Maurice Roussety’s passion for organisational best practice has culminated in successfully submitting two major theses in Leadership and Intellectual Property Valuation. These theses have been comprehensively examined leading to the award or Master of Leadership and Doctor of Philosophy (Ph.D.) respectively.
His seminal Ph.D. Thesis – An Integrated Economic Model for the Evaluation of Franchise Systems – A Synthesis of Agency and Finance Theories. The significance of this research as Maurice Roussety intends is to further contribute to the lexicon of knowledge while also to arouse interest in the evolution of economic models for the valuation of goodwill of franchisee-operated businesses. These models are intended to serve as invaluable tools in such areas as:
Although theoretical in nature, Maurice Roussety defines goodwill for the purposes of the thesis as a total value of future operating cash-flows of the business, less the opportunity cost of net tangible assets employed in generating these cash-flows. With that in mind, goodwill is produced by business assets like patents, brand name and all other elements of intellectual property. His thesis is celebrated as a significant contribution to knowledge and attracted the following remarks by its examiners:
Ph.D. Examiner 1
Based on a synthesis of agency and corporate finance theories, this thesis develops an integrated economic model for the valuation of franchisee-operated businesses. It provides an original framework and supporting methodologies to value goodwill in franchiseeoperated businesses at a change of ownership. It makes important contributions/advances in the scholarship of governance structure, risks, returns, and valuation of franchisee-operated businesses - areas of scholarship that have received only scant attention over the last three decades. This thesis demonstrates convincingly that "the valuation of goodwill of a franchisee-operated business necessarily involves the pricing of specific risks not found in businesses operated independently". This thesis thus makes an original and significant contribution to knowledge and understanding of franchising.
PhD Examiner 2
First, and foremost, I would like to commend the author for undertaking such an important endeavor- valuation of intangible assets of a franchisee. This has been an insurmountable task for many scholars and it is very impressive that the present author was able to put forward such a strong theory in a doctoral dissertation/thesis… Overall, this is a very-timely and well-executed study of risk-premium calculation and franchisee goodwill valuation. Especially, the agency cost estimation factor is a brilliant idea.
The fundamental approach to measuring goodwill in franchisee-operated businesses is the same for any other business models. However, the difference lies in the methodology, more particularly in the calculation of a risk premium, the identification of cash-flows, and the evaluation of the franchise system.
Franchisees are common law agents and are not free agents, unlike their counterparts that operate independent businesses. They are prescriptively created, governed, and terminated by contracts that are determined and controlled by their principal. As principals, franchisors rely on franchisees to do that which they cannot do themselves with equal efficiency. In order to facilitate this arrangement, they enter detailed contracts that express their reciprocal intentions and expectations. These include such things as performance standard, revenue sharing, risk allocation, operational protocol, and intellectual property rights. In fact, franchisors insist on retaining proprietary rights to all intellectual property and instead grants to the franchisee a contractual right to use it for a limited period. During that period, franchisees have to mobilise their financial and intellectual capital to leverage the intellectual property for cash-flow generation. This process often generates valuable goodwill. Arguably, goodwill exists, where the total value of cash-flows generated from the business exceeds the opportunity cost of net tangible assets employed in the business.
The problem of identifying and valuation of such goodwill in franchisee-operated businesses is complex. It requires a deep understanding of established theories relating to franchising, agency, and finance. This thesis synthesises these theories to formulate methodologies to value goodwill of franchisee-operated businesses under two distinct conditions of dependency. While both the dependent and independent methodologies are founded on identical theoretical constructs, they are distinguished by the recognition and inclusion of an efficiency rating for the franchise system’s governance structure. As important, is the submission of a fresh approach to calculate a risk premium for inclusion in six different valuation models and a comprehensive qualitative and quantitative instrument to rate a franchise system’s governance structure. In fact, these models are offered to value goodwill on change of ownership events such as acquisitions, assignments, transfers, surrenders, buy-backs, and closures.
