So, you’re a franchisor in the U.S., a top dog already, and thinking of breaking into foreign markets. Before you grab your passport and go, however, slow down and give it some thought.
What are the top things that franchisors need to avoid when breaking into foreign markets? What do you not know? Knowledge makes the difference between success and failure. Here are eight things to avoid when you decide to step into the global franchise arena.
1. Don’t assume all agreements are the same
You might know U.S. franchise agreements backwards and forwards, but outside the country it’s a whole different legal world. Be prepared to consult a franchise attorney in the host country to make sure you’re in compliance with local laws. A master licensing agreement in another country can be a completely different agreement than in the U.S.
You’ll need to comply with local laws, entirely different customs and sometimes deal with language barriers. Sometimes you have to convert your manuals and agreements to another language. Be sure you use an experienced attorney in the other country as translation can be tricky. As your franchise agreement controls the use of your intellectual property and systems, you’ll have to carefully consider all changes made to conform to the local situation.
2. Don’t neglect distribution
Make sure you have a good distribution channel – you’ll need strong ties with vendors and suppliers to provide at least a significant majority of what you sell instead of having to import. You’ll need to consider how products can be distributed and shipped in the other country. Is there sufficient transportation infrastructure to meet your needs? Can you actually get the products into the hands of customers?
3. Don’t try to make your money on the back end
Outside of the U.S., it’s best to develop a master license that generates more revenue on the front end than relying on royalties. It’s just too hard to keep track of the accounting for franchisees in other countries. You can’t assume you’ll be able to adequately audit their finances. You’ll also have to deal with the currency exchange rate. You have to decide how to accommodate these concerns when you write your franchise agreement. Will there be advertising fees? What would be the cost of converting your materials to local languages? Consider having a monthly fixed fee or a small percentage fee to provide them with all American-branded materials and let them convert it all.
4. Don’t charge a percentage fee
On the royalty end – do you want to charge a fixed fee or a monthly percentage? Charging a fixed fee is preferable because a franchisee can easily under-report their revenues. You can’t be assured of sufficient oversight. Without employing full-time auditors, how would you know if their accounting is correct? It’s hard enough to manage things in the U.S. and Canada. So, in foreign markets it’s easier to go with a fixed monthly cost – say $500 per unit per month for each franchise that’s open. There’s no tug of war. There’s no back-and-forth haggling over accounting. You can make more money in distribution instead of royalties.
5. Don’t charge interest in Dubai or Saudi Arabia
In the Middle East, you’ll find that customs and religion have a direct impact on how your business can operate. You’ll have to change all your documents. Wording matters. There is a prohibition in Dubai and Saudi Arabia against charging interest, which is a religious taboo. You can’t say that you’re charging a percentage or finance fee or default fee. You have to call it a penalty. You’ll need to be aware that Saudi society is conservative. Franchise businesses also fall under the Saudi commercial agency law.
6. Don’t assume China means easy money
If you do business in China, you’ll most likely have to send someone there to train the franchisees. You have to factor that money in when you’re charging your franchise fee. If they want to put 400 stores over there, that’s pretty good money at a fixed monthly charge. Don’t forget there is overhead to factor into the equation. You can’t assume the master license is 100 percent profit. There’s an ongoing cost to get a business going. It’s not equitable. It’s better to charge a higher fee that is sufficient to get you through the years you have to pay top-level people to go out there and train the franchisees. Figure all this into the master license fee.
7. Don’t assume you know the labor source
Think about where the actual labor is coming from. If you’re dealing with business people, they might not be the ones who are doing the actual labor. Also, does the country have a labor pool with the necessarily skills and training for the franchise to be successful or would most of the staff be immigrants? Be informed. You might not be familiar with the labor regulations in the host country. Research will prevent you from making a big mistake. The target country might not actually be suitable. There are labor unions and local labor laws to deal with. There might be onerous obligations and restrictions regarding employment. Can you easily terminate employees?
8. Don’t assume you’ll know how to deal with the red tape
Each country has its own unique bureaucracy to deal with. Learn them. Perhaps it will be best to use another corporate structure to deal with its laws and regulations. You might work through a sub-franchisor or create another company to operate as an extension of yours. You might have to take some extra steps before an agreement can be finalized.
ABOUT THE AUTHOR
Charles Bonfiglio is president and CEO of Tint World ®, an award-winning franchised provider of automotive, residential, commercial and marine window tinting and security film services. With Automotive Styling Centers™ in the U.S. and abroad, each franchise location houses approximately 20 profit centers, ranging from in-store accessory installations, to off-site sales and installation of residential, commercial and marine window tinting and security films. To find out more, please visit www.tintworld.com and tintworldfranchise.com.
