Extending franchised operations into other countries is not simple!

Successful transplants of franchised businesses take time, money and an overwhelming entrepreneurial missionary zeal.  A total belief in your product, your system and yourself is essential, as is the almost suicidal dedication to invest time and effort in foreign countries.

Whilst master franchising makes good sense, it costs time and money and is only the start of a long-term and hopefully profitable relationship.

How does one go about it?

There are some straightforward and cost effective methods to ensure the exercise is successful:

• Make and Use good Overseas contacts
• Making a Start Offshore
• Investment Appraisal
• Initial Cost
• Expected Cash Flow
• The required return
• Franchising in China
• Franchising in Canada

Prepare a comprehensive business package - not just the franchise package that the Australian franchise owner receives.  Set out and document how you can actually run the internal operations, department by department, marketing, finance, distribution, product sourcing and purchasing, franchise sales, etc.  These aspects are the real valuables that you bestow upon an overseas master licensee.  They provide the essentials of the business and are the real builders behind your concept.

Ensure the registration of all intellectual property has been taken care of.  Face up to the ongoing expense of protecting your trademark abroad.  Don't leave it for the master franchisee to discover he has to make wholesale and costly changes.

Check out the costs and services provided by local lawyers and accountants with Australian partners who will be able to guide you through all the new problems that can occur in different jurisdictions. 

 Naturally we assume you will choose English-speaking countries as a first step abroad.

In Europe business ethics can be quite different, and even trade associations have quite different roles and status than in Australia.

A successful Australian franchised operation whose end product or service fulfils a genuine consumer need, if carefully and properly adapted to a foreign market can succeed if the commercial bargain reached with the Master Franchisee includes comprehensive training and documentation, plus constant ongoing support and encouragement. 

If both partners are to survive it is essential that you avoid unintentionally misleading an eager optimistic franchisee. 

• Keep your up front initial fee realistic. Take it in small regular payments.
• Share ongoing royalties, franchise fees, etc, equitably in relation to ongoing input of effort and capital by the licensee.
• Accept the need for refinements and adjustments to your system.
• Never compromise on the product you offer to the consumer.
• Share in all the pains and closely monitor the birth of the "pilot" operators.
• Set out realistic growth patterns with the ability for both partners to revise based on pilot results.
• Cost in not only support mechanisms and controls but also people who have hands-on experience.
• Avoid ad hoc responses to emergencies.
• Allow the master franchisee a means to parachute out but precisely define the terms and conditions.

You may face the situation of being in full control of a struggling fledging operation, under different political, economic and social conditions than your Australian operation, which has the potential to destroy your Australian base.

Pick your partners carefully and be honest as to why you are expanding this way.  Whilst eager investors may have the up-front fee and entrepreneurial skills, hands-on operators with total belief and commitment to the system, and who know the local industry, get you there faster and less painfully.  

2. Making a Start Going Offshore

Growing competition, low margins and a dwindling return on investment in the Australian market leads to the often falsely held belief of the existence of more lucrative and less competitive markets overseas.

There are a limited number of companies in Australia or for that matter worldwide that are truly International. The globalisation of their brands and indeed their franchise system has provided false levels of encouragement to Franchisors that a similar success awaits them off shore.

Successful expansion outside Australia requires an International outlook on the part of not only the Founder or CEO of the business but of the firm itself.  The only way to truly go offshore is if a truly International ethos permeates all activities.  It is insufficient for the CEO to delegate himself or simply appoint a person to investigate offshore expansion. It is necessary that it become as important as the domestic operation itself.                       

Market targets have to be identified and measured.  Priorities have to be developed and targets set.  Management has to be recruited, trained, motivated and appraised.  Problems of administering marketing or franchising activities when they breach International boundaries can be both unique and immensely complex.  The tools of marketing, price, product, package, promotion and distribution are indeed the same anywhere.  The problems involved in administering an International operation rather than a domestic operation can be quite different and the skills demanded of the marketing people are therefore different.

Most Franchisors establishing themselves on the International market are normally not marketing orientated.  Whilst they may have focused their business in Australia on the needs of the consumer they are preoccupied with the flow concept of marketing i.e. they see marketing picking up where production finishes and are preoccupied with their need and their Franchisees need to convert their products into cash.  The Australian Franchisor is reactive rather than proactive.  To be successful on a global basis there is a need for a better approach. 

The Franchisor must become concerned with three activities, the recognition of demand, the stimulation of demand and the satisfaction of the demand, not just the product or system itself.

Unfortunately most Australian Franchisors are salesmen first and marketers second. 

The first step is to draw up your own development plan.  What it should cover depends on your knowledge, skills, attitudes and priorities.  Every situation is unique but some general principals apply.

In order to convince people that your franchise system is worthwhile you have to ensure they have an opportunity or a problem that only your system will solve.

It is critical to ascertain the acceptability and length of product life in the new market place before you and your Master Licensee invest time and money in developing it.

Both must agree on all the licence terms. Both sides must win.

