So you establish a franchise in the United States, you have a few locations and suddenly an investor from Saudi Arabia comes to you with a cash offer to open a location overseas.
Enticing deal aside, this does not mean you’re ready for international expansion.
We caught up with Francorp Chairman Don Boroian to discuss the key considerations for franchisors before pulling the international trigger. Having sold franchise locations for their own brand in 27 other countries around the world, as well as country licenses for dozens of clients over the last 40 years, Boroian knows a thing or two about selling a brand abroad.
“The number one thing franchisors need to be conscious of is their core business plan. What are the original and founding goals for the company,” said Boroian. “There should be absolutely no consideration of a foreign market until the brand is well established domestically, and this is where many brands make their first big mistake when it comes to international expansion. In years past, too many U.S. companies have engaged in a “Take The Money And Run” strategy without realizing the necessity of providing essential training and support.”
Boroian went on to explain that a lot of international expansion in the market today tends to be responsive rather than initiated. It can be tempting when an investor approaches you with cash in-hand, but often times selling a single location to an investor overseas will fail and could cost you more than the initial investment.
“Let’s say you’re a 9-hour flight away,” explained Boroian. “It will end up costing you more money to support this foreign investor than you will make on the deal.”
Boroian said there are 12 elements franchisors should analyze to determine whether or not they are ready to franchise internationally:
1. Proven Prototype?
2. Multiple Locations Established Domestically?
3. Electronic Monitoring Capabilities?
4. Universal Appeal?
5. Transferability and Adaptability of Concept?
6. Cultural Adaptability?
7. Training Capability?
8. Startup Assistance?
9. Support Capability?
10. Knowledge of Foreign Business Procedures?
11. Knowledge of Foreign Legal, Tax and Trademarks?
12. Calculated and Defined Goals for international Expansion?
Once a franchisor is ready, Boroian says the structure of international expansion is the next most important key to success.
“The majority of our clients who we’ve guided through international expansion have done so via master licensing agreements per our recommendation,” he said.
With a master licensing agreement, rather than selling locations, a franchisor is selling territory to a partner they’ve vetted and determined has the knowledge and resources within their own country to see the expansion through.
“There are things that are crucial to success overseas, like being able to source supply and equipment within the country where you’re expanding vs. importing everything,” said Boroian. “If you have a Master with extensive knowledge of the market already, this saves the franchisor from having to start over from square one in an unfamiliar market.”
Boroian does caution however that franchisors should be very careful about the size of the territories they’re selling. Take China for example, one of the most popular foreign markets today.
“China has 11 cities with more than 10 million people, each with unique market needs,” he said. “Selling the rights to the entire country would be crazy; because it’s very doubtful a single investor would have the required knowledge of all of the country’s major markets.”
He went on to say that ensuring master license agreements include strict performance and expansion requirements the Master will be held to is imperative.
The good news for franchisors who feel they’re ready to take the international plunge? Boroian says in many respects, international franchising is getting easier. Generally franchising does not compete with an individual country's businesses, but does provide a lot of opportunities for economic growth and development. Many countries are encouraging the idea.
“In Ireland for example, the government is giving people money to bring in foreign franchise concepts,” said Boroian. “Canada is another great example with a special loan program specifically for those bringing in foreign concepts.”
However, many countries now have put into place protective and punitive tax barriers. In China for example, you cannot sell a franchise unless you have company operation(s) first. What this does is either require you to open a company-owned operation in China or require your Master’s to come to the US for all of their training and then take the knowledge back to implement, making the ‘boots on the ground’ level of support required by the franchisor less.
Ultimately, franchising internationally can be a lucrative, game changing opportunity for franchisors if approached carefully and correctly. Boroian recommends consulting with Francorp as well as with the IFA during the research process for valuable resources. He added that many regions throughout the world have their own Franchise Associations that will provide resources such as population density data, and market research.
“Franchisors can also go to PricewaterhouseCoopers for an annual ‘Doing business in’ booklet for any country they’re interested in and this is typically a lifesaver type resource,” he said.
In closing, Boroian says franchisors should always refer back to Francorp’s Seven Be’s of International Franchising: Be Selective, Be Organized, Be Visible, Be Innovative, Be Responsive, Be Supportive and Be Careful.
For a free copy of Don Boroian’s third book, “Franchising Your Business” go to www.francorp.com.