International Franchise Expansion

International expansion is a viable, and valuable, way to expand your franchise opportunity beyond the boundaries of the United States, or the country in which you are based. In 2002, there were 500 franchise companies operating internationally in over 100 countries. This number is undoubtedly higher now.

Here is a brief summary of considerations:

• Many countries have specific franchise laws, and even in those that don’t, it is necessary to determine what the local laws that govern business relationships might be. Canada has franchise registration laws in three provinces. Mexico, Australia, and the European Union have franchise or business relationship laws, for example.

• It is always necessary to hire a local attorney who is familiar with franchising to determine how your legal documents must be converted to match local law, and/or local franchise requirements. This requires a budget for international expansion.

• The most common franchise form for international expansion is master franchising, where a local entity becomes your “alter ego,” doing everything you do in a specific area, normally a certain county, but the territory may be a specific area or a province. Most franchisors allow sub-franchising in the master franchise’s area, but some require the master franchise to develop only units that they own and operate.

• Your legal documents will first have to be rewritten into the franchise format that you will be using for international expansion. The documents may also have to be translated into the local language. Mexico, for example, requires that the documents be in both English and Spanish.

• Direct franchise sales, joint venture licensing, and direct investment (where you actually own and operate the local businesses), can also be considered, but are less frequently used as international expansion models.

• The most common international master franchise structure is something like this:
o Initial franchise fee. $125,000 to $70,000
o Unit franchise fee. 10-25% of what the master franchisee charges unit franchisees, with 20% being typical. (The master franchisee keeps most of the fees to develop the franchise in the country.)
o On-going royalty. 10-25% of what the master franchisee charges unit franchisees, with 20% being typical.
o Development schedule. The master franchisee is almost always required to open a certain number of united in a specified time frame.

• Many of the entities purchasing franchises in other countries will already be developing and operating several different franchise bands in that country.

• International franchise consultants recommend that you always register your mark in a foreign country before you sign any agreements with potential franchisees outside the United States, and that you do not allow the local person to assist you in this process. There are many stories of international brand theft.

• The United States Department of Commerce, through its U.S. Commercial Service division, can assist franchisors in locating local franchise attorneys, and provide guidance for specific countries. Local U.S. embassies have staff with specific experience in franchise expansion.

• Factors to consider about each country include: The existence of rule of law, the stability of the country, the amount of government involvement in business matters, the level of corruption in the country, the strength of intellectual property protection, local sourcing and infrastructure, and the amount of return on investment that you can obtain.

An international franchise consulting firm, EGS, summarized it this way:

• International development is a strategic business direction for a franchisor, not a short term source of up-front fees. It requires a major commitment.

• Your international franchise model must have clear differentiation in other countries. You must offer something different from that which is already being offered there.

• Select countries where you have a good chance of making a good rate of return

• Take the time and money to find, fully evaluate, and sign the right master franchisees, licensees, and/or joint venture partners.

More information can be found at:  www.biltmorefranchise.com