Challenges of international franchising

Iain Taylor examines whether companies that have franchised successfully in the UK need to take a new approach when doing the same in the international market.

Launching a franchise abroad brings fresh challenges. While many of the elements of successfully franchising abroad are common to domestic franchising, there are some challenges peculiar to international franchising.

Finding the right partner

Established franchises will have a clear idea of the type of franchise owner they want for their domestic networks. However, the profile for a suitable international franchise partner may be quite different. In many instances, you may not be able to provide the same level of support as you can for your UK-based franchise owners and you may expect a much larger initial investment. In addition, if you are expecting the franchise owner to set up an extensive network itself, the experience and financial standing you require may well limit the number of suitable franchise partners.

The profile of the right partner will depend on your own needs and the nature of your business, and it is helpful to have a clear idea of what sort of organisations will fit the profile.

Using the right structure

The issue of the right partner is closely related to the issue of the right structure to use, and again there are differences from franchising in the UK. While most domestic franchises adopt a standard format, when it comes to franchising internationally, a variety of structures is used.

  • Unit Franchising – The franchisor has a direct relationship with a number of individual franchise owners.
  • Development Franchising – The franchisor gives a partner (the developer) the right to establish and operate a number of franchise units.
  • Master Franchising – The franchisor grants a partner (the Master Franchise Owner) the right to grant sub-franchises in the territory.
  • Joint Venture – A franchisor may also want to take a shareholding in the company running the franchise in the territory. This could mean taking an equity stake in the partner itself or in a new jointly owned company; this can also mean the franchisor has the option to buy out or be bought out at a given price.

At an early stage, you should consult knowledgeable franchise consultants, who will work with you, and suitably experienced franchise lawyers and other key professionals, who can adapt or combine elements of these structures to find the best strategy for you.

Exercising the right level of control

The success of domestic franchising often depends on maintaining the uniformity of the system and on close monitoring of franchise owners. For international franchising, many of the levers of control are the same, such as trademark protection, financial reporting and audit rights. However, there are some additional considerations.

While keeping control of your brand, it is nevertheless in your interest to be sensitive to the new cultural and legal environment and to show a degree of flexibility, where necessary.

There may also be local regulations that may have a significant bearing on the proposed franchise. For instance, many countries require pre-contractual disclosure and/or registration of any Franchise Agreement.

In addition, there is the fact of geographical distance and the impracticality of having local representatives to monitor the franchise owner. In some situations, franchisors will require representation on the franchise owners’ board or seek a shareholding in the franchise owner.

Setting the right price

Most successful domestic franchises rely on profit margins that are enough for both the franchisor and the franchise owner. However, depending on how the arrangement is structured, international franchising can involve different financial modelling. For instance, if you are considering Master Franchising, you should be confident that projected profits are going to sustain income on three levels: yourself, the Master Franchise Owner and for sub-franchise owners.

It is interesting to note that some of the bigger companies that franchise internationally do not charge any initial fee at all and generate revenue solely on the basis of the ongoing operation of the franchise owner’s business.