International franchising as an expansion strategy is one of the specialties of the author of this article (and Managing Director of Cencir, Inc., who is also the moderator of the International Expansion site). He was operating and consulting internationally before most companies considered “global” part of their vocabulary and international franchising was in its infancy. From Scandinavia to Central, Southern, and Eastern Europe to East Africa to the Middle East to Southeast and Far East Asia to Australia to North, Central, and South America, he has lived, studied, or worked around the world since the 1950s. During the 1990s, he lead the development of indigenous franchise consulting practices on several continents, training and supporting more than 20 international franchise consultants. At the same time, he consulted directly with international franchise companies, attended international franchise conventions in many countries, and appeared as a franchise expert in various media around the world.
For many, international franchising is still synonymous with licensing a US brand abroad. Ours is a much broader perspective and involves two main practice areas:
1. Franchising within a country abroad, which we perform either directly, using our extensive experience in several countries, or through our network of foreign representatives, and
2. Franchising from one country into another, in which case we represent both companies exporting and companies importing franchised brands.
We consider the first “international” because we may not necessarily rely solely on domestic resources to assist franchise companies in all countries. We consider each situation individually and use the most appropriate talent from around the world, usually in combination with local service providers.
As for the second part, not only does this involve either structuring or restructuring the international transaction, but also due diligence investigations similar to what we provide when performing mergers and acquisitions investigations apart from franchising.
International franchising and distribution usually differ substantially from domestic programs. Also, it is not uncommon for franchise companies to avoid domestic franchising, relying instead on company-owned outlets domestically. In either case, a new program is typically called for when expanding internationally.
Your international franchise expansion strategy may range from using a foreign joint venture to franchise to selling off whole countries or regions as sub-franchises. In most instances, you will want some kind of alignment with a local representative who can assist with adaptation to the local culture (subject to your approval, of course) and building and supervising the local distribution network.
Here is a quick checklist of issues to cover when structuring an international franchise offer (more to follow later):
- Type of offer: Master/Sub-franchise vs. Area Rep; Area Rep is recommended, if possible.
- Territory size should correspond to number of units to be opened.
- Require that Master open showcase and training unit(s) before selling franchises.
- Development schedule should be fairly aggressive (3-5 years), to preempt competition.
- Initial term should coincide with or extend just beyond the development schedule.
- Allow Area Rep who completes development schedule on time to renew for one or more additional terms, but retain the right to require establishment of additional franchises during any renewal term as a condition of renewal; if Area Rep fails to comply or renew, franchisor may take over the area or appoint a new rep to manage the area.
- Duties of Master/Area Rep may include: contributing to Franchisor’s franchise lead generation activities, such as advertising on the Web and national publications, preparing DVDs, and printing brochures, generating additional franchise sales leads, qualifying leads, following up with qualified leads until ready to sign, filling in blanks in documents for franchisor and franchisees to sign after the appropriate cooling-off periods, training new franchisees at showcase unit, assisting new franchisees with opening of new units, periodically visiting with franchisees in area, coordinating marketing, testing, and introduction of new products within area, conducting refresher training, training new managers for franchisees when necessary, reporting to franchisor on franchisee compliance and recommending termination, if appropriate, etc.
- Duties of the Franchisor may include: coordinating Internet and multi-territory marketing for franchise sales leads, providing lead generation and sales tools, turning over “local” leads to Master/Area Rep, training Master/Area Rep in franchise marketing and sales, training Master/Area Rep in training, assisting, and supervising franchisees, coordinating system-wide product marketing measures, providing Master/Area Rep with new developments to be introduced to the market, conducting annual convention, etc.
- Typical transfer and right of first refusal provisions should be included.
- Typical default provisions should be included.
- Typical choice of law and venue provisions should be included.
- Typical confidentiality and non-compete provisions should be included.
A pro forma should be developed to test assumptions, such as initial fees, split of individual franchise fees and royalties, and how to handle product sales and commissions; this should also include a projection of the initial investment and ongoing expenses that the Master/Area Rep will incur and the anticipated cost to the Franchisor to establish a Master/Area Rep.
Finally, any required franchise disclosure document must be amended to include the projections for the Master/Area Rep and the provisions of the Master/Area Rep Agreement.
Although domestic recruitment of franchisees is somewhat different from standard consumer marketing, it is still akin to such sales and executive recruitment. International recruitment is completely separate from consumer sales. It resembles industrial sales. We are typically evaluating companies, not individuals — although exceptions occur, especially when we display your offering at franchise shows abroad.
We may often use a franchise show abroad as a convenient platform for visits to particular countries or regions, but the preparations for such visits are all-important. Our main purpose is always to pre-arrange meetings with the best prospects ahead of the show and meet with them during the show, but at a different location. Our booth at the show may promote several franchise offers — and some of our clients participate just for the exposure at the show — but the more effective approach is to use the occasion to close sales apart from the show, using the show simply as a base of operations. (Of course, having several clients with different target markets join the show helps defray the cost of attending the show, and the reduced cost for each client makes it possible for many to “test the waters” in new markets. As such, this approach is a win-win solution for all involved.)
The real work, however, takes place before we leave for the show. This work is not dissimilar to that of assisting with mergers and acquisitions. We are looking for the right strategic partners, and our contacting them is more on the basis of equals joining forces than our selling them on our product, although there is always some selling to do. We always prefer to have a few suitable candidates in the running at the same time, and our tactics may differ for each of them, as they may need us and we them for different reasons. Obviously, in order to reach the best candidates, we need to research each market before contacting the candidates. This pro-active approach is designed both to eliminate interested, but inappropriate partners, and to learn who would be most suitable and what they need. Simply “taking orders” at a franchise show does not even start to provide these advantages.
Finding the right candidates is as much art as science. The science side is rather obvious and similar to the domestic scene, in which a company may, for instance, acquire franchised chains to gain dedicated channels of distribution. The art side has more to do with understanding the “movers and shakers” of the local economy, and especially, whom to avoid. Here, we use both our own network of contacts, commercial media, and available commercial affairs organizations. On occasion, it may even be appropriate to hire a local investigator to verify some information. Our initial research is not meant to be exhaustive, however, but just sufficient to gain and understanding of suitable candidates. Our subsequent one-on-one discussions with the same might reveal a need for further investigation, but any controversy or uncertainty may simply lead us to concentrate on other candidates. Because the approach and cost may vary greatly, we tailor each search assignment to the needs of our international franchising clients.