Taking any franchise overseas is a big decision that remains an aspiration for many, and one which can feel tantalizingly out of reach as it requires strategic planning, a good chunk of money, and plenty of patience. So as a franchisor, you should first prepare properly and understand the different approaches available to you.
Direct unit franchising
The direct model means you grow your franchise network in a new country, much as you’ve done in your existing domestic market. No middle man, and no big player with the rights to develop a far larger territory than you’d normally grant. You simply recruit direct franchisees.
As an approach, it probably represents the easiest way to get started, and the easiest way for things to go wrong. In my experience, many emerging franchisors take this route when asked to open a franchise in an exotic market that they’ve not considered before. It’s exciting to be asked to take your brand overseas, but opening one unit franchise makes no strategic sense unless you have an actionable plan to be able to open many more. The cost of time and energy to support that one unit franchisee, to adapt your model to the market (you absolutely will have to, no matter how well suited you think it is) will far outstrip any upfront fee.
Where the direct model can be appropriate is when you’ve identified the one market in which you intend to start your global empire, and you plan to open many unit franchisees there. The market itself would probably need to be very similar to your home market, and one where similar unit franchise candidates are readily available.
It’s particularly well suited to lifestyle businesses where traditional multi-unit operators are less common. Make sure, though, that you get good quality advice on the local franchise legislation and any disclosure or registration requirements – they can be cost-prohibitive for a direct unit approach.
A step up in scale from the unit franchise model, this approach implies that you’re granting a much larger territory (city, state, or province) to one franchise candidate who’ll develop it themselves. There are no subfranchised units, as they are all owned and operated by the franchisee. The increase in scale of the territory should also be reflected in the scale of the initial franchise fee.
Intrinsic to the success of the area development model is the development schedule – an agreement between both parties as to how many franchise units they will open, and over what duration of time. Care must be taken to get the balance of this right – it should be aggressive enough to ensure that you haven’t granted a huge territory that’s never fully penetrated, but not too much so that it’s impossible in reality to deliver.
The advantage of this approach versus direct unit franchising comes from the growth plan that’s baked in. If the franchisee sticks to their plan, you should get multiple units across the region in the timeframe that you want. You also have a direct relationship with one larger player, rather than having to support multiple unit franchisees from afar.
Finding the right quality candidate here is key. Every international discussion that I’ve ever had has involved a stack of reasons as to why the prospective candidate should be granted exclusive rights to a huge swathe of territory. Buyer beware here – make sure that any area development franchisee is of sufficient caliber to deliver and don’t go giving multi-unit rights to a unit quality franchisee.
A master franchise remains the dream scenario for many franchisors, and yet is a model that unfortunately often seems to work out poorly as a result of picking the wrong candidate.
Rights granted are similar to those given to an area developer. But unlike the area development model, it usually grants rights to the franchisee to not only open and operate their own corporately run units, but also to recruit and support franchisees in the market themselves. You will then share the franchise fees and royalties with your master partner on an agreed percentage basis (which can vary greatly from deal to deal).
There are some real advantages to this approach. Usually, there’s a significant upfront fee that the master will pay you for the privilege, though the heady days of giant upfront fees are somewhat behind us as an industry. They take on the role of recruiting and supporting franchisees, which greatly reduces your local involvement, and also provides a degree of legal protection as you are now one step further removed from the local unit franchisees.
The downsides, however, can also be pretty significant. The first is financial – you’re giving away a good chunk of what the market will generate in royalties and franchise fees to the master. You also lose a great deal of control and are subject to that one master franchisees’ ability to grow the business as well as you do.
This is really where recruiting the right partner is key. Finding a candidate for a master is not that difficult if your proposition is strong. Finding the right partner however is much harder. You need a group that sufficiently understands your industry to be credible and able to represent you effectively. They also need to understand franchising, and be able to recruit and support a franchise network. These are distinct and diverse skill sets that are not easily found. They’re also going to have to be resourced sufficiently, both in terms of financial and human capital.
This is an approach often seen in developing markets, where franchising is less widespread. It involves setting up a new entity in which you’ll become a partner with your local franchisee. It can be useful when both parties bring really clear and distinct skillsets to the table, and can perhaps be something that you build up to when the franchise relationship has been proven.
Really deep due diligence is required here. Know exactly who you are getting into bed with, and understand that the normal franchisor/franchisee relationship doesn’t apply. Expectations will be high about what you’re contributing as a partner, and you may be required to be much more hands-on. Ensure you have all of this agreed upon ahead of time, especially as to where the share of roles and responsibilities lie.
Financially, of course, you’ll take a share of profits and benefit from the valuation of the JV – so the upside can be much higher than a simple royalty percentage. Not for the faint of heart though!
Five take-homes for expansion
- Pick the model that suits your industry, your franchise candidates, the scale of your aspirations and the target market dynamics
- Whichever approach you take, make it a strategic decision and not one that’s driven by ego
- Flag planting serves nobody’s interests. 30 franchisees in one new market is much better than one new franchisee in 30 markets
- Make sure you have sufficient resources and patience for the journey
- Don’t take your eye off the ball and neglect your core franchise network.
Andrew Walters is the founder of Kindling Franchise Consultants, a boutique firm with 17 years of international franchise experience offering specialist advice to franchisors looking to expand globally