In today’s inter connected global economy, more and more businesses are looking at overseas expansion. With many developed economies looking to increase exports, there’s been plenty of talk at government and media level on the subject too.
Franchising internationally has proved to be a very successful way to achieve global success and renown for a brand. Some of the most recognisable names on the global business landscape are franchised, and the model is also being used by a growing number of businesses that don’t franchise in their country of origin.
In the UK market, there are several instantly recognisable high street businesses that have used franchising as their preferred overseas expansion method, despite having no domestic franchise branches – including Marks & Spencer and Debenhams to name just two. Many of the most renowned hotel chains are widely franchised, including Hilton, Holiday Inn and InterContinental.
While there are strong earlier examples – such as ServiceMaster, which was one of the UK’s earliest franchisors in 1959 (and is still going strong with four different brands today) – international franchising really took off in the boom period for the business model in the 1960s, particularly with the expansion of US brands into Canada and across the Atlantic.
Some of those businesses remain amongst the most prominent worldwide today – McDonald’s and KFC being good examples.
There are several advantages to franchising overseas:
- Quick growth is possible
- Largely funded by the capital investment of others
- Combines a developed brand with local knowledge
- Increases the visibility and value of the brand itself
- Decreases or removes geographic limitations
However, speak to anyone with experience of international development in this way – whether a consultant or business owner that has successfully done it – and they will tell you that it requires a huge amount of thought, planning and strategy to manage it well.
SYSTEM SETTINGS
The most common routes for international franchisors to take are master franchising and area development agreements. The former grants a local party the right to open owned and sub-franchised units in a defined territory; the latter gives rights to open owned units only in a region. Alternative options include direct franchising and joint venture agreements.
Which structure is right depends on both the business and the market it’s entering. Euan Fraser of AMO Consulting is one of the foremost international franchising advisers in the UK. As he says: “There’s no best entry method – research is critical and what works well for one company may not be right for another. Development plans and schedules are crucial.”
A look at international franchisors in the UK market highlights the variety. Master franchising is widely used, with care companies such as and prospering; get a bad one and you could be stuck with one shop thousands of miles away, or mired in a legal battle.” It’s a two-way street, he insists, adding: “Your franchisee partner must want you for who you are, not what they think you should be. But you get out of franchisees what you are prepared to put in; it’s a mutually beneficial relationship.”
FINANCIAL FOCUS
Setting the right fees for international partners is notoriously difficult and they range greatly according to factors, including the size and maturity of the marketplace, potential demand for the brand in that market and realistic turnover and profit projections.
“Understand the services you’ll need to provide and estimate the costs involved in setting up – legal fees, translations, trademarks, travel and so on,” advises Fraser. “It’s easy to underestimate those fees, with practise often requiring extra than theory allowed, so build in contingency.
“Ongoing fees should cover all direct costs in the early years and be based on the support you provide. There’s a wide range of different fee structures in international arrangements, which may include a proportion of the unit opening fees and a percentage of the MSF collected from the network.”
As always in franchising, finding the right fee structure that ensures both franchisor and franchisee are profitable and getting what they want from the business is of utmost importance.
VOICE OF EXPERIENCE
Ken Deary is the UK master franchisee for care company Right at Home, which was named Emerging Franchisor of the Year 2014 by the British Franchise Association and HSBC and now has a growing network of 30 offices across the country.
Ken is a former BFA HSBC Franchisee of the Year from his time in the McDonald’s network, so he had a comprehensive understanding of the sector when he took the brand into the UK, signing his first franchisee in autumn 2011, following a successful pilot.
“Buying a reputable master franchise can be a better solution than setting up from scratch on your own and can speed up your network and business growth considerably with excellent long term benefits to both parties,” he comments.
“However there are no easy, quick wins in franchising so do your due diligence and ensure the model gives you a value for money, and a long-term business proposition that ensures a good return on your investment and effort.”
Ken has the following advice for those looking at a master franchise opportunity:
- Research in depth what you are getting for your initial fee (systems, software etc.) to ensure value for money.
- Pay the initial fee in installments based on opening new franchises, giving an element of shared risk.
- Work with an experienced franchise consultant to ensure the fees you pay to the franchisor are realistic; bargain hard over MSF to ensure you get the returns you want from the investment.
- Use an experienced franchise accountant to check your projections and an experienced franchise solicitor who has dealt with master franchises to check the legal agreement.
- Ensure the relationship with the franchisor is right and you have the necessary independence you require in running the day to day operations. You must be comfortable with the agreement in the long term.
- This is a long-term relationship, therefore ensure you do the necessary due diligence required to ensure the terms work for both parties.