The objective of the thesis is to develop an integrated economic model for the evaluation of franchisee-operated businesses and defend the proposition that “the valuation of goodwill of a franchisee-operated business necessarily involves the pricing of specific risks not found in businesses operated independently, such as risks associated with the franchise system as a whole”. In so doing, the focus is on examining agency theory from a positivist perspective, thus concentrating on the role and effectiveness of governance structures in managing conflict goals rather than on mathematical and algorithmic approaches alone. Expectedly, finance theories, in particular those relating to capital asset pricing and franchise business economics inform the development of methodologies to evaluate businesses operated by franchisees and franchisors respectively, thereby arriving at a value for goodwill for franchisee-operated businesses.
The thesis is structured in five parts and fifteen chapters.
Part 1, chapter 1- Thesis Introduction introduces the research problem and the thesis.
Part 2, chapters 2 to 7- Literature review presents an examination of franchising structures, leading to an analysis of agency and franchising theories. The issue of goodwill and contemporary valuation methodologies are explored before a detailed review and discussion of the denotation, composition, and application of risk.
Part 3, chapters 8 to 13- Synthesis of agency, finance, and franchising theories synthesises the three theories in the development of a framework and methodology for valuing franchisee-operated business goodwill and the evaluation of a franchise system’s governance structure. It presents four instruments in support of the synthesised valuation model to; (a) calculate five betas at five levels of imputed risk, (b) franchisee risk averseness, (c) franchisee risk mitigation factor, and (d) an efficiency factor for a franchise system’s governance structure.
Part 4, chapter 14- Valuation simulation culminates in the application of methodologies developed in Part 3 relating to franchisee-operated business goodwill and the franchise system governance structure to a bank of mock data to simulate a rating for a fictitious franchisor and a valuation of goodwill for a fictitious franchisee under differing change of ownership conditions. Part 5, chapter 15- Thesis conclusion ends the thesis by highlighting the new knowledge acquired from this study, and proposes areas for further research.
The arguments, theories, calculations, and simulations presented in the thesis are supported by the following files written in Microsoft Excel:
Inevitably, change of ownership events raise issues of property rights and transferability, and equity value in operating assets attached to the franchisee-operated business. More importantly, franchise agreements create obligations for both the franchisor and franchisee, which are substantially designed around property rights, to wit “… the rights to use, to earn income from, and to transfer or exchange the assets and resources” (Kim & Mahoney, 2005, p. 226). Consequently, resource owners (franchisors and franchisees) must transfer to each other the control over some attributes of these resources, which in a franchising arrangement consists mainly of non-physical assets (Windsperger & Dant, 2006, Stanworth, Stanworth, Watson, & Purdy, 2004 and Hunt, 1973). Contractual and relational events are often adversarial, affecting ten per cent of franchisees (Frazer, Weaven, & Bodey, 2012) and bring undesired levels of complexities to taxation, contractual, financing; and estate and succession-planning transactions, which to date have escaped the inquiring lens of researchers. Given this context, there is a need for franchisors and franchisees to evaluate their business frequently, but by what means? Whilst the literature abounds in methodologies and approaches for valuing businesses, intellectual effort toward addressing the specific needs of franchisee-operated businesses is inchoate at best, non-existent at worst. Franchisee-operated businesses are a special category of business, unlike others. By their very nature, franchisees enjoy an umbilical connection with the franchisor. It is the perfect exemplar of a relationship borne out of co-dependency and reciprocity. Ultimately, it will be the syndicated effort of the franchisee and the governance of the franchise system that will determine the value of the franchisee-operated business. Put more directly, a valuation of the franchisee’s business cannot, and ought not to be performed independently of the franchisor and vice versa, because of these relational, commercial, and legal inhesions and interdependencies. Nonetheless, a great number of franchisee-operated businesses continue to be priced according to rules of thumb or industry averages or some other ad-hoc methodologies that in no way reflects the true worth of the business, when properly valued by financial and econometric models. In other words, franchisee-operated businesses are routinely priced by various nostrums rather than being robustly valued according to established finance principles. The problem therefore resides in the identification, evaluation, and apportionment of entitlements in the goodwill value of the business, which franchisor and franchisee mutually value and nurture.