If you act as if you are desperate to sell your system the buyer has overwhelming strength and can force outcomes in their favour.  Remember when, or if they fail, it is still your business.

The Probability of Acceptance will increase inversely with the following:

• They must be familiar with the context in which the system is to be placed and the consumer motivations in the host market.
• They must seek out and study quantatively and qualitatively the target market.
• Research must delve deeper than the traditional "intent to purchase". Identify and question in depth true potential end users.
• Don't make the assumption that the "halo" effect of either a well known, respected master licensee or a well known or merely catchy trademark and clever delivery system is sufficient to obtain penetration of the market in the host country.

Questions the prospective Licensee must ask:

• How long to prove a prototype unit operating successfully in the host country?
• Are operating systems and procedures adapted and documented for the host country?

The following must also be addressed: -

• Protection of intellectual property, especially Trade Mark
• Engage local advisers to negotiate and prepare appropriate documents
• Record date of first use. Retain supportive invoices.
• Register both primary and secondary marks in all current and potential market places
• Seek advice as to wider registration and protection in additional classes.
• Make sure overseas agreements and the vehicle used for overseas expansion recognises the Trade Mark ownership.
• Have ready prepared licensing/registered user agreements. Make sure they are executed and recorded.
• Make sure from the start on your promotional literature that the trade marks and symbols R and TM are properly used
• Manuals copyright the manuals & enforce their registration.
• Make sure advertising agencies, research organisations, suppliers who may utilise your logo do so properly and with your written agreement
• Watch the market place for confusingly similar Trade Marks or applications - seek cancellation, oppose them or if necessary purchase them if all else fails
• File everything but remember it can be used against you too - so be careful with any admission of weakness.

Expansion offshore for the Franchisor is a major time and capital investment and therefore requires informed analysis of expected future costs and benefits.  Well-informed, sensible decisions are central to securing the future profitability of the venture.

Franchisors often make their decisions based on assessments of their need or in fact gut feelings or intuitive decision-making. Their financial advisers are usually accountants specialising in compliance with government requirements who are more at home with non-discounted cash flows.  Often their client understands them more easily if they can easily visualise an investment project "paying back" its original cost and the sooner it does the better their liquidity.  This is very important for most small businesses as cash is king and if short-term cash results long term projects are irrelevant.

Franchisors usually have fewer resources than most large organisations and therefore analysis methods are not always readily and/or reasonably available.

Two questions need to be asked

• What information is needed to assess the capital investment?
• What analysis structure is appropriate?

Main Information Needed to Ensure Reliable Decision Making

• The initial cash cost of undertaking overseas expansion.
• Expected cash flows from the activity.
• Level of return needed to make the investment worthwhile.

This is usually self evident however there are hidden costs other than acquiring the Master Licensee:

• Loan set up costs
• Training of employees
• More working capital for increased local inventories etc
• Increased debtors

• This is where uncertainty emerges. What is the life of the capital investment? What is its sales value at the end of its life?
• Do not rely on financial research data prepared by a potential Licensee
• External factors such as the local economy, competition, currency fluctuations and market demand is never easy to determine

Consider factors such as:

• Cost of borrowing money
• The cost of servicing debt
• Effect of inflation on future cash flow
• Possible alternative use of resources - Is there really no room for growth in the home market?
• The risk factor (the greater the risk the greater the return should be)

The required rate of return varies from business to business and project to project.  Decisions must be made on the basis that there is a return greater than the return on the local market for the same investment of time and money.

7. Franchising in China

We are pleased to announce the formation of a strategic alliance between Franchise Systems Group and FranChina , the leading franchise consultancy in Beijing.

Our aim is to provide you with the best solutions on both strategy and tactics, tailored to meet your requirements on your franchising journey into China. We are able to offer practical advice and an extensive range of services from commercial to legal, local to international.

We can recruit Master Franchisees for systems entering the Chinese market, with the advantage that Australian franchisors can liaise with Franchise Systems Group in Australia, who will oversee the recruitment process to ensure you find the "right" partner

8. Franchising in Canada

We are proud to announce the formation of a strategic alliance with Davier Consultants Inc, a Canadian firm specialising in Franchising Services in Canada, with its Head Office located in Montreal. They can assist international franchisors interested in entering the Canadian market including:

o A review of the concept for the specific Market
o Recommendations on possible modifications at any level
o Recommendations on the most efficient method of entering the Market: (Corporate presence, Development Agents, Master Licensee, Distributor, acquisition of competitor, strategic alliance….)
o Finding the qualified franchisee: single, multi-unit or master franchisee.

DAVIER has built a network of business relations with various professionals who can be of assistance to you: lawyers and bankers specialized in franchising, advertising and public relations firms, consultants in Operations Manuals, translators, and other consultants across Canada.

We now also share their formal strategic alliances with reputable consulting firms covering Algeria, Argentina, Belgium, Chile, Egypt, France, Germany, Great Britain, Italy, Jordan, Lebanon, Morocco, Romania, Syria, Tunisia and the United Emirates.