Common International Franchising Mistakes--and How to Avoid Them
When the topic of international franchising comes up with clients, many are quick to dismiss the opportunities. Comments such as, "I haven't sold out the U.S. yet," are common. Some franchisors take a more inquisitive approach and ask, "What's it going to cost me?" Others want to know how quickly they can open because they want the initial fee or want to go there on vacation.
Whether the client's attitude is skeptical or overeager toward international franchising, I typically ask: "Is this a good market for your products or services?" Most answer: "I don't know."
Such lack of clarity can be a serious problem for franchisors embarking on an international franchising strategy-- and resulting mistakes can put ventures at risk. This article covers two common mistakes made by international franchisors and provides suggestions for avoiding or mitigating them.
Mistake #1: Lack of strategy for international growth
Franchisors often begin international development by responding to random inquiries from a prospective master franchisee claiming to have the experience and resources to develop the concept. The reasons franchisors respond to these inquiries vary--expense-paid trips, competitor presence in the region, or upfront fees--but often the reasons do not align with a focused global development strategy.
While it may be tempting to go after large, well-known markets, this may not be the best strategy. Hopping all over the world to visit and provide support is expensive and time-consuming. India and China may seem like close markets, but Beijing is 2,958 miles from Mumbai-- farther than from Los Angeles to New York.
A strategy for international development should be based on an assessment of a franchisor's resources and a careful examination of the best markets for its products or services. As Ned Lyerly discusses in Focusing Your Global Development (Franchising World, March 2009), a focused international development strategy involves evaluation of organizational readiness, evaluation of resources, a financial plan, and research. This is a long-range strategy for expanding to the right countries at the right time and devoting the proper resources based on the following principles:
- Organizational readiness. Franchisors should have a profitable business model, core competencies to provide all levels of support, and the ability to replicate these attributes in other countries.
- Evaluation of resources. Franchisors should have the internal resources needed to support international expansion, including an appropriately trained and experienced staff.
- Financial model. Franchisors should have the funds available to support international expansion, and have determined the impact of international expansion on their financial position.
- Research. Franchisors should investigate the potential markets to determine if they are appropriate for their goods or services, and have determined that the legal environment is appropriate for their system. This includes researching local laws or cultural traditions that may require significant system adaptation.
Mistake #2: Insufficient resources and commitment to support international operations
International franchising is not simply translating the operations manual into another language and training a franchisee to operate a unit just like franchisees do in the U.S. Developing and supporting international franchises requires commitment from all members of executive management, strong understanding of what you do well, and a willingness to work cooperatively with your master franchisee to adapt your system to fit into the culture and market in the country.
Considerations should include the following:
- Management commitment. Management needs to convey that providing support to the international franchisees is just as important as supporting domestic franchisees.
- Staffing assessment. Does the existing staff have the skills and time necessary? Are any people with international experience available within the budget?
- Intranet for information sharing. A very robust and complete intranet is one of the best tools for providing international support. This allows the international franchisees to access information they need 24/7.
- Cost of support. You should also expect to spend most, if not all, of the initial fee for support. It may take the international franchisee several years to establish a number of units paying royalties sufficient to pay your costs for ongoing support.
International franchising can be one of the most exciting ways to expand your business and energize your concept. It can be expensive, time-consuming, and sometimes frustrating, but it also can be very rewarding. If international expansion is right for you, enjoy the journey and try to avoid common mistakes that can derail your strategy.
Jeff Brimer is special counsel with Faegre & Benson LLP. He can be contacted at jbrimer@ faegre.com or 303-607-3657.