In the case of franchisors, goodwill generating assets relate to the system-specific knowhow and brand name assets (Klein & Leffler, 1981 and Norton, 1988), which also include knowledge and skills in site selection, store layout, product development and procurement (Kacker, 1988). On the other hand, the franchisee’s goodwill may comprise outlet-specific knowhow in local advertising and customer service, quality control, human resource management, and product innovation (Sorenson & Sorensen, 2001). Whereas this delineation is theoretically appealing, in practice it is impossible to separately identify and quantify the value added to the franchisee’s business by the franchisee and the franchisor. In support, Kim & Mahoney (2005) make the point that brand name capital is a shared asset between franchisor and franchisee and stated more generally by Elango & Fried (1997), who maintain that franchising is a joint effort by franchisee and franchisor of combining resources, to create a franchise system. On that basis, this thesis focuses on goodwill as being the total value of future operating cash-flows of the business less the opportunity cost of net tangible assets employed in generating these cash-flows. This delimitation is critical to the valuation process and is discussed in detail as this thesis progresses. Franchisors may grant different types of franchises, each performing a different strategic and operational function. However, this research will deal exclusively with single-unit franchises within the meaning of Sc 4(1) of Part 1, of the Code that have operated a site license (non-mobile) for at least three years, and granted under a principal-to-principal agreement. Such franchise types ubiquitously feature in franchise systems as the cornerstone of network growth, and manifest the fundamental characteristics of modern franchising. To that end, the following propositions are now introduced.
1.3 Main proposition
Main-proposition MP1:- It is proposed that the valuation of goodwill of a franchisee-operated business necessarily involves the pricing of specific risks not found in businesses operated independently, such as risks associated with the franchise system as a whole.
1.3.1. Theoretical framing
The theoretical intellectualisation of the main proposition will be framed by the following three subordinate propositions, which are discussed in chapters 3, 5 and 7 respectively. They will be synthesised in an integrated economic model for the evaluation of franchisee-operated businesses.
Objective: This chapter introduces the research problem and how it will be resolved. It presents the main proposition and three subordinate propositions that will be progressively defended by a synthesis of agency and finance theories with franchise business economics. Attention is given to the research approach and the contribution to knowledge for academics, advisers, franchisors, franchisees and government. An overview of the structure of the thesis together with details of terminology prepares the reader for a body of concepts, arguments, and discussions leading to the design of an integrated economic model for the evaluation of franchise systems.
Objective: This chapter examines the growth of franchising in Australia. It looks at issues of goal alignment between franchisor and franchisee, and explains how this phenomenon is represented in franchise contracts, the nature of these contracts and the relational, operational, and legal complexities that arise. An examination of the different types of franchise structures is undertaken to accentuate their differing legal and operational characteristics, which consequently create a need for the customisation of methodologies for the valuation of goodwill.
Objective: This chapter proposes a framework for the evaluation of franchise systems by synthesising agency theory. Franchisors specialise in ownership and franchisees specialise in custodianship. These demarcated functions of the franchise relationship generate value for both parties. However, that value cannot simply be imputed or guesstimated. The evaluation framework targets the governance structure of the franchise system and systematically rates its sub-systems and governance drivers. It allows franchisors and franchisees to test the efficiency of their respective businesses against a theoretical governance structure and ultimately value their goodwill entitlements.
