What are the fundamental steps a franchisor needs to consider before embracing international franchising? Alan Branch, president of global development at OptiVance 360 takes us through the issues.
Most successful national franchisors aim to expand overseas; more than 30 percent of franchise systems in Australia have already done so. However continuing a national strategy will not always be successful at an international level. When faced with different customer expectations, legal systems, language and rights to use real estate it quickly becomes apparent that careful planning and implementation is needed.
The core strength of a franchise system lies with its reputation, efficient processes and marketplace leadership. Entering a new country means that each aspect of your franchise needs to be re-evaluated to see whether it is still competitive and in demand in the target country.
The franchise trademark and domain names need to be available, a process which can take between six months and two years and sometimes longer. Entering a new country without a trademark may work for companies with a huge international reputation but for all other businesses advance registration is the best option. But while waiting for trademark registration a lot of other advance planning can be completed.
You will need to recruit a dedicated team that will not be distracted by local franchisees or procure external consultants skilled in international development. The team’s first task is to select and prioritise desired target countries.
This is not a simple process as market analysis, identifying potential competitors and legal obstacles are difficult within your own country and exponentially more complex in reviewing a country where your management team may have little experience. Consequently do not start this expensive and time-consuming journey without fully understanding what you are getting into.
Make sure that your existing business can support the financial and management drain that comes with international development and that your existing structures are both risk and tax effective just in case the overseas expansion does not work out as planned.
Starting international expansion before you’re ready just because you receive an enquiry from an exotic country stating that they love your franchise is not a sound business reason to take action. Many enquiries are from profit driven intermediaries, competitors looking for your know-how or wealthy individuals with little or no franchise experience. On most occasions a great deal of time and effort is spent with the negotiations collapsing.
HOW TO CHOOSE YOUR NEXT COUNTRY FOR EXPANSION
Your business will be more successful in some countries rather than others. You need to fully understand what makes your business successful and then look for similarities that will enhance that success in the target country. Having done so, the hardest thing is to stick to that plan and not be distracted by typical ‘common traps’ enquiries.
PLANNING AND BUDGETING
Having chosen the right market and made some overseas enquiries a realistic expenses and income budget needs to be set to ensure that your expansion plans do not fall over before they even start.
Even though Export Market Development Grants (EMDG) are available, overseas expansion is an expensive exercise. Start-up costs to evaluate the target companies, undertake several discovery visits, consider whether a joint-venture or master franchisee or regional developer model is required and to begin the recruitment process will usually exceed $100,000. Many of these expenses will need to be incurred whether the international expansion is successful or not.
MAKE YOUR INTERNATIONAL PROPOSAL ATTRACTIVE
There are thousands of businesses looking to move internationally. What will make your offer stand out? Ideally the prospective investor that you are looking for has already been identified and you can tailor make your offer specifically to match up with the business goals of the target investor.
If you need to resort to general marketing your deal terms need to be competitive for the market segment that you are entering.
Is your offer:
- meeting a future customer demand
- led by new technology
- a better return on investment
- able to increase economies of scale for a multi brand operator
- irresistible due to great past success
- significantly better than existing competitors
- showing a track record for ongoing innovation?
DOING THE DEAL
Each time that you pass out information about your international business plans, you risk educating your best future competitor. A detailed confidentiality agreement is a starting point but most importantly you need common sense in deciding when to start talking frankly with your potential investor. Often too much information is given out before a face-to-face meeting or the integrity of the investor is tested.
There are some steps you can take to gain confidence that the investor is someone that you can have a long-term business relationship with; ask them to complete a detailed business, psychological and financial questionnaire and pay a reasonable deposit; undertake your own discovery visit. The next stage is entering into a heads of agreement which starts to solidify the business expectations of both parties.
Be sure to include critical dates when certain actions within the heads of agreement need to be completed and an adequate non-refundable deposit so that the investor will proceed as planned.
At this stage, re-evaluate the budgets to take into account shifts in the deal terms, timing of royalties, withholding tax and additional management time to oversee these overseas activities.
NOW THE DEAL IS DONE THE HARD WORK REALLY STARTS
Your local expansion has taken years to identify the correct suppliers, import obligations, staff, social media, understand your customers and how to market to them. In the target country, due to the huge amount of time and effort that has already been taken, these lengthy time frames are unacceptable.
Intense work needs to be undertaken in a short time frame to develop all of the necessary networks and protect your brand both to support the new country franchise operations and to keep training and checking on the performance and integrity of your new overseas operator.
You should budget for weekly conference calls and at least quarterly trips to inspect and review the overseas activity.
During this time a detailed systems review should be undertaken to identify any potential fraud, cultural mismatch, changes in menu or services and an assessment as to whether the minimum performance criteria remain realistic. It is always best to tackle these difficult issues early.
Whether the international expansion meets expectations or not, it will open up new opportunities and enquiries. A successful international expansion will be noticed and will be the greatest advertisement for your franchise brand as it looks for a new target country.
It is worthwhile maintaining detailed records of that journey which can be used for the next expansion and will reduce future costs and speed up the process.
Alan Branch has received multiple awards from the Franchise Council of Australia and a recognised international consultant and speaker. He is president of global development, OptiVance 360; www.optivance360.com
This article is for general information and the reader should seek specific expert advice before taking any action.