websites, mobile applications, loyalty programs, ordering systems, and digital platforms. As these channels become more important, control over the customer relationship itself may migrate away from local operators and toward centralized systems. The practical significance of this shift may be enormous because whoever controls customer information increasingly influences future business decisions.
How Can Franchisees Protect Their Authority?
The article also suggests several practical ways franchisees can protect whatever authority remains available to them.
The first and most obvious protection is careful due diligence before signing. Franchisees should read governance provisions with the same attention they devote to financial disclosures. They should understand not only what the franchisor can do today, but what powers the franchisor reserves for the future. The most important governance provisions are often the ones that seem unimportant when business conditions are favorable.
A second protection is asking detailed questions of existing franchisees. The article’s survey findings suggest that contractual language and day-to-day reality do not always look the same. Many franchisees reported perceptions of autonomy that differed from the authority allocated in the contracts analyzed by the researchers. Prospective franchisees should therefore ask experienced operators not only whether they are profitable, but also whether they feel they possess meaningful control over their businesses. Understanding how authority operates in practice may be just as valuable as understanding the written agreement.
A third protection involves paying particular attention to territorial rights, transfer rights, renewal rights, technology requirements, supplier restrictions, and data-related provisions. These areas increasingly appear to be critical points of governance. Because many of these provisions affect future authority, they deserve close scrutiny before any investment decision is made.
A fourth protection is active participation in franchisee organizations where they exist. The article notes that independent franchisee organizations remain relatively uncommon, but such groups may provide information, collective experience, and a mechanism for communicating franchisee concerns. As governance becomes more centralized, information-sharing among franchisees may become increasingly valuable.
A fifth protection is maintaining a clear understanding of the distinction between brand value and governance rights. Strong brands can create tremendous opportunities, but franchisees should avoid assuming that a successful brand automatically implies a balanced governance structure. The strength of the business opportunity and the allocation of authority are separate questions.
Perhaps the most important protection of all is intellectual rather than contractual. Franchisees should stop viewing the franchise agreement solely as a financial document and start viewing it as a governance document. Many franchisees spend enormous amounts of time evaluating startup costs, revenue potential, and projected profitability. Those factors matter tremendously. But the article suggests that long-term outcomes may also depend on who controls key decisions once the relationship is underway.
The article does not claim that franchisor control is automatically inefficient or harmful. Many restrictions may improve quality control, strengthen brands, enhance customer experiences, and improve coordination across the system. However, the article also argues that efficiency and bargaining power are different issues. A governance structure can be efficient, profitable, and successful while still distributing authority unevenly. Franchisees should therefore separate the question, “Does this system work well?” from the question, “How much control will I have within this system?” Those are not the same thing.
This distinction may be one of the article’s most important contributions. Much of the traditional franchise literature focuses on efficiency. The article suggests that even if particular governance arrangements improve coordination, strengthen brands, and increase overall performance, it is still important to examine who possesses authority within those arrangements. A franchise system can be highly successful and highly centralized at the same time. Franchisees therefore should not assume that a successful system automatically represents a balanced relationship.
Because authority appears to be becoming more centralized, collective organization may become increasingly important. The article notes that independent franchisee organizations remain relatively uncommon. Nevertheless, these organizations can help franchisees share information, compare experiences, identify governance trends, and participate in discussions regarding system changes. As authority becomes more centralized, franchisees may increasingly rely on collective institutions to reduce information gaps and improve their ability to participate in governance discussions.
The value of such organizations may grow as franchise systems become larger, technologically sophisticated, and more data-driven. Individual franchisees often have deep knowledge of their local markets but limited visibility into the broader system. Franchisors generally possess the opposite perspective. Franchisee associations can sometimes help reduce that imbalance by collecting information, identifying common issues, and encouraging communication among operators. While the article does not advocate any particular organizational model, its findings suggest that collective representation may become increasingly important as authority becomes more concentrated.
Ultimately, the article encourages franchisees to think about franchising in a different way. The traditional question is, “Is this a good business opportunity?” The article argues that an equally important question is, “What governance system am I entering?” A franchise agreement is not merely a license to use a brand. It functions much more like a constitution for an ongoing relationship. The provisions governing territory, suppliers, products, pricing, speech, data, transfers, dispute resolution, and future system changes determine where authority will reside for years and sometimes decades after the investment is made.
Thinking of the franchise agreement as a constitution rather than a simple contract helps clarify the article’s central message. Constitutions allocate authority, establish procedures, define rights, and determine how future disputes will be resolved. Franchise agreements perform a similar function. They establish the rules that will govern countless future decisions, many of which nobody can fully anticipate at the time the agreement is signed. The true importance of governance provisions often becomes apparent only years later when unexpected challenges arise. For that reason, franchisees should evaluate not only what a franchise system offers today but also how future decisions will be made and who will have the authority to make them.
Bottom Line
The article’s evidence suggests that the most important long-term question may not be whether a franchisee owns a business, but how much authority that owner will continue to have after becoming part of the system. The authors conclude that, between 2009 and 2023, authority generally shifted toward franchisors across numerous dimensions of the franchise relationship. A careful franchisee should therefore pay as much attention to decision rights and governance provisions as to projected revenues and expected profits. More broadly, the article suggests that the long-term success of a franchise investment may depend not only on the strength of the brand, the attractiveness of the economics, or the quality of the operating system, but also on the extent to which the franchisee retains meaningful authority to make business-related decisions after the relationship begins.
Viewed in its broadest sense, the article is really asking a question that reaches far beyond franchising itself: What does it mean to own a business if someone else increasingly controls the important decisions? The authors do not argue that franchising is broken, that franchisors are acting improperly, or that centralized governance is necessarily harmful. Instead, they document a long-term shift in the balance of authority and invite franchisees to think more carefully about the difference between ownership, risk, and control. For future franchisees, that may be the article’s most valuable insight.