Objective: This chapter offers an overview of finance theory and discusses the interaction of three guiding principles relating to investment, financing, and dividend. It considers the importance of risk, timing, and information in maximizing firm value and explores the links to agency theory. Attention is also given to the role of these principles in the formulation of valuation methodologies and the relevance of the market efficient hypothesis in valuing privately held and operated businesses, such as those existing under franchise structures.
Objective: This chapter explores the goodwill enigma and considers its treatment in an economic, accounting and legal sense. It defines what it is and discusses why it is different in businesses operated by franchisee when compared to those operated independently. Special attention is given to issues surrounding its valuation and change of ownership events that give rise to its identification, quantification, and apportionment. Above all, the need for franchisee goodwill valuation is reinforced by the identification of a number of important contractual and regulatory triggers that in themselves have triggered relational conflict amongst franchisees and their franchisor.
Objective: This chapter evaluates extant methodologies for the valuation of a private firm. Attention is directed at the difference in approach required to value equity in the firm as opposed to the firm itself and the implications of diversified and undiversified buyers and sellers acting in the valuation process. In particular, the dominance of discounted cash-flow models in valuation practice is explored and the composition of risk premiums and betas discussed to advance a framework for the valuation of franchisee-operated business goodwill.
Objective: This chapter introduces the concept of risk and discusses its implications in valuing franchisee-operated businesses. In the process, risk is defined and identified to enable the calculation of a risk premium for franchisees later in chapter 11. It is proposed that risks in franchising are multi-layered and hierarchical. Consequently, this relationship is represented in a Franchise Risk Ecology (FRE) developed as a critical component of this thesis. Discussions about the FRE are aimed as background information for discussions and conceptualisation of the Franchise Risk Imputation Model (FRIM).
Objective: This chapter aims at advancing a framework for the valuation of goodwill in franchisee-operated businesses under suspended and extended agreements. Attention is given to the pricing of franchise specific risks and the development of a stepwise valuation algorithm for cases where the franchisee’s rights to the future value of the unexpired portion of the franchise grant and any putative renewal options are recognised by the franchisor and cases where these rights are disregarded.
Objective: This chapter presents a theoretical model that aims at measuring the effectiveness of a franchise system’s governance structure. It provides the framework and the formulae for calculating an efficiency factor and an implied measure of agency costs for inclusion in the dependent TVM. In so doing, various scenarios are offered to model the relationship between the system’s efficiency and the level of agency costs incurred in an equilibrium state and to defend sub-proposition SP1 that proposes goodwill of a franchisee-operated business cannot be valued without also evaluating the governance structure of the franchise system.
Objective: This chapter discusses the issue of agency costs and explores their importance to franchisors when setting initial and ongoing fees that optimise the operational efficiency of their systems. A framework is submitted to model levels of agency costs that are sustainable and suitable to the economic welfare of both franchisor and franchisee by advancing EAC (the expected agency costs) as notional operational efficiency goal, required of franchisors for the efficient management of the franchise system. It also demonstrates how cash-flows generated by the franchisor include an imputed compensation for goodwill forgone to the benefit of its franchisees in line with sub-proposition SP2.
Objective: This chapter offers a set of algorithms that identifies and measures risk at each discrete level of market, franchisor, system, industry and endogenous within the franchise risk ecology. It sets out the rationale for SP3. In doing so, soft and hard risks that indwell at the endogenous level of the FRE can then be apportioned and incorporated in the composition of a risk premium. The theoretical justification for this approach rests on the argument that franchisee-operated businesses are undiversified and as such cannot rely on traditional risk premium calculations.
Objective: This chapter proposes a model to assess the level of risk averseness held by those who choose to operate a franchise business. A metric is returned for that risk which is subsequently incorporated in the calculation of a risk premium in the FRIM. Risk is measured for an individual franchisee by evaluating their pre-contract preferences and comparing them to their post-contract choices. Any divergences between preference and choice represent a risk to expected returns of the business.
