Taking Your Brand Abroad?, Part 2
Kay Ainsley, managing director of MSA Worldwide, is recognized as one of the leading authorities on international franchising because of her experience as a franchisor, as a consultant, and from her international leadership within the IFA.
“I have seen too many franchisors expand internationally too early or before they were prepared and have watched them fail unnecessarily,” she says. “You don’t begin to offer franchises overseas simply because you receive a call from someone in Dubai or some broker has convinced you that you can make some quick cash. You franchise internationally only when you are ready and only after you have developed a well-thought-through and validated plan that you can adapt based on each country’s unique requirements.”
When you begin to give serious thought to international franchising, here are some of the points you should consider, says Ainsley. (Part 1 covered products and services, local economic issues, supply chain and logistics, and getting internal buy-in for an international growth strategy.)
Deal structure. Have you decided on the deal structure that best suits expansion of your business? There are numerous models of international expansion, including, for example, master franchising, direct franchising, multi-unit development franchising, and joint ventures. Each has pros and cons related primarily to the amount of control the franchisor has over enforcement of system standards, and the ability to terminate the franchised business and continue to expand with other franchisees, just to name two. For example, if you plan to use direct franchising, you can retain more control over expansion and you won’t have to share royalties with an intermediary. However, with more control in direct franchising, you may experience slower growth rates, have greater servicing costs, and collect fewer short-term fees.
Translation issues. What do you know about the local language and dialects typical of the local market? What documents will you be required to translate, and what control do you want to reserve over the translation process? For example, is there a reason to have the legal documents translated because your prospective franchisee doesn’t understand English, or government filings require a translation? Or is there a reason to resist translation of the legal documents because permitting a translation will expose you to more liability under the local laws? Will you translate manuals, marketing materials, and other operational documents the franchisee and its staff need to operate? Under those circumstances, will you shift the cost of translation to the franchisee? What are estimated costs of translation in your deal, and how do you build that cost into your deal budget or fees you are charging the franchisee? If your franchisee is authorized to translate some of your documents, like your operations manual, have those documents independently translated back into English to better ensure that the documents your franchisees will be using are accurate and align with your franchise system.
Training and support. How will you revise your training program to fit into the local market’s culture and traditions? Will you customize your training program for the local market? Training will be your first substantive operational contact with your franchisees. Training is critical because your franchisees will need to train their staff. Do your best to avoid offending your audience, and strive to make a good impression. For example, if you conduct physical training programs in a local market for a fitness franchise with a majority Muslim population, you may consider having separate training sessions for men and women led by persons of the same gender. It could be offensive for persons of opposite gender to have physical contact with each other in the local market.
Local laws. Will local laws affect your expansion efforts, brand identity, costs, or revenue streams? For example, how will local taxes affect the fees you collect? Can you protect your intellectual property rights in the local market? What exchange rates will you designate, and what restrictions exist that may affect how you receive your fees and other income in the U.S.? You will need the assistance of an experienced attorney and tax advisor to evaluate the impact of the local laws on your deal.
Legal and other transactional costs. Have you accounted for legal and other transaction costs? International expansion requires extensive due diligence, complex legal documents, and regulatory compliance. For example, international franchise deals are sophisticated, requiring numerous rounds of letters of intent and proposals. Costs can add up between drafting and negotiating letters of intent and preparing the final agreements. International deals can take weeks, months, and sometimes years to negotiate. So be sure you understand the costs, which can vary depending on the requirements of the local market. For example, entering into a market in which English is practically the first language, U.S. currency is easily available, and where there are no country-specific disclosure laws, government registration requirements, or other business restrictions will be much less expensive than entering into markets with these significant barriers to entry.
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