Will My Expansion Overseas Work Out? | Global Franchise
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Friday 27th May, 2022

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Will My Expansion Overseas Work Out?

Insight

Will My Expansion Overseas Work Out?

That will depend on how thorough are your preparations and how carefully you choose your overseas partner, say Andrew J. Sherman and Daniel Blumenthal

That will depend on how thorough are your preparations and how carefully you choose your overseas partner, say Andrew J. Sherman and Daniel Blumenthal

To be positioned for success abroad, you should be well-established at home, having developed a secure domestic foundation with adequate capital, resources, personnel, support systems, and training. The business should have strong unit earnings results and consistent unit growth. Identifying the best target market for your brand will also gear you for success. Sometimes even the best partner on the ground will struggle to overcome obstacles of being in the wrong market.

Economic and political factors are vital and staying abreast of economic trends (a World Bank study showed that real GDP growth of 4% or more is an indicator of considerable new business development) in the target market is critical in expanding any business. Have you analyzed the geopolitics to evaluate the risk of political instability that can hamper or destroy the chances of success? Your analysis should take into account the consumption habits and size of the consumer market, with an eye on exchange rates, to ensure that you don’t put a great product in a region where few people can afford it or whose spending habits cut against the success of your brand.

You should also consider regional religious considerations, and whether your brand and product will be compatible with regional dietary customs and restrictions, and the cultural lifestyle.

Unexpected government regulations can hinder business growth and success. Don’t be tripped up by a country’s foreign investment and approval procedures, franchise or business opportunity laws, industry-specific regulatory requirements, labor and employment laws, technology transfer regulations, customs laws and import restrictions, tax laws and applicable treaties, repatriation and immigration laws, intellectual property requirements and policies, and costs and methods of dispute resolution.

Other practical and logistical challenges can pose insurmountable challenges. Investigate access to resources and raw materials, transportation and communication challenges, language and cultural differences, access to affordable capital and suitable sites for the development of units, and availability of appropriate media for marketing efforts. One supply chain nightmare can destroy your brand’s regional reputation, so you should ensure redundancies and back-up systems just as you would in your own backyard. Make sure that there is a reliable mechanism for sending and receiving funds. Many franchisors require royalty payments by ACH; it can be far more difficult to collect royalties from abroad than it is domestically.

Who are you riding with?

Once you know where you want to take your franchise brand, you need to find the right partner to help you deliver it. The most promising candidates are those with proven financial resources and who have already established a track record of successful business operations in the host or target country. They should have experience and relationships with local and regional real estate and financial communities, accessibility to capital and management resources, understanding of the relevant political landscape, and language and communications capabilities. They should also have knowledge of the underlying industry, contacts with key suppliers, and a working familiarity with computer and communications technology. Relationships with or access to government regulators can be an extremely useful tool in certain markets, especially where the absence of that access can become a significant obstacle to your strategic plan.

But your candidate doesn’t just have to have all of the attributes, background, and experiences to be a perfect partner on paper. You should also have a comfortable level of trust. Of course, not all franchisors who are pursuing an expansion strategy into a new international market have existing relationships with such partners, let alone relationships with a degree of comfort that lends to trusting your brand in the hands of another for an entire region of the world.

So how do you find the partner?

Parallel to or ahead of the process of finding your brand expansion business partner, it is a good practice to identify and contract with a local liaison to guide you on matters that you cannot easily navigate remotely.

This will be someone local with a good understanding of the business, government, and cultural landscapes to help you understand the country and to be your ears and eyes on the ground. They will assist you with due diligence, and will help you identify and hire local professionals such as an attorney, an accountant, consultants, investigators, and other local business contacts. This contact will be helpful before and during the franchise relationship. Much of the process below that you will use to identify your brand expansion partner will also apply to identification of the liaison.

How do you find your partner?

Develop your network well in advance. The best time to network is always and include the networks of your key advisors and others in your ecosystem. Your chances of future success will be enhanced through constant and continuous development of an expansive and diverse network of contacts. Attend events that your perfect business partner might attend, or that people who might know your perfect business partner will attend.

Activate your network.