Objective: This chapter presents a model to assess a franchisee’s ability to manage endogenous risks. It allows the franchisee to evaluate the governance structure of the franchise system, and indicate which functions of acculturation, organisation, communication, and incentive are expected to be mitigated by employing targeted management practices. Hard risks are separately identified and highlighted in a quadrant analysis to indicate risks that cannot be mitigated by the franchisee.
Objective: This chapter uses simulated data to highlight the differences in goodwill value when using each of the six TVM suspended and extended goodwill models, namely ISG, IEG, IRG, DSG, DEG, and DRG. Each TVM-6 model is systematically synthesised in context of finance and agency theories and considered in context of its relevance to exit events relating to acquisitions, assignments, buy-backs, expiries, transfers, surrenders, closures, and terminations.
Objective: This final chapter offers a synopsis of the key concepts and findings of this thesis in context of its main proposition MP1 and the three sub-propositions SP1, SP2, and SP3. It recaps the role of the GSEM, the FRIM in establishing a framework for valuing dependent goodwill under TVM-6. It highlights important limitations arising from the conceptual nature of this work and suggests how this addition to knowledge about goodwill valuation can be enhanced by further empirical research.
The primary purpose of his thesis titled: Follow the leader- the game we’ve all played. But, do leaders and followers really behave differently in organizations? is to apply key findings of contemporary research in leadership to develop and present a conceptual model that predicts leadership style and effectiveness.
His work is a systematic review of information garnered from published work of prominent authors in leadership theory stored on the Emerald on-line database, which was supplemented with a manual check of reference lists of key empirical and theoretical articles as well as reference sections from subject-matter texts. It is exploratory, interpretive, and context-bound. It deals with views, opinions, perceptions, and behaviours.
Notwithstanding extant empirical support for the concepts and theoretical propositions introduced in this paper, the author acknowledges the need for further testing and validating of the entire construct in a comprehensive study.
The leadership construct could inform further empirical and meta-analytic research towards the development of a regression model for predicting leadership style and measuring leadership effectiveness in organizations. It has practical implications for forward-thinking medium to large organizations interested in improving leadership effectiveness by moderating the risks of improper matching of leader-to- follower to- situation at the outset.
The leadership construct proposed in this paper draws from prominent theories about leadership effectiveness. Its uniqueness lies in the way it integrates a triad of meta-leadership dimensions in equipollence to predict leadership style. It consolidates extant theories that deal, to varying degrees of foci, with leader style, follower behaviour, and situational settings.
“Leadership in this new landscape is not about controlling decision making. We don’t have time anymore to control decision making. It’s about creating the right environment. It’s about enablement, empowerment. It’s about guidelines and boundaries and parameters and setting the people free” (Carleton, 2000) and “Business growth and expansion in different parts of the world will increasingly have to be based on alliances, partnerships, joint ventures and all kinds of relations with organizations located in other political jurisdictions” (P. F. Drucker:- Author). As both Carleton and Drucker suggest, with globalization comes organizational challenges such as:- ethnocentric competition, workforce diversity, total quality management practices, customer sovereignty and employee empowerment, yet still amongst the many challenges facing organizations big and small, there is no bigger, no more complex than the need to better understand how organizations can effectively lead themselves through this dynamic and complex environment.
According to Levinson’s Psychological Verities, all human beings differentiate themselves into groups and all groups follow a leader, who is replaced as the organization adapts to changes in its environment (Levinson, 1994); and expressed differently by De Vries et al., (1999:113), “the need for leadership is the extent to which an employee wishes the leader to facilitate the paths towards individual, group, and/or organizational goals”.
The group-level phenomenon is based on the “relational model” that suggests that groups specify norms concerning fairness (Tyler and Lind, 1992). Group membership is a powerful aspect of social life because the group offers more than material rewards. Individuals are strongly affected by identification with groups: - even when that identification is based on minimal common circumstances (Brewer and Kramer, 1986).
