Everything You Must Know Before Starting an International Franchise
If you’ve established a successful network of business locations in your home country, you might be interested in taking it across the world. But how do you set up your business in foreign countries and what do you need to bear in mind when running an international franchise? Let’s find out.
Using the franchise model to expand into international territories is often a great way to grow a customer base and increase sales, but it can be a complex process. First, you’ll need to decide which business model you’ll use to take your franchise across the world.
Which models can you use to enter international markets?
- Master franchise – The simplest way to grow your business internationally is with the master franchise set-up. You award master franchise rights to your chosen entrepreneur in the target country, and they make a considerable investment. The master franchisee then starts and runs several new businesses under your brand and business model. Essentially, the master franchisee becomes the franchisor in that country.
- Regional franchise – Some countries are too big for a master franchisee to manage all its units. In these cases, you could adopt a regional franchise model, which divides the country into regions. These sub-sections are then regarded as ‘mini master franchises’, and the regional franchisee sells individual franchise units to other investors.
- Area development – Sometimes, regional franchising is not allowed in a country or industry. If the territory is too large to be managed by one franchisee, it’s divided. But, where a regional franchisee would sell franchise units to individual franchisees, an area development agreement requires a single franchisee to run all the units in their location.
- Direct franchising – If you want to retain control of your franchise, you could opt to take the direct franchise route. You would run all the units in the target country and take full responsibility for the training and recruitment of employees. Usually, franchisors manage their franchise locations remotely, so direct franchising works best in countries with the same language and similar culture and legal systems.
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Choosing your franchise model
Master and regional franchise systems are the most popular when it comes to expanding overseas in the franchise world. But, as regional and area development franchises are fairly similar, let’s consider the pros and cons of these three options.
Many people think of master franchising as the simplest and quickest way to expand abroad, but it isn’t always the best option. The main advantage of this model is the significant chunk of capital invested by the master franchisee. After the initial set-up phase, however, they keep a portion of the royalties and the franchisor must provide them with ongoing support. This can put a strain on finances and, ultimately, if the return on the master franchisee’s investment is inadequate, the business may suffer.
What’s more, the franchisor inevitably loses some control over the business. The master franchisee effectively becomes the franchisor in their area or country, which can be frustrating for the franchisor, who has built the business from the ground up.
Regional and area development franchises
For the reasons described above, franchisors may prefer to use a different model to expand their business overseas. The regional and area franchise structures have a number of benefits for franchisors. For instance, because regional and area franchisees have fewer responsibilities than a master franchisee, they keep less money and, as a result, the franchisor gets more in royalties.
But the most significant benefit for franchisors is that there is no real loss of control. Regional and area development franchisees work with smaller territories than a master franchisee. So, the franchisor still has power over how the business system is implemented in a particular territory and makes all the operational decisions.
Making your decision
As you can see, there are pros and cons to the international franchise models, so you should do thorough research and consult franchising experts before you come to your decision.
Navigating legal issues
Many countries have specific franchise laws, but there is an abundance of countries that don’t, such as the UK. It’s your responsibility to fully understand and adhere to the laws that regulate franchises in the territory you’re about to enter. We recommend you take legal advice from international franchise lawyers to help you make sure you’re not making any mistakes.
Here are just a few of the factors you should keep in mind:
- Intellectual property – As a franchisor, your biggest assets are your brand, trade name and trademarks. When you’re taking your business to foreign countries, you should ask yourself whether you’ll need to make any changes to your brand. The intellectual property laws differ from country to country, so it’s worth consulting a UK brand protection specialist and a lawyer in the target country before getting started. They will be able to tell you how to protect your brand and give you an indication of the costs involved.
- Disclosure laws – There are no disclosure rules in place for franchise agreements in the UK, but many countries have robust ones, which must be adhered to. In most cases, you will need to give the franchisee access to the Franchise Disclosure Document before the contract is signed.
- Competition laws – Most international franchise agreements are subject to competition law, regarding key factors relating to price fixing and exclusivity. You should familiarise yourself with these and consult a legal adviser specialising in international franchises.
Expanding your franchise internationally
Here’s a rough outline of the key steps you need to take if you want to build an international franchise.
1. Make a list of the countries you’d like to expand into. Then, go through them and work out which ones are most suitable for your business. Which will be the most profitable? During this step, you may want to consider potential complications when it comes to working with different time zones, languages, laws and customs. Don’t forget to do some market research and make sure your chosen territory has sufficient demand but not too much competition.
Your first step is to target the right countries and figure out which ones make sense. – Rick Bisio, franchise consultant and author of The Educated Franchisee
2. Once you’ve decided which countries or territories you’d like to target, you may find you need to adapt your business model for it to work well there. Think about whether your business would work better if you made some changes to the products or services you sell, the strategies you employ or how you advertise. When Naked Pizza expanded in Dubai, for example, it used the brand name NKD Pizza to align with the city’s cultural values.
3. Next, you’ll need to select franchisees. Of course, you’ll need to make sure your chosen candidates have good understanding of the local market and consumer spending habits. You’ll rely on them to make the best decisions for the business in the future. The screening process is particularly important for master franchisees, as they’ll have more control once they’ve signed the franchise agreement.
Steve Abrams highlights the importance of finding knowledgeable franchisees:
Culturally, geographically and even from a capital perspective, it’s almost impossible to go out into the world and understand the market properly. – Steve Abrams, Owner and CEO of Magnolia Bakery, New York City
4. Another key step is creating all the necessary documents to guide franchisees as they set up and run their new businesses. When you’re establishing an international franchise, it’s particularly important to develop clear documentation so your franchisees in foreign territories have enough information to lead the business to profitability. You’ll probably need to develop:
- The franchise agreement
- Licences that can be adapted to fit the target country’s regulations
- An operations manual, with any changes you’ve made for the target country
- Financial models with initial start-up costs and ongoing fee structures
- Information about training, support structures and development programmes for franchisees
- A development schedule for individual franchisees
- Marketing and branding materials
- Employee recruitment materials
>> Read more:
- You're Never Too Young to Become a Franchisee
- Becoming a Franchisee: 8 Things You Must Know Before Getting Started
- 3 key traits of a successful franchisee
- Five Great Reasons to Become a Franchisee
- Are you ready to become a franchisee? Check out our checklist
- Top 10 things you should know before you become a franchisee
If you need more information, the International Franchise Association is a great place to start. There are also a number of other resources that are helpful for those looking to build an international franchise. Try:
- Franchising World – You can find an online archive with digital versions of this magazine’s previous issues.
- DLA Piper’s FranCast newsletter – Who’s Who Legal named DLA Piper the international number one law firm in franchise law. Its newsletter provides all the franchising information you need to get started.
- Grow Smart, Risk Less by Shelly Sun – This book is a great guide to franchising your business.
To read more about becoming a franchisee, visit our franchise articles resource page. You’ll find guides on all aspects of the franchising world to help you launch your own successful international franchise.
Alice Tuffery, Point Franchise ©
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