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A lack of financial capital is among the earliest identified explanations for expansion through franchising (Oxenfeldt & Kelly 1969). Dant (1995) reported that 22.6 per cent of entrepreneurs who ultimately elected for the franchising option nominated access to capital as their most compelling reason for choice of growth mode. This ranked second in Dant’s (1995) identified list of motivations, behind market entry and growth within.

Table 5.2 provides a rating of the Dant factor of access to capital for each case. Cases with very little resources were given a low rating. These organisations were considered unable to fund the expansion of their organisations on their own or tap traditional finance providers like banks. Medium ratings were provided to cases that had a limited supply of capital and were able to fund their expansion through debt finance or new equity investors. A rating of high was attributed to companies that had sufficient internal funds to finance their expansion.

Table 5.2: Access to capital

Case Access to capital

1F Low

2F High

1C Medium

2C Medium

3C High

5.4.1 Analysis of access to capital for franchising cases

For the owner of case 1F, the adoption of a pre-emptive strategy characterised by quick expansion was critical. The news that a major overseas competitor was about to enter the Australian market was the prime motivator to expand the organisation quickly in target locations. Without significant funds to expand the business, this entrepreneur's choice regarding the method of expansion was certainly restricted. High property rental prices in new locations and the costs required to expand the business posed major financial obstacles. The 1F entrepreneur had an existing loan and during that period the banks were hesitant to loan money to unproven fitness centres. Franchising was seemingly the only growth strategy option. Thus, for case 1F, access to capital was completely relevant and played a significant part in the growth mode decision process.

For the owner of case 2F, availability of capital was not a significant factor in influencing the selection of an expansion method. This is because 2F's business model was built around establishing numerous smaller-sized facilities that were better suited to management by independent owner-operators rather than a single company management set-up. The model was unique to the Australian fitness market, akin to a boutique business sitting between a personal training studio and a normal-scale fitness centre. These facilities required lower establishment and ongoing costs and would be seen as an attractive investment proposition for potential

franchisees. It was this operational / management requirement that drove case 2F to opt for franchising, not a lack of access to capital. In fact, case 2F offered finance to its franchisees.

Table 5.3 provides a summary of access to capital for the entrepreneurs of franchised sites, together with the importance placed on the criteria.

Table 5.3: Dant factor - access to capital and companies that expanded by franchising

Case Access to capital Importance to decision to franchise

1F Low Yes. Wanted quick market expansion but did not have access to capital.

2F Medium No. Had access to capital and was even able to offer finance to franchisees. Management requirements were more important than access to capital.

5.4.2 Analysis of access to capital for company-owned cases

Case 1C was known as Australia’s most prestigious health club. Its brand and exclusive image were renowned throughout the industry. This financially successful business came up with the required investment whenever the opportunity to purchase a new club presented itself. Thus, access to capital for this entrepreneur did not pose any barriers at the time of their expansion.

Like many fitness centre operators during the late eighties, the case 2C owner faced some tough financial times. After many years of financial struggle, the business started returning a consistently strong profit from the early 1990s. The timing of business expansion was certainly directly linked to limited access to, and availability of, capital. Franchising was however not viewed as a possible solution as the 2C owner had serious concerns about franchising, i.e. the potential risks on his brand reputation.

Prior to opening his first fitness centre, the entrepreneur of case 3C was operating another successful business. Consequently, access to the capital required to open his first fitness centre was not a problem. For this entrepreneur, quick expansion was not paramount. He settled on a strategy of getting managers appointed to a new outlet to contribute a third of all establishment costs. Thus, this entrepreneur reduced the capital requirement for expansion. The resulting company ownership model was therefore characterised by a minority partner-manager arrangement.

The expansion of all three cases of company-owned chains focused on increasing market penetration within their initial club. Increasing membership numbers allowed the entrepreneurs to build their revenue streams. This resulted in increased profit and the ability to pay down any existing debt. This strategy also provided each entrepreneur with a greater financial capacity to purchase new sites to expand their business. Financial capacity for these entrepreneurs was further enhanced by selecting a joint-venture mode of growth for the organisation. This allowed the employee or manager to purchase a small percentage of the new site, providing additional capital to the entrepreneurs.

Table 5.4 provides a summary of each company’s capacity to access capital and the importance of this in relation to the decision to stay with company ownership.

Table 5.4: Dant factor - access to capital and companies that expanded through company- owned outlets

Case Access to capital Importance to decision to stay with company ownership 1C High The owner had adequate funds to finance their partner-friends

who co-owned the first additional outlets.

2C Medium The entrepreneur was conscious of the financial requirement to expand, as such he did not expand until access to capital could be achieved.

3C Medium Not really. Managers were required to put in some equity in the co-owned outlets, giving them a financial stake in the business' success.

5.4.3 Summarising the relevance of the access to capital factor

There is a common belief that capital scarcity during periods of tight credit will encourage franchising (Combs & Ketchen 2003). This was the case at the time of expansion for case 1F. This was a young, growing firm that wanted quick market expansion but lacked the capital required. Their limited access to capital coupled with their desire for rapid expansion was the key driver for selecting the franchise option as a growth strategy. Franchising offered an effective solution to the challenge of how to grow the business quickly without putting up any capital of their own.

Employing meta-analysis on 44 research studies, Combs and Ketchen (2003), however, found little evidence to support the hypothesis that a firm’s capital scarcity is positively related to the use of franchising. Capital scarcity may play a role in an entrepreneur’s initial decision to franchise but not to expand the operation once the initial base had been established (Combs & Ketchen 2003). Our findings suggest that while lack of capital can drive a company to franchise, not all companies will franchise just because of a lack of capital, as with case 1F. While access to capital was a consideration for 2F it was shown not to be a driving factor in selecting the growth strategy.

None of the company-owned case studies sought quick market expansion. In addition, the acquisition of new sites was never a part of their agenda. At some point or at all stages of their expansion, the company-owned businesses raised capital and addressed any agency theory concerns by offering a minority share in the business to a manager who would effectively treat the business as their own. Thus, an alternative to franchising was chosen.

For the business owners who ultimately elected to maintain company ownership as their method of organisational growth, capital availability (or lack thereof) was not enough of a motivation to

drive them toward franchising. Their moderate growth ambitions required low capital investment, if additional funds were at all required.