The Fundamental Initial Considerations for International Franchising

Once a franchise system has obtained a measure of national success, many franchisors are presented with the opportunity to grow their system through international expansion. Making the decision to tap into international markets and create a global brand is an exciting and critical time for any franchisor.

Given the significance of this juncture in the evolution of a franchise system, it is crucial that franchisors first have regard to certain fundamental initial considerations before they decide to extend beyond their national borders. With that in mind, the following are five key questions that franchisors should answer when considering international expansion for their brands:

1. Are you pushing or being pulled?

Many franchisors expand internationally as a result of a foreign national experiencing their brand during a trip abroad. The individual loves the franchisor’s concept and believes it can work in their country.

Following an expression of interest, the franchisor, enticed by the prospect of selling into a new country and earning a significant fee from the prospective master franchisee or area developer, decides to franchise their concept in a foreign country.

This scenario is an example of a franchise system being “pulled” towards international expansion. While excited to grow internationally, albeit through the initiative of others, franchisors in this situation have done little, if any, research into the details of the expansion into the target country to their own potential detriment.

In contrast to this passive expansion strategy, franchisors should instead be actively considering the prospect of international franchising when they start their growth phases. They should be dedicating time to the prospect of “pushing” their concept into international markets. Among other things, this includes conducting certain critical investigations, such as:

• Who is my competition and who owns my competition?
• What are the local laws?
• In what way will my system need to be adapted to account for local preferences?
• How will my supply chain work?
• Is growing internationally the best use of my available resources?

2. Do you appreciate the potential impact on your intellectual property?

Most franchisors begin franchising with a trademark which they have either registered or have made an application to register with an opinion of its likely registrability.

It is critical to ensure that a franchisor’s trademark is protected in the country they are looking to expand into. That is, if a franchisor gives up the use of its trademark to third parties, for example to a master franchisor or unit franchisees, it needs to understand the chances of that trademark being unrecoverable to them at law or in practice if there is a breach of their intellectual property rights contained in their initial agreements.

In too many cases, franchisors only get one chance to get this right. Practically speaking, the loss of control over their own brand will mean that no second chance will be possible.

3. What is the best way to expand?

Franchisors typically expand internationally through master franchising or area development agreements, though often by way of a new legal franchisor entity to address tax and liability considerations. Each model has its pros and cons for international expansion.

Errors are often made choosing which model to utilize without the franchisor first appreciating the business issues associated with each. For instance, international franchising can be a very “skinny” model for the master franchisee. It must operate an entire franchise system with a fraction of the fees that the master franchisor receives when it operates its own national system.

This model can place a great deal of financial pressure on the master franchisee which can lead to failure. Getting the economic balance right between the franchisor and its international partners is critical for long-term success. Both sides need to win. If either loses, the whole effort is likely to fail.

The vast majority of the largest international franchisors are American-based. There are many resources and dedicated experts in international franchising available which have developed from that market. Moreover, most international practitioners have a tight network of reliable, capable colleagues across the globe that know the ropes and can guide a franchisor focused on international expansion to success. Given this, there is no reason for a franchisor looking to expand internationally to reinvent the wheel.

Picking the right first country to expand into is an important decision to be made. For instance, for Americans, coming to Canada may be a logical first start to international franchising. The reverse however might not be the case.

4. Do you know your partners?

Choosing any foreign partner, whether as a master franchisee, area developer or unit franchisee, is always more challenging than selecting a partner in one’s own country. For example, language and cultural differences can raise obvious concerns. Some franchisors look for their international partners to be the experts in their country that will do all the leg work while the franchisor simply provides the name and the system. Similarly, some franchisors off-load the responsibility of creating local legal agreements to their international partners.

Time must be taken to know your prospective international partner(s), to assess their capabilities, resources and competing interests, and to learn from them and with them. Doing so will naturally increase the likelihood of securing a partner with greater experience, knowledge, local expertise and possession of valuable assets (for example, they may operate a portfolio of brands or control critical real estate).

It is also essential that local legal counsel be engaged to negotiate the transaction and ensure compliance with any local laws affecting the proposed agreement or relationship. Franchisors can use experienced counsel in their own countries to work with external foreign counsel to assist in the process and help the franchisor navigate through the issues.

5. Are you prepared to stay involved?

The commitment to international franchising requires more than the decision to do so and a resulting agreement with an international partner. It is critical for franchisors to remain hands-on in these foreign markets regardless of the expansion model they follow.

For example, most international deals contain quotas and expectations on the local partners in respect of the growth of the brand in their jurisdictions; however, these are frequently not met. It is imperative for a franchisor to stay connected, stay involved, provide support, watch for signs of trouble and know what it is looking for in the market.

It is a commonly stated rule of thumb that it takes five years of focused research and planning to maximize the chances of success in international franchising.

Franchisors can apply many of the lessons they learned when growing locally, regionally and nationally to an expansion beyond their national borders. Fortunately, international franchising is now a well-developed model and there are professionals dedicated to this aspect of the franchising industry.

As Canada’s largest franchising law group, Sotos LLP has assisted many international franchisors in their efforts to come to Canada and in taking Canadian brands international. The firm has developed a large network of local experts in many countries with whom the firm members have worked in helping to guide all manners of international franchising to success.

This article was originally published in the Global Franchise Magazine.