Finding the Right Overseas Franchisee To Take Your Brand Abroad

If you decide to take the plunge into international waters, you want to tread carefully as you try to find your initial franchisees. To structure a business relationship that provides the optimum benefits to you and your brand, you want to select a franchisee who has expertise and experience in the foreign market.

So, passport in hand and ready to fly? Not so fast. A big part of implementing an international franchise expansion program involves teaming up with the right franchisee. First, consider that U.S. franchisors typically expand internationally in three ways:

1) Master franchising. A master franchisee is granted rights to open units pursuant to a development schedule that calls for X number of units over Y number of years. Master franchisees operate their own units, sub-franchise to qualified franchisees, or do both. As a mirror image of the franchisor, they provide support to their sub-franchisees on the local level in exchange for a percentage of franchise fees and royalties paid by the sub-franchisees.

Although master franchising was historically the most popular way for franchisors to expand internationally and is still used today, master franchising is no longer the primary expansion method. Today, the Internet, intranets, and other modern communication technologies allow franchisors to set standards, monitor the performance of their international franchisees, and provide them with a significant amount of support. By avoiding master franchising, a franchisor is able to retain much of the revenue it would have needed to share with its master franchisee.

2) Multi-unit development. A multi-unit developer is granted rights to develop units pursuant to a development schedule in a geographic area, with some territorial protection from development of units by the franchisor or other franchisees (no sub-franchising is permitted) and relies on the franchisor for support services. The structure of this relationship is almost identical to that found in use for domestic multi-unit franchisees in the U.S.

3) Joint ventures. In a joint venture, a franchisor and a local franchisee form a venture company to pool their expertise and cash. This option gives the franchisor both more control and more risk. But the franchisor's equity participation may make a deal more credible to the local franchisee and to the country's government and banks, among other stakeholders.

Cautionary note: Joint venture agreements can be tricky and require care in how they are structured. Issues include the extent of the authority of the joint venture franchisee partner to obligate or incur liability on behalf of the joint venture and to acquire or dispose of assets. Joint venture relationships require working with legal counsel experienced in these relationships.

Trust is paramount

Not just any warm body will do when you are looking for a franchisee overseas. The biggest reason international franchising attempts fail is poor matchmaking - such as selecting a franchisee who is undercapitalized, inattentive, doesn't adhere to a development schedule, or who wants to operate your brand in their own way.

Distance makes international franchising difficult enough as it is. The complications of trying to effectively communicate over several time zones and oceans enhance the difficulty even further. Nipping a problem in the bud is more difficult and more costly when you are thousands of miles away in a different country. By the time you find out about the problem, it may be too late to problem-solve. You could end up spending more money than you were paid to straighten it out - or worse, to litigate it.

Remember: In looking for an international franchisee, trust should top your list of qualities in a candidate. You are entrusting this person to build a network, protect and grow your brand name, and uphold your standards. You want some assurance that this person (or group) will put their heart and soul into the deal. What you may not want is a large institutional franchisee swimming in so many directions that your franchise drops to the bottom of their ocean. Your brand deserves capital and staff to support a development schedule, and your brand deserves their focus. An international franchisee with access to real estate and local suppliers is a key ingredient for overseas success. If your joint venture partner is up on franchising, all the better for you.

Internationally, your franchise prospect may differ from the candidate you typically look for in your home market. The prospect may be bigger and better financed, and they may have more resources and more bargaining power. This has its minuses as well as its pluses. You may consider (or even target) the type of franchisee you may not necessarily target in the U.S., including a portfolio company operating multiple brands.

 Joyce Mazero, a shareholder with Polsinelli PC, a law firm with more than 825 attorneys in 21 offices, is co-chair of its Global Franchise and Supply Network practice. Contact her at 214-661-5521 or jmazero@polsinelli.com. Michael Seid is managing director at MSA Worldwide. Contact him at 860-523-4257 or mseid@msaworldwide.com.