To facilitate a smooth expansion overseas, you will need to ensure that all contingencies have been anticipated, says Emma Lusty
Overseas expansion is a complex matter and not always easy to get right.
There are many factors to consider when deciding whether or not to franchise overseas; the following are points for consideration.
1. Is there a market for your products and services? For example, while it works well in this green and pleasant land, you will have an uphill struggle building a profitable lawn treatment business in Sub-Saharan Africa.
2. How big is the territory in question? Once you know the size of the territory in question, you can establish the best method for international expansion.
For large territories which are far away, it may be best to grant a master franchise for the whole country.
For smaller territories which are closer to home, you may wish to grant direct franchises.
3. Is there any direct competition in the territory? If so, establish their market share.
Is there a big enough market for more than one provider? Will you and/or your franchisees be able to grow successful businesses or is the market in the territory already saturated?
4. If your business involves supplying products, you will need to ensure that there is a viable supply chain and that you can ensure consistency in terms of product supply and quality throughout the territories in which you wish to operate.
If you are operating a restaurant business, for example, are your core products available in the territory?
5. In that territory, is there an internet domain name available that matches your business name?
6. Are there social or cultural factors which would make your business unviable in other territories? Using the restaurant business example, you will need to consider whether or not your menus are appealing to potential customers in different countries.
7. Is there a language barrier either in terms of how your brand and business offering is presented or in terms of being able to operate successfully a franchise business in that territory?
You may need to consider making an English-speaking management team a requirement of your legal agreements.
8. Is there entrepreneurial spirit in the territory? Are you likely to be able to find people willing to be franchisees?
9. Is funding for franchisees readily available in the territory?
For some franchise businesses this will be less of an issue but for those which require a significant capital commitment this will be an important factor. Franchisors should speak to local banks and franchise associations in the territory for more information.
10. What level of fees are typically charged in the territory both in respect of initial franchise fees and ongoing royalties? Will you be able to operate profitably based on those average fees?
Particularly if there is to be a master franchise arrangement, you will need to ensure that there is a mutually beneficial fee split with the master franchisee and that both parties can operate profitably.
11. Are there any tax implications associated with doing business in the territory which may make operating in that territory less viable?
12. Is it relatively easy to bring profits back to the UK or other home country?
13. Are there any franchise-specific laws or regulations with which the franchisor must comply?
Local franchise lawyers in the territory should be consulted in the early stages to establish whether or not there are such laws and, if so, how easy or difficult they are to comply with.
14. Are there any disclosure requirements in the territory?
These often require a substantial amount of work before a franchise can be sold so this needs to be considered early on.
15. If your franchise business requires business premises, consider whether or not the type of property required is freely available and how easy it is to acquire such premises from a legal perspective.
16. Is the franchisor legally required to provide translations of legal documents, operations manuals and/or advertising materials?
The cost of such requirements will need to be considered when conducting feasibility studies.
17. Particularly if your business is personnel heavy, for example, if you operate in the restaurant trade, are there local employment and/or immigration laws which may make it more difficult and/or less profitable to operate in that territory?
18. Can your trade name and any trade marks be registered?
Are there any pre-existing trade mark registrations which conflict with your current marks? Do your brand and/or trading name require translating or are there any other social factors or cultural sensitivities which mean that your existing brand needs amending or otherwise reconsidering for use in the territory?
19. What jurisdiction should your legal agreements be subject to?
There are differing opinions on this point – some argue that the jurisdiction should be in the country in which the franchisee is based and some that the jurisdiction should be in the country in which the franchisor is based.
Legal advice should be taken from both your current legal advisors and local lawyers in the relevant territory to decide the best approach in your situation.
20. Although tempting to ignore the elephant in the room, UK-based franchisors who are considering international franchising and international franchisors considering franchising in the UK ought to consider the impact that Brexit could have on that expansion.
Clearly at the moment that will require an element of crystal-gazing, however, it cannot be overlooked, especially for those businesses which include the import or export of products and/or rely on migrant workers.
There are lots of considerations, but there is no denying that with the right approach and guidance from consultants and legal advisers with franchise experience – both at home and abroad – international expansion through franchising can be both lucrative and fulfilling for franchisors and their international franchisees.
ABOUT THE AUTHOR
Emma Lusty is a commercial senior associate in Shoosmiths’ business advisory division. Emma has an interest in commercial contracts, specialising in franchising and works with franchisor and franchisee clients on a wide range of franchise matters. Emma is noted in The Legal 500 for franchising and is acknowledged as a notable practitioner by Chambers & Partners and by Legal Who’s Who as an expert in franchising.