How to take a franchise international
Member Franchise Council of Australia and Franchising Association of India
In all my years in franchising I have lost count of how many Franchisors have been excited by the prospect of overseas expansion. Sadly, very few of them have done it well and, consequently, only a low percentage of them have really succeeded.
The typical expansion is ad hoc and comes about as a result of an overseas enquirer stimulating the process. It then becomes a matter of a quick sale, which is unplanned and poorly researched, and destined to deliver an unsatisfactory result for either party.
So, what are the key points in making an overseas expansion successful?
1. Understand that any venture such as this will probably cost twice as much as you first thought and put a strain on your existing resources as the time commitment is also underestimated. Set yourself an expansion budget in both money and time, and be realistic.
2. Don’t rush into a deal which is driven by an applicant. An overseas expansion needs to be planned and carefully considered. Ask yourself, “Which is the most appropriate country for me to go to first?” It’s probably not the one you received the enquiry from. Issues such as proximity of that country to your own, the language and culture are all key elements in making the right expansion choice.
3. Once you have settled on which country, you need to visit it personally – and not treat it as a jaunt or holiday. You need to take in the culture, the people, and the climate, both economic and meteorological, and be brutally honest about your business’ prospects in the environment. Learn all you can about this country, soak up all the information you can get.
4. Protect your Intellectual Property before you do anything. Register trade marks, names, words for tag lines and logos before you talk to too many people about your plans. Many companies have had to buy their own names back because their lose lips have allowed “entrepreneurial” types to pre register I.P. and then sell it back to the rightful owner when that company wants to enter the country. Some companies have even been forced to trade under different names across the globe and this clearly dilutes the impact of the brand.
5. Establish key professional links before you grant a franchise. You will undoubtedly need three areas of professional help:
- A consultant will be needed to ascertain if your home country business model is the right one for the new country. For example, you may not use Master franchising as a model at home but it may be the correct model for the new country. You may even decide not to use a franchise model at all. The consultant will also advise on territories, fees and structure help with the system design such as supply chain issues and other operational matters. The consultant will peruse your support documentation, Operations Manuals and make the necessary adjustments to reflect the local market conditions.
- You must appoint a lawyer in the new country that specialises in franchise law. The country Franchise Association is usually a good place to find the best lawyers. The lawyer will be needed to help you with the I.P. registrations (see 4. above) before they draw up franchise agreements. Reluctant as you may be, understand it may be better to start with a clean piece of paper that reflects the new country’s laws than try and mould your home country legal documents to suit.
- An accountant that is familiar with franchising and tax law in the new country is a vital link. Tax, foreign investment restrictions and getting money out of the country must all be clearly understood before commencing a franchise operation on foreign soil.
6. Set up a pilot operation before you grant a franchise. After all, that is almost certainly what you did in your home country – you proved the business model worked before you franchised it, didn’t you? Why should you expect to do it differently in unfamiliar surroundings? This will be expensive as it will mean you will have to send out one of your best people to get the ball rolling. So, not only have you got establishment costs, but extra personnel costs too. The pilot will expose all the localised nuances that will require adjustments to the system to reflect the local market and maximise the opportunity.
7. Once you are sure the business will have a good chance of success, you need to find the best possible local person to become your driver. They may be a Master Franchisee for the country or perhaps you will have several regional Masters. Sometimes it pays to think in regions rather than countries, but, if this crosses borders, it can run into complications with differing laws. Any person or entity that is granted rights must be thoroughly checked out and every step should be taken to ensure they are the right person for your business. Management from a distance brings many problems to the table and, when this is exacerbated by differing culture and language, a relationship can quickly become strained. Require the successful applicant spends a significant amount of time in your country prior to launch so they may totally understand your business.
8. Insist your Master Franchisee opens and runs the first franchise personally. This gives them better knowledge and credibility with future Franchisees. You may allow them to franchise that unit in time, or when they reach certain milestones.
9. Set your Master Franchisee certain Key Performance Indicators. Everyone expects KPI’s, such as minimum royalty returns or a set number of franchise units established within a certain time frame. These will vary from system to system, but think about restrictive KPI’s. Some Masters have been fantastic at granting loads of franchises in a very short space of time, making a quick buck and then riding off into the sunset leaving the mess behind. Even contemplate restricting the number of franchises that can be granted in year one, which should focus the Master on Franchisee performance and profitability. When the international Franchisor asks the Country Master “How are sales going?”, the question should be answered “My Franchisees are 10% up this month” and not “I’ve granted another 2 franchises”. This culture is vital if true franchise success is to be achieved.
10. Continually communicate and train. Being an international Franchisor is not about selling a country off and collecting fees – it’s a commitment to support for the term of the agreement. It’s lonely being a Master Franchisee for a country, so all help and guidance from overseas is both comforting and helpful. The international Franchisor should commit to a set number of support trips per year and include training for the Master on those trips.
Obviously, one of the key issues is to be fair when setting the royalty structures. Too often International Franchisors are far too greedy when it comes to taking their slice of the pie. Please consider that it is the Country Master who will do most of the work and, consequently, deserves most of the income and reward.
So, international franchising is tough and it’s expensive but certainly not without its rewards. Don’t underestimate the road ahead but, with proper planning and investment in both money and time, the rewards are certainly there for the taking.