Given those dynamics, individuals (leaders and followers) who voluntarily or as dictated by circumstances, organize themselves in groups do so in search of rewards; in the form of security, status, self-esteem, power, affiliation, and goal achievement. By virtue of the role, the leader assumes a dual symbiotic responsibility to achieve a personal goal and that of the group of followers within the settings of the organization and its environment.
Based on the above proposition, it follows that the organizational phenomena concerning leadership effectiveness ought to be examined in context of group dynamics (leader-follower interaction), decision-making under uncertainty, and contextual influence. Given its compelling significance to organization behavioural science, it is not surprising that this paradigm has advanced the development of prominent theories such as the Average Leadership Style pioneered between the late 1940s and early 1960s (Schriesheim et al.,1999), which comprises the Ohio, Michigan and Texas studies (Taylor et al., 1972 and Schriesheim et al., 1995); and Blake and Mouton (1985), where they argued that leaders apply consistent behavior styles to all group members. Considerable literary debate also featured other leading models such as, Vertical Dyadic Leadership where behavior style is tailored to in and out groups (Dansereau et al., 1975), Leader-Member Exchange where behaviour style is modified to suit to individual members (Graen et al., 1982), and Contingency where leadership styles are fixed for given situations (Robbins et al., 2004). Notwithstanding the intellectual determination of scholars, professionals and researchers towards refining knowledge about leadership effectiveness, there seems to be a paucity of effort towards a synthesis of these theories, and more particularly towards contemporising a robust and empirical investigation of the synergetic role that leader characteristics, follower characteristics, and situational factors play in leadership effectiveness.
This seems to hold true even for most recent theories that examine the influence processes between leaders and followers, and those that focus on the interaction between leaders and followers. Moreover, the early approaches to leadership theories directed their foci on the identification of leadership traits and behaviours to differentiate effective leaders from others, whereas; Hersey and Blanchard (1974); Fiedler (1978); Vroom-Jago (1988); and House (1996); subsequently postulated the lead role that situational factors play in the determination of leadership effectiveness, and Danserau (1995); and Graen and Uhl-Bien (1995) highlighted the importance of leader and follower relations in the dyadic exchange, inclusive of follower performance and leader-follower compatibility, which according to Byrne (1971); and Tsui and O’Reilly (1989) is influenced by the similarity of attitudes, values and demographic factors.
Consequently, I find it somewhat enigmatic that whilst researching this review, I have been unable to identify any literary work that purports to synthesise traits, behaviours, situational factors, as well as leader and follower relations in one singular leadership construct. This phenomenon is best captured by Daft and Pirola-Merlo (2009:37), “each theoretical perspective has something to offer, but none of them can, on its own, give a complete understanding of leadership” and reinforced by Bernstein et al., (2006:741), “having personality traits does not guarantee good leadership ability, however people can be effective leaders in one situation but ineffective in another (Chemers, 2000). The reason is that effective leadership also depends on the characteristics of the group members, the task at hand, and most important, the interaction between these factors and the leader’s style”.
Responding to this challenge, I propose to address the apparent gap in leadership literature, by presenting a case for the explication of leadership effectiveness by identifying commonalities in prominent leadership theories and then combining this knowledge in one eclectically cohesive construct. More specifically, it is to be noted that the intelligence sought by this review relies heavily on the identification of relationships between variables, antecedent variables and consequences, relating to leaders, followers, and situations. To facilitate this task, information is principally garnered from published work of prominent authors in leadership theory, which are stored on the Emerald on-line database. To supplement the electronic search a manual check of reference lists of key empirical and theoretical articles as well as reference sections from subject-matter texts such as Robbins et al., (2004); Bernstein et al., (2006); and Daft and Pirola-Merlo (2009). This work is exploratory, interpretive, and context-bound. It deals with views, opinions, and perceptions of published authors as well as those of the author.
This thesis is organised in four parts, with each part logically progressing discussions, arguments and hypotheses to a valid synthesis.