Five reasons you may fail, because sometimes knowing what not to do, is as valuable as knowing what to do.
This is not an article which will argue that COVID-19 is the reason you shouldn’t export your franchise business. Despite the dubious decision-making of many governments’ about creating ‘hard borders’, stifling international trade and creating uncertainty, I believe now is an appropriate time to at least get your ducks-in-a-row about being ready to take advantage of the opportunities that will exist to get your franchise into another country. The tide will turn.
Before you crash my LinkedIn profile with messages about the lack of sensitivity I am displaying about the effects of COVID-19, let me say I am as shocked and appalled as anyone as to what has happened to people around the world with this virus. I acknowledge that many countries have been particularly challenged and I dearly hope they bounce back strongly. I am equally shocked and appalled about what this pandemic has done to the world economy. My belief is the franchise sector is one of those business sectors that is well placed to lead the economic recovery worldwide.
“Just like selecting franchisees at home, the choice of international partners is vitally important”
There are many reasons franchise businesses are resilient. The good ones are usually more systemized and structured. They understand the need for flexibility and compromise. They have robust commercial foundations and by their nature understand the need to adapt quickly to changes in market conditions. Surviving and thriving during significant changes in economic cycles is something a good quality franchise system will do.
But before you take your franchise global or even to just one more country, I urge you to consider five reasons you may fail. Remember, knowing what not to do, is as valuable as knowing what to do.
Five reasons you will fail
Way back in 1995 (the last century!) I completed an MBA thesis on international franchise strategies for Australian franchisors. I interviewed and surveyed 40 franchise companies that had exported their franchise system. I recently dusted off that research after completing a consulting project for a franchisor exploring global expansion. I reminded myself about the seven reasons why you would export your franchise business, which is perhaps an article for another day. What really made a difference to the conversation with this franchisor was discussing my five reasons they might fail. So, without further delay, here they are:
1. Lack of “End Game”
First up: why are you even doing this? How do you know you are ready to export your franchise business? Some signs might be there. You’ve achieved national coverage in your home country. You’ve got a strong balance sheet. You’ve got the talent to spare. You’ve got people that want your franchise in their country. Attractive signs you are ready to go. Pause and take a breath. Do you have the end in mind? Not death. I’m talking about a strategic road map about why you are in your franchise business and what you want to achieve out of it. Is exporting a core part of that plan? If it’s a “bolt-on” idea then you best connect it to core strategy and make sure your family, team, suppliers, and domestic franchisees know you have it in your plan. It is a big commitment.
2. Overestimation of capabilities
So, you’ve built up a strong domestic franchise or it’s heading in a very positive direction. You might have met someone at a franchise convention abroad, or you’ve been approached by a broker from overseas: “Hey, we really love your franchise system and believe it will go really well in our country. Let’s do a deal!” This is seductive stuff. Someone thinks I’ve got a great business and they want to take me global! Pause and take a breath. Who are these people? What do you know about them? How do you know you are ready? Have you given any thought to how much this will really cost? My research in 1995 demonstrated that 95 per cent of the franchises that exported their franchise overestimated their capability and underestimated the costs, the time it takes, the bona fides of their international ‘partner’ and worst of all, the drain of international expansion on their domestic operation which put the core business at risk.
3. The great cultural divide
“They speak the same language here. They eat the same sort of food. They like the same sports. They have successful franchising. We’ll do well in this country”. Pause and take a breath. One of the more attractive features about franchising is that it does have a certain, natural exportability. It is a pre-packaged business IP (intellectual property) that can be “dropped-in” to another country without too much effort. Many articles have been written about franchise brands struggling in a country that seems to share the same cultural characteristics as that of its domestic base. For example, some brands have struggled to gain traction in the U.S. because they underestimate the nuances of regionality of that wonderful franchising market. There is federal and state franchising laws to contend with. Some are okay and some are downright unfriendly to franchising. The climatic conditions of markets need to be considered if you’re a franchise business that is mobile and works outside. It’s not so easy mowing lawns in the north-east or mid-west of the U.S. in winter! If you’re in the QSR sector, culture can be very challenging. You must be prepared to adapt your menu if you’re going to a country where certain foods, words, or social etiquette once translated can easily offend.
4. They seemed like good people
Just like selecting franchisees at home, the choice of international partners is vitally important. In fact, the stakes can be considerably higher. In 1995, 86 per cent of surveyed franchisors stated that they did not put sufficient due diligence into understanding who they were dealing with. Some even signed international franchise agreements without meeting the people or visiting the country. Pause and take a breath. If you can’t get to that country right now, but your research says it could be a good market, engage a local franchise consultant or law firm to help you verify the bona fides of the people you are negotiating with – and the market. It could save you a lot of money and stress in the long run. While you’re doing this, make sure you work hard on corporate structure. Is it a master franchise arrangement? A joint venture? Or some other structure that is most appropriate for that market. Don’t wake up one day and find your IP is ‘gone’ in a new market or you’ve inadvertently created a tax problem.
5. We eat with our eyes first
An old chef once told me: “we eat with our eyes first”. He was talking about the presentation of the meal. If it looks good, it must taste good. True, a good-looking meal usually tastes pretty good. Pause and take a breath. Global franchising of your brand certainly looks good. I prefer to look at it as a progressive dinner made up of many courses. Start small, keep each dish manageable and don’t get food envy! What might look very do-able, can suddenly turn to a bad case of indigestion if don’t pace yourself. One country first, then another. Not 10 at once! International franchising is exciting, hugely rewarding and well worth the entry price when it clicks into place. Know where your weak points are as it will help strengthen your domestic IP and reduce risk when going off-shore. Finally, please remember to pause and take a breath. Take advice from both your domestic advisors and from advisors in the country you intend to launch in. Most importantly, talk to your franchisor colleagues who have done it. Their stories will be full of precious wisdom.
Michael O’Driscoll CFE has been in the franchising sector for 30 years. He has been a CEO, COO and board director of several franchise systems. He is former director of the Franchise Council of Australia and holds an MBA in International Franchise Strategy.