One of the biggest steps a company can make is expanding its brand internationally. Not to be taken lightly, this move requires extensive planning and evaluation to determine if your company is ready to make that monumental step. When you do decide your company is strong enough domestically to venture into foreign countries, the two most important questions to keep in mind are deciding which countries to expand into, and in what order. To help you make that decision, here are some preliminary questions you will need to address:
1) Is your company ready to expand internationally?
2) Which countries and at what time?
3) Which franchise vehicle is most appropriate?
Taking these key issues into consideration will help your company to successfully and strategically branch into the realm of international expansion.
Deciding to Expand Internationally
Before taking the plunge and expanding into different countries, it is important to do a thorough analysis of your company domestically and determine if you are internally strong enough to take your brand to the next level. There are a few key items to keep in mind when analyzing your brand:
1) Saturation of the home market Classically, international expansion has been undertaken only after the franchise system has achieved near saturation in the home country. Modern thinking, however, is that system maturity and depth of resources are more important indicators than saturation. More and more franchisors are able to develop, with modern technologies and methods, solid domestic programs along with profitable international programs.
2) Is expertise in the underlying business enough? You cannot franchise mediocrity domestically and you certainly cannot franchise it internationally. Expertise in the business being franchised is absolutely crucial. However, international expansion vehicles often require the franchisor to export expert knowledge about the process of franchising and how to adapt it to local conditions as well. If the franchisor has not honed its ability, strength and depth of knowledge about franchising, then international franchising maybe should wait.
3) Capital Resources There is no debating the idea that franchising is an alternative method of financing the growth of a business, as the franchisee’s capital is employed in the expansion rather the franchisor having to tap its own financial resources. However, that truth is moderated by the fact that the “pump has to be primed.” As is the case in an early-stage domestic franchise program, the franchisor has to invest capital before a return is realized. International expansions are no exception, even if the categories of investment are different.
4) Human Resources People run businesses, not machines. Having the right people to do the required jobs is critical in any business and in any type of franchise activity, whether domestic or foreign. However, the skill sets for international franchising, in many ways, are different than the skill sets for purely domestic franchising. One reason for this is that the international franchisor is dealing with cultural and possibly linguistic differences that are sometimes deep and complex. If the franchisor’s people do not understand the nuances of the foreign market, the chances for disappointment are that much greater.
Which countries at what time?
All too often, a franchisor begins an international franchise expansion or jumps into another foreign jurisdiction because some eager prospect approaches them with a financial enticement.
The choice of which foreign markets and in what order is absolutely critical in succeeding in an international franchise expansion. Some obvious factors are closeness geographically to the home market and linguistic and cultural similarities.
Many franchisors are unaware of the worldwide proliferation of franchise-specific legislation or legislation that affects franchising. Not all countries require a registration like the US registration states, but many have disclosure requirements, and some require the filing of the executed franchise agreements. Others require a filing/registration prior to being able to sell franchises in those countries. Penalties in some countries can be significant, while others may not be, but could prevent or delay the relationship. The existence or not of such laws is a factor to consider when deciding upon an expansion strategy.
There are dramatic differences, one country to the next, as to the number of business people who will be accepting of the franchisor’s terms and financial proposition. On average, prospects in countries like Canada and England, for example, are more likely to negotiate strenuously and over longer periods of time, than would typically be the case in say Mexico or Bahrain. There are any number of additional matters that should be considered in deciding upon which countries to expand to and in what order including:
1. The existence of exchange controls;
2. The degree of adaptation which may be required for the success and public acceptance of the concept; and
3. The cost of supplying franchisees with the appropriate type and quality of goods and supplies.
Choosing the best franchise vehicle
The franchisor has a number of choices of vehicles for international expansion. Each one carries with it its own set of issues, challenges and advantages, which can have a dramatic impact on the choice of expansion territories and their order.
1) Direct Unit Franchising Granting unit franchises directly to foreign franchisees will be the slowest, most expensive and, in some ways, riskiest expansion method. In direct unit franchising, the franchisor shoulders the entire burden of selling franchises and supporting the franchisees.
2) Development Arrangements Multi-unit franchises, area development arrangements and territorial development arrangements are some of the names applied to situations where a single franchisee is given the right to open up two or more franchises in a given territory.
3) Master Franchising When done properly and timed correctly, master franchising can be one of the most effective means of expanding a franchise network. This is particularly so when the expansion is into foreign markets. In fact, master franchising is the most frequently-used vehicle for international franchise expansion.
4) Joint Venture Franchising This occurs when the franchisor takes an equity position or a partnership role in the franchisee entity. Joint venture franchising can be used in virtually any franchise vehicle, from unit franchises to master franchises.
5) Acquisition The acquisition of a competitive business can be one of the quickest ways to expand a franchise system internationally. The target company may be another franchisor or a multi-unit business that is capable of being converted into a franchise network.
Although international franchising can be a challenging feat, if your company does so strategically and is able to pick the right countries at the right time, in the right way, international expansion can take your company to new heights and establish a respected presence around the globe.
Anthony Padulo is the Executive Vice President of International Development for BrightStar Care, the full-service home care franchise that provides both medical and non-medical care for infants to seniors, with more than 300 locations in the United States. To learn more about BrightStar Care International, visit franchise.brightstarcare.com/international or email Padulo at Anthony.padulo@brightstarcare.com.
ABOUT THE AUTHORS
Anthony Padulo, Executive Vice President of International Franchise Development, BrightStar Care
Edward Levitt, Partner, Dickinson Wright LLP
Enrique Kaufer, Vice President of International Stores, General Nutrition Centers
Larry Oberly, Vice President of Global Development, Re/Max
