Fast Food Franchising of Boston Chicken Restaurants

Boston Chicken Inc is chain of fast food restaurants, and also in the business of take-out home cooked food. The main business strategy of Boston Chicken is differentiation. To achieve their overall business strategy, Boston Chicken implemented four strategies. First, Boston Chicken focused on franchising to larger regional developers after a careful screening process. Second, Boston Chicken diversified their product offering by keeping introducing new varieties of food choices. Third, Boston Chicken expended rapidly using the area developer franchise model. Fourth, Boston Chicken spent large amount of money on developing their computer software system to support its network of stores and linking headquarters to developer stores.

Boston Chicken has two key success factors. The first one is their rapid expansion through franchising; the franchise fee is a main resource of the company’s revenue.

The second one is that Boston Chicken put a strong emphasis on its customers; they offer a variety of quality food choices to their customers and their food is cheap, clean and fast.

The rapid growth also comes with a large cost and Boston Chicken might not be able to earn enough cash flows to maintain its daily operating activities. Also over 50% of the total revenue was the franchising related in 1994 fiscal year, the profitability and sustainability of the franchisee are a concern. According to the Boston Chicken’s Management Analysis and its Financial Statements, some of the assumptions the company made are: 1. Deferred financing costs are amortized over the period of the related financing. 2. Revenue from Company-operated stores is recognized in the period related food and beverages are sold. 3. Revenue derived from initial franchise fees and area development fees is recognized when the franchise store opens. 4.Pre-opning costs are amortized over one year. 5. Royalties are recognized in the same period related franchise store revenue is generated.

6. The notes are structured to give the parents the option to convert the loan into equity in the franchisee at a 12%-15% premium over the equity price at formation of the franchise. Boston Chicken’s accounting policy for revenue recognition is aggressive because it did not use consolidated financial statements to include the financed area developer’s operating results in the parent books even if it has control over the financed area developers. If consolidated financial statements were used, there will be a big effect on the Income Statement. The royalty & franchise fee and interest payment will be eliminated from revenue. Another accounting issue is that Boston Chicken agreed to loan the franchisees as much as 80% of their capital and reported loans at face value but did not have any allowance for bad debt.

Boston Chicken’s current accounting standard have kept franchise losses from the public and it also did not mention that the franchisees’ losses will hurt their ability to pay, this has also made Boston chicken’s accounting policy aggressive. Because of Boston Chicken’s business strategy, the company’s success will depend on both its own store operations and the financed area developers; whether franchisees are profitable or not is a key factor for the company’s long –term success. However, Boston Chicken’s accounting policy did not allow its financial statements to measure the profitability of the franchisees and therefore will not be useful when measuring the effectiveness of its business strategy. One of the key risks Boston Chicken has is that whether the company’s profit can be sustainable during rapid growth and expansion, since Boston Chicken did not include franchises’ operating result, the accounting policy failed to address the company’s risk as well.