Franchisee or Franchisor?

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    Currently there are around 1 million franchise
    outlets in the United States and over 40,000 international ones operated
    by U.S. based franchisors. Ownership and operation of these outlets can
    differ greatly depending upon their parent corporation. For instance
    Burger King franchises around 90% of their restaurants, McDonalds 80%,
    Wendy's 79%, and Arby's 69%. Conversely, large investor groups, such as
    Bain Capital, can also decide whether to license out the business model
    and make money off royalties or operate the franchises themselves,
    earning revenue directly. This decision is highly dependent upon the
    market in question and impacts future management of the property.

    Typically,
    franchisors have three main sources of income, (1) retail sales at
    Company-operated restaurants; (2) franchise revenues, consisting of
    royalties; and (3) property income from restaurants that the parent
    company leases or subleases to franchisees. If a company were to engage
    in the first, it would necessarily negate the latter two and vice versa.
    In order for the first option to make sense, the specific franchise
    would need to operate with larger margins. For example, Bain Capital,
    which owns a 93% controlling economic interest in Dominos Pizza, chooses
    to sell the franchise rights of most of their stores (including U.S.
    based ones) but operates outlets based in Japan. This is because pizza
    delivery is considered a luxury item there, with people willing to pay
    up to $43.00 dollars for a single delivered pizza. Thus in Japan, it is
    more economical to operate rather than sell the franchise rights.
    Conversely, in the U.S., where pizza delivery is assuredly not a luxury
    item, it makes more sense to sell the franchises as margins are lower.

    Should
    a parent company choose to own and operate a store, it can receive
    benefits related to its applicable real estate. A location operated by a
    parent company with investment grade credit, will instantly increase in
    value. This is because the locations returns are no longer guaranteed
    by an individual franchisee who has no credit rating but by a company
    which does. Furthermore, that company can still pull money out of the
    property through a sale-leaseback. This allows the company to take
    advantage of the properties increase in value and pull capital out for
    other uses. These factors are highly evident in net lease properties,
    where credit ratings are of high importance and sale leasebacks have
    always been very popular. A property which is corporate owned and
    guaranteed will typically fetch a much higher price than an individual
    franchisee due to the flight to quality in the current market.