International Expansion: Risks and Opportunities for Franchise Brands, Brokers, and Investors

For decades, franchises have successfully expanded in their domestic markets and many have grown internationally, especially since the 1980s. However, the road to international franchise success is hard and littered with failure. Many franchises often ignore the first thing about international expansion research because they are convinced about the global validity of their product or service. They are well-advised to take advantage of the local expertise available. Some franchise systems may even have to revalue their attitudes toward candidates.

I was recently invited to submit an academic paper to On Research, the journal of the European Business School, about international market expansion in franchising. You can read the paper starting on page 87 of the publication.

Here, I want to draw on the paper's main findings and make specific recommendations for the key stakeholders in international franchise growth. Not surprisingly, there are lessons for franchisors with international franchise aspirations, especially the ones that engage local consulting services. However, there are also lessons for local investors considering a franchise.

Build it and they will come -- and then do the market research

You need a strong brand. Before considering international expansion, franchisors need to get their own house in order. Selling a license to an international franchise partner is no ticket out of domestic trouble. Ethics aside, franchisors with weak systems will only add to their misery by tying up resources in international growth. Rather, they should use everything and everyone they have to clean up.

This is important because the research shows that only 20% of franchises follow a proactive international growth strategy. On the contrary, about half were approached by a local investor. The temptation for franchisors is to jump on this opportunity without being ready for international growth. The systems that are ready still need to go through the necessary due diligence, validating the market opportunity for their product or service and equally important, validating the partner.

Based on the research, finding the right partner is the hardest thing for franchise brands. The right partner in this case refers to the cultural and personal fit, not whether they sign a master agreement or area development agreement. Measured against outcomes, the franchise type has little to do with meeting international growth goals. The majority of franchise systems that did not meet their development goals post-market entry failed because the relationship with the local partner collapsed.

In fact, based on the survey, choosing the right partner and conducting market research to identify the most suitable market is a franchise system's best bet to meet its international goals. To repeat, franchisors must have a strong brand to make a strong offering to local investors. As noted, about 50% of brands are approached by a local candidate. This is likely not just because those investors liked the brand. A savvy investor also will have conducted research on the system's performance.

A strongly performing brand is your best calling card, regardless of whether franchisors pursue a proactive international strategy or take an opportunistic approach. Strong systems will attract stronger candidates. Franchisors able and willing to consider international expansion could address this with the right communication approach. For example, does their online presence convey a willingness to speak with interested international candidates? Are the domestic franchisees of a brand in a position to discern whether that foreign customer could be checking out the system?

The second "must" for brands seeking to grow internationally and to meet their expansion goals is to conduct their own market research. Do not enter a new market assuming you can attract customers for your product or service the same way you do it in your domestic market. The same applies to marketing the franchise opportunity to local investors. However, pair a strong system supported by thorough market research with a good local consultant/broker and you are ready to go. The research underlines how much of a difference this makes.

Franchise brokers and consultants -- some franchisors can't handle the truth

The message to consultants from the research is simply this: you're the experts, do your consulting thing. That may mean you need to push back. The challenge is that many of your clients have built their system over years, sometimes decades. Who else could know any better what works for them? However, you know what will work better for them in your own backyard. Consultants who take their job seriously want to help and will tell their clients the truth. You cannot accommodate everything because, well, you can't.

Some examples of unrealistic expectations from our own experience as consultants/brokers:

• "I want one master for all of Europe."
• "I want to sell the master license for Germany for $2 million and the master needs to commit to develop 250 franchises over 10 years."
• "I want a master for all of the United States and the license fee should be around $7 million to $8 million."
• "We will go with a direct franchise strategy for the United States. Our franchise development department will be staffed with our own people from [Asian country]."

To which one of my partners had the only realistic comeback: "Good luck."

Don't forget the other takeaway from the research: Even if your franchisor clients do not like your message -- they pay for your expertise. If they cannot handle the truth, they might not be ready. If you are worth your fees, they might accept that. Even if they then choose another consultant, brokers should not forget: as consultants they have the same opportunity as investors. You don't have to wait for franchise systems to find you. You can find them. Just as 50% of the brands in the sample were approached by local investors to take the concept to their country, so can you. Find those well-performing brands and approach them about your services and the market opportunities. In many cases, you will be able to assess this opportunity simply based on your own expertise without having to conduct market research. These are some of the low-hanging fruit for consultants.

The day of the franchisor's one-sided bargaining power is over - the time of the franchisee has come

Soft skills are king! The investor's financial ability is a simple "yay or nay." Otherwise, no need to talk. Therefore, franchisors actually allocate more value to the candidate's fit to their system's culture as well as their personal fit. That means prospects need to fulfill more criteria, with the result that they are harder to find in a tight selection process. As a result, once the franchise has identified a suitable investor, that candidate is in a strong position. They are a rare commodity and the laws of supply and demand apply.

This should not come as a surprise to franchisors. After all, they probably have the exact same experience in their domestic market. Franchise prospects have become more sophisticated. Why should it be different in other markets? And yet, franchisors stick to the notion that they "award" a franchise. Perhaps they need to rethink this. They are looking for an investment partner in the form of a capable franchisee. For a market entry, the value of the right partnership is even greater, given the possible negative impact on the brand and the franchisor's bottom line if that partnership turns sour or the partner turns out to be the wrong one, regardless the reason.

For potential investors that means they can go brand hunting on their own and proactively search for brands with a good performance history in their domestic market. The United States is probably the easiest market for such investors to evaluate. Because of the local disclosure laws, it is one of the most transparent markets in the world. International investors are spoiled for choice. This does not mean franchisors will compromise on the core principles of their system. In franchising, it is the franchisor that will call the shots. However, the investor is the one who will bring immense expertise about the local market. The partnership needs to strike the right balance.

All three stakeholders are in a good position to reap the benefits of the franchise business model. A strong concept is an attractive opportunity for an investor, and the ROI potential can be enormous for both franchisors and franchisees. If they learn how to dance with each other, adding a consultant/broker can be beneficial for both. The franchisor will be better prepared. And the investor and the franchisor will have a potential mediator who is often happy to be a cheerleader as well.

 Peter Schwarzer is managing director of LeOS Franchise Consulting, a Munich-based consulting company with partners throughout Europe, the U.S., and Australia. He also is a partner of Franchise Pool International, a global network of franchise consultants and brokers.