Understanding The Road To International Expansion

22/04/2018 17:00 | Start a business

Franchise expansion internationally

For those franchises that have experienced some success on the domestic front, international expansion is often the next step in the growth process. However, transplanting a franchise to another country is a complex task that requires a great deal of forethought, planning, industry expertise, and experience if its going to succeed. Its also necessary to have a firm understanding of what the road to international expansion consists of and how it can be achieved in several different ways. The International Franchise Association is often a good source for this information. Here, we take a look at the numerous different routes open to expanding franchises and explore their respective strengths and weaknesses.

Diversity of option

At the moment, international expansion is a popular choice for both franchises based overseas and franchises headquartered in the UK. Recent research has shown that 20% of UK franchises are master franchisees, while 38% of franchises founded in the UK have expanded to other countries. This expansion takes various forms and can be achieved in numerous different ways. Businesses looking to become global franchises need to carefully consider what method of expansion theyre going to employ to facilitate growth. There are four primary models by which franchises develop an international presence. They are master franchising, area development arrangements, direct franchising, and joint venture arrangements.

Master Franchising

In the context of international franchise opportunities, master franchising is perhaps the simplest of all franchise arrangements. Mainly, it involves the franchisor granting an individual or organisation in the target country exclusive rights to develop the franchise in that territory. Typically, this will be in return for a significant investment in the original franchise. Such an arrangement allows the new master franchisee to utilise the franchises brand, its systems and technology, methods of trade, and marketing material. Master franchisees can then operate the new franchise in one of two ways;

  • They can run the master franchise directly, opening all new franchise outlets by themselves and developing and managing all the units in that country.
  • They can decide to sub-franchise. This involves breaking the country up into smaller regions and selling franchisee rights to a suitable party.

Master franchising has several advantages. These include;

  • Territory expertise Business and consumer cultures vary from country to country, and any franchise that's going to succeed requires a thorough understanding of the market into which they're expanding. Master franchising allows franchises to sell the rights to parties who have extensive knowledge of the target market.
  • Simplification Signing over the rights to a master franchise simplifies the expansion process. It eliminates the complexities of establishing yourself in a foreign market and reduces the need for consulates tax arrangements.
  • Outsource critical responsibilities Master franchising allows franchises to grow without having to perform many of the most labour, time and resource intensive tasks.

Area Development Agreements

Area development agreements operate similarly to master franchising, with some crucial differences. First and foremost, it grants franchising rights to specific areas or regions, rather than the entire territory. This is a particularly popular model in contexts where sub-franchising is not permitted and, consequently, master franchising isnt a practical means of expansion. In such situations, awarding a master franchise would target too big a market as the master franchise would have to open all new franchise units themselves and limit the scope for growth.

This system boasts several benefits. These include;

  • Eliminating sub-franchising In some countries, sub-franchising is not permitted. Area development agreements are a good way of expanding within a large territory without the need for sub-franchises. Similarly, some franchises may not want to allow sub-franchising for their own business purposes.
  • More control than master franchising One of the fundamental drawbacks of master franchising is the loss of control experienced by the original franchise. Area development agreements limit this loss of control by giving them more control over who owns the franchise rights in each specific area.

Direct Franchising

In cases where a franchise wants to expand internationally but is wary of selling the rights to a territory to another party, they may opt for direct franchising. This is where franchises grow into a new area without selling the franchise rights to an external actor and instead manage the expansion themselves. While there are numerous ways of doing this, some of the most popular methods include running the new territory from the franchises central headquarters, establishing a subsidiary office in the new area, or hiring an agent to run the territory for them. While this can lead to complex structural and financial arrangements, there are several advantages to operating in this way;

  • Maintain control With a direct franchising system, the franchisor retains complete control over the new territory. They are responsible for day-to-day operations and can grow the business in any way they deem fit.
  • Increased revenue By cutting out the middleman, direct franchising can increase revenue for the franchisor. However, this is dependent on the franchise meeting growth expectations in the new territory.
  • Testing new markets The difficulties inherent in expanding into a market with cultural, linguistic, and business differences often means direct franchising is considered a less favourable model for international growth. However, it can be used to test the possibilities of a market, before switching to a different franchising system.

Joint Venture Agreements

Though its not strictly a franchising system, joint venture agreements are an interesting alternative to those models listed above and can be adapted into a franchise-joint venture hybrid. A joint venture agreement is entered into by two or more entities who want to collaborate on a specific project. It can manifest itself through the creation of an entirely new business entity in which management responsibilities, profit, and loss are shared by the parties or the parties can maintain their independence and operate together under the terms of the agreement. This makes it a flexible and versatile model that requires a great deal of research to pursue.

Conclusion

If a franchise is to expand into international markets successfully, it must make an informed decision as to which model best suits the business. Each system has its advantages and disadvantages, and the most suitable arrangement will be dictated by a wide range of factors. These can include the unique characteristics of the target market, the size of the expanding franchise, the amount of control the franchisor wants to retain, and existing franchising legislation. International expansion is a powerful means of fuelling growth, but it must be carefully planned and executed if its to succeed.

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