The reality of global franchising too often fails to match expectations, says Richard Chatten.
International franchising, if not prepared for correctly, can result in a greater than expected expenditure in time, resources and risks. Preparation really is key. Many franchisors go into international franchising inadequately prepared for what lies ahead, so it should not come as a surprise when overseas franchising fails to meet their financial expectations. But what is the reason for for this?
Increasing bureaucracy and regulation is a start. The 2018 NatWest/bfa Survey confirmed that legislation has overtaken language differences as the primary barrier to international expansion – 33% of franchisors highlighted this, compared to 22% in 2015.
The result of this is much slower than anticipated international development.
Government interference, especially concerning withholding tax on the repatriation of management service fees, can delay progress and affect the bottom line.
When you are unprepared, you may not recognise how these regulations will impact your operations until it’s too late. Many franchisors do not generate as much revenue from international franchising as they expected, and this is often down to underestimating the amount of management time required, along with unrealistic expectations.
Time is an issue, especially when franchisors do not appreciate the time it takes to generate a positive cashflow and the sheer amount of management time it requires. Franchisors need to be well-capitalised both financially and in human resources. At TaxAssist Accountants, we have created an international team that focuses on international development without diluting the support provided to the domestic network.
International franchising must be seen as a long game. It can take many years of effort to make a substantial profit, and with insufficient local knowledge, sometimes longer. If you are unprepared and have not done the research beforehand, there is a real danger of spending a lot of time setting up operations in a country only to discover it’s unprofitable and your time has been wasted.
The calibre of the franchise partner can be more important than the target market itself. In the 2018 NatWest/bfa Survey, a lack of suitable franchisees emerged as a considerable barrier to growth outside of the UK. Franchisors can suffer when they recruit an international partner and then realise further down the line that this partner is not the right fit, and has failed to give the Master Franchise operations adequate focus and attention.
To help with the recruitment process, successful international franchisors will likely have set up pilots in the target country before recruiting international partners. These brands can then demonstrate that their model works in the target country and will have shown their commitment by opening a location there first.
Even though reality does not meet expectations for many franchisors, those that invest in research and development before they go global are the ones that reap the rewards. They are building sustainable and ethical international franchise models that provide profitability and added value to their global brand. Thorough preparation puts franchisors in a much more powerful position to be successful in international franchising.
ABOUT THE AUTHOR
Richard Chatten QFP DipFM is International Support Manager for TaxAssist Accountants. You can contact him at richard.chatten@taxassist.co.uk www.taxassistgroup.com
