International Franchising: The Different Models

28/03/2019 13:00 | Start a business

International franchising information

Originally posted on 25/11/2017. Updated on 28/03/2019.

International franchising is when an existing domestic franchise chooses to expand into foreign countries and markets. It can be a complex process and there is a myriad of factors to consider. In particular, the pros and cons should be weighed up before any decisions can be made. Having said this, international franchising is a great way for motivated franchisors to expand their business ventures into new territories. When compared to other methods of overseas growth, extending a brand globally through franchising is relatively low-risk and requires minimal investment.

What models can be adopted to enter new markets abroad?

Master Franchise

The simplest way to grow your franchise overseas is by master franchising. This is where you award master franchise rights to your chosen master franchisee in the target country, in return for a considerable investment. The master franchisee is then given exclusive rights to your brand and business model and grows the franchise by developing a sub-franchised network. Essentially, the master franchisee becomes the franchisor in the target country. Master franchises are often native of the target country and have a greater understanding of the political and bureaucratic problems in the country.

Regional Franchise

In some larger countries, it may be impossible for a master franchisee to manage exclusive territory rights for the whole country. Therefore, in such cases, adopting a regional franchise model would be more appropriate. Effectively, the target country is divided into regions, which can then be regarded as mini master franchises.

Area Development

Development agreements are used when sub-franchising is not permitted, either in the target country or in a specific industry. As a single franchisee must own and operate all new outlets, a whole country may not be manageable, so the territory is divided, much like in regional franchising.

Direct Franchising

If you wish to retain more control of your franchise, and you have ample time and resources to provide the necessary support, you go for the direct franchise route in the target country. In this case, youll take direct responsibility for the training and recruitment for the franchise. This is usually managed remotely and so direct franchising tends to be more effective in countries that use the same language and have similar culture and legal systems.

How do you know which model to choose?

Lets consider the two most popular models for international franchising: master and regional.

Despite master franchising being deemed as the simplest and quickest way to expand abroad, it isnt always the best option. The obvious benefit is that the majority of the capital needed for the expansion will be invested by the master franchisee. But this can also have knock-on effects on the profitability of the model in the future. The franchise fee and royalty payments that would have belonged solely to the franchisor must now be shared with the master franchisee, resulting in lower returns for the franchisor. And, if the return on its investment is inadequate, the business may not have the financial ability to succeed.

Another crucial factor for franchisors to consider before embarking on a master franchise agreement is the inevitable loss of control that comes once the contract is signed. The master franchisee effectively becomes the franchisor in their area or country and enforces system standards for the franchise. This can be frustrating for the franchisor, as everything they have done and are doing for their domestic franchise business is, to an extent, now out of their control.

Therefore, for these reasons, regional or area development models may be more suited to international expansion. At a basic level, the finances seem to make more sense. The franchise fees and royalties are paid to the franchisor and a greater proportion is retained as theres no master franchisee to share the profit with. Of course, the regional or area franchisee will get a percentage, but as their responsibilities and duties are less than those of a master, the share is likely to be less too.

Here, the most significant benefit for franchisors is that there is no real loss of control. As a regional or area development agreement is entered directly with the franchisor, they still have total power over how the business system is implemented in the particular territory. In these models, the franchisor makes all operational decisions about the franchise system.

Regardless of which model is chosen, its in the best interest of the new franchisee - master or not - to provide their own local perspective and expertise to the franchisor on what will work and what wont in that territory. If the system works and the franchise is a success then the new franchisee will be able to recruit additional franchisees in that area, which is the ultimate aim for all involved.

So, there are pros and cons to all the international franchise models and a decision should only be made following thorough research and by consulting international franchising experts. Foreign expansion is not easy and what works in the UK may not translate abroad.

What else do you need to know?

There can be many challenges associated with international expansion including cultural differences, intellectual property issues and legal considerations. To understand what steps should be taken and what issues should be considered, the International Franchise Association is a great place to start.

Take a look below at some issues that may arise with international franchising:

Protecting Your Intellectual Property

As a franchisor, your biggest asset is your brand, trade name and trademarks. When youre considering franchising, you should ask yourself whether any changes will need to be made to your brand, or if there are any concerns with using your trading name overseas.

The intellectual property laws differ from country to country, and so both a UK brand protection specialist, as well as a lawyer in the target country, should be consulted before getting started with the expansion. Seeking professional advice will help you understand how to protect your brand, as well as the necessary process to follow and the costs involved.

International Franchise Laws

Many countries have very specific franchise laws, but there is also an abundance of countries that dont, including the UK. Either way its essential to understand what the local laws that regulate franchised businesses are. Legal advice from international franchise lawyers is recommended to help you work through the complexity of legal issues such as:

Disclosure Laws

Although there are no disclosure obligations in place for franchisors entering into a UK franchise agreement, many countries have robust disclosure laws in place which must be adhered to. The Franchise Disclosure Document must be made available to the franchisee with all required information about the business before the contract is signed.

Competition Laws

Most international franchise agreements are subject to competition law and include the key components relating to price fixing and exclusivity. You should familiarise yourself with these and consult with a legal adviser specialising in international franchising

Where can I look for franchising help?

On top of the previously mentioned International Franchise Association, there are also countless resources that can guide you in international franchising.

  • Franchising World: Provides digital versions of Franchising World issues and archives of past articles.
  • DLA Pipers FranCast Newsletter: Considered the number one global law firm in the franchise law area by Whos Whos Legal, it provides all the franchising information to set you up for success.
  • Grow Smart, Risk Less, by Shelly Sun: This book provides a great guide to franchising your business.
     
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