Global Franchise 9.2 - Issue 56

The right countries at the right time Many failed international franchise expansions can be traced back to poor choices regarding target countries. Too often, franchisors react to an overture from a foreign resident without conducting the necessary research to weigh the options and cost benefits of each potential market. From an international franchise perspective, not all countries are created equal. Various factors need to be considered, such as proximity to the franchisor’s home base, shared language and culture, the prevalence of similar businesses, availability of critical supplies and labor, and the legal protections for the franchisor’s rights. When starting an international expansion program, it’s essential to think in terms of geographical regions rather than individual countries. For example, targeting the META region, Scandinavia, Europe, Asia, North America, or Latin America can yield better results. Many franchisors find greater success by focusing on one region at a time instead of spreading themselves too thin across numerous countries. This approach can involve recruiting a master franchisee for the entire region or taking the time to learn from experiences in one country before venturing into the next. Choose the right franchise vehicle When it comes to international expansion, franchisors have several franchise structures to choose from, including unit franchises, multi-unit franchises, area agency franchises, master franchises, and joint venture franchises. Selecting the right structure can be the difference between success and a spectacular flop. A well-advised strategy is to start with one or a few corporate units. This allows for a “test drive” of the concept in the foreign market, offering more flexibility for fine-tuning and creating a localized proof of concept for prospective franchisees. Once the corporate units are thriving, franchisors can either begin franchising new units or sell those existing units to new franchisees. Historically, master franchising has been the go-to structure for international expansions, granting the master franchisee the right to sub-franchise. The ideal situation involves finding a well-financed master franchisee who knows the industry and has previous franchise experience. Unfortunately, these “unicorns” are rare, and many ambitious master franchise programs have floundered. The risk of failure significantly increases when franchisors relinquish too many critical decisions to the master franchisee, mistakenly believing that local knowledge alone can replace thorough research. To mitigate these issues, consider granting multi-unit rights to a select few franchisees within a country.While this may result in slower growth and higher franchise development costs, it offers a much better chance for sustainable, long-term success. Avoid oversized territories As franchisors dive into international expansion, they often face the temptation of granting large territories. Prospective franchisees frequently pursue the biggest territory they can secure, sometimes encompassing an entire country or multiple nations within a region. Newcomers to international franchising often grant these expansive territories due to ignorance about the market’s potential or the misguided belief that dealing with one master franchisee in a larger area will simplify operations. In reality, franchisors are more likely to cultivate a stronger and more profitable system by starting with smaller territories. This approach enables franchisees to demonstrate their capabilities before potentially expanding their footprints. Plus, it’s easier – both psychologically and often legally – to reward good performance than to penalize poor results. Set the right fees Determining the appropriate fees for a franchise is one of the most challenging aspects of franchising. Various factors influence this critical number, including the length of the franchise term, the system’s track record, the amount of training and support provided, and the additional investments expected from franchisees. If fees are set too low, franchisors may struggle to offer adequate support that helps franchisees achieve profitability. Conversely, if fees are too high, they can hinder a franchisee’s ability to thrive financially or operate the business effectively. Similar considerations apply when establishing the ongoing royalty rate. If the chosen vehicle is master franchising, franchisors must carefully determine how fees from unit franchisees will be divided between themselves and the master franchisee. It’s vital to clarify responsibilities for system development and administration before discussing how profits will be split. Only then can a fair fee structure be established that reflects those responsibilities. While international expansion may not be an easy road, the rewards can be substantial – financially and otherwise. So, as the U.S. Founding Father Benjamin Franklin famously put it: “Failing to plan is planning to fail.” Take his words to heart as you set out to navigate the complex but rewarding journey of expansion through international franchising. STRATEGIC PARTNER- SHIPS: Forge alliances with local experts or master franchisees who understand the market dynamics, regulatory challenges, and consumer behavior. EXPERIMENT WITH PILOT PROGRAMS: Before committing full-scale, implement pilot programs in select regions. This allows you to test your concept, refine operations, and gauge reception. PRIORITIZE CULTURAL INTEGRATION: Instead of merely translating your marketing materials, adapt your messaging and branding to resonate with local customs and values. “The decision to expand internationally hinges more on the quality of the franchise system and its capacity to support foreign franchisees than the size of its domestic footprint” 27 GLOBAL-FRANCHISE.COM Lega l Ins ight | FEATURE