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Thursday 11th August, 2022

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Why franchising is more than a numbers game

Insight

Why franchising is more than a numbers game

Scale is not a measure of quality – know how good you are

Scale is not a measure of quality – know how good you are.

In the last edition of Global Franchise, I put forward five reasons why a franchise business might fail at international franchising. Understandably, it created commentary. This I welcome, in all its forms. Mostly, people grasped the point of the article. Think and plan before you leap!

Whilst I love a good debate/ argument/challenge about my opinions, I always try and look at what people are trying to really tell me. Particularly those that don’t agree with me. These people, many of whom I know and respect, have valid opinions and experience. It’s not about right and wrong. It’s about what’s relevant and appropriate. Context is important when trying to ascertain the appropriateness and readiness of a franchise system expanding from its domestic operation internationally.

But what really stood out, besides “the world is ending, so why bother?” opinions, was this little gem: “I’m too small and will never be able to export my franchise”. Wow, just wow. Before I deal with that, let me deal with the first comment. THE WORLD IS NOT ENDING. Did you have international expansion plans in play and then put them on hold? Good. Were you thinking about expanding internationally but the COVID-19 train wreck in your domestic economy forced you back into your shell to shore up the home base? Good. Did the potential or existing international partners get cold feet and withdraw from the deal or try and renegotiate the current arrangement? Good. It is time to reflect on the value of your IP (intellectual property) and how you can make your business smarter, nimble and more resilient to “king hits” that will occur in the future. This won’t be the last COVID-19 we have. Life will and must go on. Time to adjust, adapt, and get smarter.

Firstly, let’s deal with “end of the world” believers. There is no denying the economic and social challenges the world is facing right now. This is a dreadful time for many people and businesses. Jobs are lost and lives disrupted, business are closed or on life support if their resources and their government can support such a significant downturn. But the world economy will turn. Political stability will come. Multiple vaccine solutions and technological innovation is upon us. I would argue that a business with high-quality IP that understands its durable competitive advantage will survive anything thrown at it. Franchise businesses, by and large, know their worth. Why? They understand and create value by their clear-eyed understanding of their IP.

Know the worth of your IP

So back to this curious recurring comment I received about being “too small” to go international. Expanding internationally is an interesting and tantalizing prospect, but it’s also a relative matter. What, if any, rules are there about how much scale you should have before you venture to international markets? I don’t know of any rules. There are many experienced franchisors who can relate their experiences. Some went too soon and some went too late. Not enough resources or not enough adaptability because of their scale. It’s usual to default to thinking that you need a large number of franchise units and many experienced team members to be able to go offshore. But let’s think about what that really means. Yes, you will need adequate reserves of resources: money, people and resilience. But this does not mean that a franchise system with 50 successful franchisees and a well- run head office is less adequate or capable of some international expansion than a franchise with 200 outlets. It’s about the “smarts” of your IP. Is it deeply invested in the knowledge of franchisee profitability? Does your IP use all available technology to make it smart and nimble to implement and manage? Are you willing to partner with the right attitude to share the investment burden and risk? There is more than one way of entering the international marketplace. ‘Give a little to get a lot’ is saying that comes to mind.

“Sit back and think strategically, put your ego to one side and spend time and money to fully define your IP and its quality”

I know of franchisors to reach only 50 franchise units before heading to their next market overseas and are doing well. I also know of franchisors with 150 units that went offshore and are struggling or failing. There is a lesson here. Both are domestically successful but that does not mean the larger system has a better IP than the smaller franchise. Quality is the key. It pays to get advice about clearly identifying what the uniqueness of your IP is. It also pays to be honest about your capabilities and resources. It was not so long ago that franchise systems were “boot-strapped” start-ups that relied on franchise unit sales to fund growth. That’s OK. That’s entrepreneurism in action. I increasingly find well informed and resourced franchisors operating their businesses with a clear-eyed view of the worth of their IP. They have resourced adequately and are not fixated by 100 per cent or even majority ownership. They are prepared to trade equity for resources and expertise to exploit the inherent strengths of their IP. Is it better to have 49 per cent of something worth $50m than 100 per cent of something worth $10m? You can be the judge of that one. Sit back and think strategically, put your ego to one side and spend time and money to fully define your IP and its quality. The worth will come when the quality is known and bought to market.

Test, fail and repeat

Ultimately, regardless of your so-called scale and your belief in the quality of your franchise IP, the only way to know is to go. Be clear about this. Do your homework. Use networks, use in-country advisors, local franchise associations, and technology to make plans and execute well. Test the market. Don’t bet what you can’t afford to lose. But be prepared for setbacks and failure.

In all my years of working in franchising across many countries, I have rarely seen a franchise go international without failure. I am seeing many more succeed. We might feel like we have been through hell, but I would argue with all the great technology, advice, and experience swirling around us, now is a good time to realize the importance of quality over scale and think smartly about how you scale your franchise IP domestically and internationally.

THE AUTHOR

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.

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