If the perfect business partner is not already on your immediate radar screen, search your network for the people who are most likely to (a) know them and (b) want to connect you to them. Active networkers gain value by making connections, even where there is no direct or immediate profit to them. Use social media tools such as LinkedIn to determine direct and indirect resources that may be relevant. And because you’ll be seeking an introduction from a person you know and perhaps trust, there may be a greater initial level of comfort in your network connection’s network connection.

If you are ready for international expansion and your business partner does not exist in your direct or expanded network, then there are several active measures you can take to seek out the right person. In our analogy, you can think of these as the matchmakers.

The United States Commercial Service (“USCS”) (www.export.gov) is the trade promotion arm of the U.S. Department of Commerce’s International Trade Administration. The USCS organizes trade missions where mission members – which include government officials and representatives from private U.S. companies – travel as a delegation to a region, attend market briefings, participate in site visits and networking receptions, and have one-on-one business matchmaking appointments with pre-screened partners. In addition, the USCS is a resource for market intelligence, other trade events, and can even help with key regional contacts and resources.

The International Franchise Association (www.franchise.org) represents, promotes and enhances franchising in the United States and is another resource for a franchisor with an eye toward international expansion. The IFA hosts and sponsors international franchise conferences and events and has an active and engaging staff that is happy to provide its members with helpful introductions. Their website offers helpful country guides on business and franchising, an “international toolkit” with a number of topical resources, a calendar of international franchising events, and contact information for franchising associations worldwide.

And of course Global Franchise Magazine (www.globalfranchisemagazine.com) is an excellent resource for international franchising news, events, and opportunities.
Preparing for a Successful Partnership

Ideally, you will have many meetings with qualified potential partners, eventually choosing to work with someone with whom you have good trust and rapport, and who checks every box of the perfect candidate. Your liaison will help you through a due diligence process. You should hire a regional professional to vet your candidate, with your search extending to subjects including: business reputation; litigation history; criminal record; regulatory actions; negative press; government watch lists; reference checks; credit reports; personal and business financial records; tax records; and sources of funds. You should check your candidate and any known associates against the U.S. Office of Foreign Asset Control (OFAC)’s published lists of individuals, groups, and companies whose assets are blocked and who are off-limits for business dealings with U.S. persons.

Once you have identified your local franchising partner, you must establish clear and open channels of communication. You will need to recognize the cultural differences, some of which you will understand and some of which you will learn through your liaison and your partner. And just as you will have to trust your partner’s guidance on cultural norms, they will have to trust yours as they learn to operate within the framework of an American business. You may have to trust that certain alterations to your brand presentation will lead to better local acceptance and sales, and you may have to convince your partner to operate within the bounds of U.S. law – even when it contradicts local business customs – to avoid violating the Foreign Corrupt Practices Act.

Finally, it is critical to have a back-up plan in case things do not work out. Maintain your network. Have a plan in case you need to enforce your contracts. Obtain the contact information for everyone who you would need to speak to – suppliers, franchisees, employees – if your partner became suddenly unavailable. There is no substitute for a seamless back-up plan, and the best way to prepare is to keep your network active and growing.

ABOUT THE AUTHORS

Andrew J. Sherman (@AndrewJSherman) is a partner and Chair of the Corporate Department in the Washington, D.C. office of Seyfarth Shaw, and a top-rated Adjunct Professor in the MBA and Executive MBA programs at the University of Maryland and at Georgetown University Law Center. He is the author of several books, including Harvesting Intangible Assets, Franchising & Licensing and his latest released January 2017, The Crisis of Disengagement. Mr. Sherman can be reached at asherman@seyfarth.com or 202-828-5381

Daniel Blumenthal is an associate in the Corporate Department of Seyfarth Shaw’s Washington, D.C. office. He focuses his practice on issues affecting business growth for companies at all stages, including domestic and international franchising, licensing, and venture financing. Mr. Blumenthal served as general counsel to an international fast-casual restaurant franchise for five years, where he provided all legal support for the company while taking an active role in the company’s strategic growth planning, supply chain, marketing, and operations. Mr. Blumenthal can be reached at dblumenthal@seyfarth.com or 202-828-5325

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