International franchising 101

Why the franchising model can work around the world for almost any kind of concept

Annually, franchising accounts for a turnover of $300bn in Europe, $850bn in America, and $130bn in Australia. In the retail, restaurant and leisure sectors, global brands such as Marriott, Domino’s Pizza and Burger King have long been at the forefront of international franchising.

However, franchising is not the exclusive preserve of these megabrands. A franchise strategy can also work for companies that have never franchised before.

Benefits for all concerned Franchising works because it offers real benefits, not only to the brand owner but also to its franchisees. It offers a number of clear advantages to companies looking at global markets.

For the brand owner, it removes the need to invest capital and other substantial resources in the venture. It uses the local know-how and connections of the franchisee to secure good sites and overcome obstacles with local product registrations and permits.

A franchise strategy will see the local partner make the bulk of the investment whilst benefiting from the know-how, good name and quality assurance program of the company acting as the franchisor.

Franchising enables companies to access the required capital and grow the business internationally without significant expenditure or external funding. Franchising also allows companies to attract high-quality local investors.

These investors are highly sophisticated and have a great incentive to make the project a success in their local market. They also have a strong understanding of the local market.

Franchising not only enables you to grow your business internationally by taking advantage of the capital and resources of local investors but also enables the local investor to have access to the blueprint of a strong proven concept with a known reputation.

Few local investors have the resource and time to research their own specialists and know how to put together an innovative and successful concept for the local market that would generate attractive levels of income without the trial and error that goes into building a successful business.

Franchising in a nutshell

When franchising is correctly understood and applied, it is a highly sophisticated business tool. Not confined to fast food, in the last 15 years, franchising has become the structure of choice for international expansion for a large number of global brands.

Franchising works. To demonstrate this claim, you only need to look at Mcdonald’s which reported more than $5bn in revenues in 2020. McDonald’s uses a heavily franchised business model. In 2018, the company had 93 per cent of total restaurants franchised.

In a franchise, the franchisor licenses a complete business model to the franchisee. The franchisor provides branding and know-how in return for a royalty fee. Often the franchisor is also the sole supplier of certain key products or services, which it sells at an agreed margin.

Franchising is thus a form of business by which the owner (franchisor) of a branded product or service obtains distribution through affiliated partners (franchisees). Franchising can be viewed as a low-risk alternative to a joint venture.

A well-run franchise system creates a win-win partnership between franchisor and franchisee where each partner contributes its special skill set. The franchisee operates the business on the basis of detailed guidelines, uniform quality standards and thorough training.

The franchisor ensures compliance with its brand standards via regular brand audits. Franchising is not risk-free, but the risks can be controlled using an established quality control toolkit.

A win-win proposal

There are important benefits to a business that elects to franchise. Primary benefits are the growth achieved by risk-sharing and leveraging the resources of third parties, the franchisees.

Franchising is not a quick fix for a struggling business – quite the opposite. The underlying business case needs to be sound for franchising to succeed.

“Franchising works because it offers real benefits, not only to the brand owner but also to its franchisees”

Capital requirements will be lower because the franchisees provide the capital to grow their franchised rights. Perpetual earnings are generated through a royalty-based income stream that adds value to the franchisor’s brand and importantly covers the day-to-day running of the franchisor.

At the same time, entrepreneurial franchisees are invariably more motivated, treating the franchise operations as their own business leading to higher sales and profit levels. Franchisors gain access to local expertise and know-how provided by the franchisee, typically routed in the local community. Furthermore, franchisee innovation can contribute to new ideas for the business.

A franchisor needs fewer people to build a global business than a corporate lead group and through an active and incentivised franchise network, the business can grow as fast as the franchisor can develop its infrastructure. As such franchising offers limited risk of capital outlay and asset-light growth by partnering with others.

As a franchisor, international franchising allows you to build and enhance your brand as a global player, and reduce your dependence on your home market. Many international markets present growth opportunities that franchisors can develop to diversify their business and grow market share.

Franchising is growing exponentially in established markets such as the US, Canada, Australia, South Africa, and Europe, but also in emerging markets where we also retain expertise, such as Africa, Asia Pacific, and South America.

“A well-run franchise system creates a win-win partnership between franchisor and franchisee where each partner contributes its special skill set”

While opportunities abound, franchising beyond your home market can be challenging and you should consider and plan for such issues when attempting to globalise your brand. Just because your brand works in your home market does not necessarily mean it will work, look and feel in the same way in other international markets.

You might need to develop, change or amend your menu, design, working practices or marketing campaigns to reflect local cultures and traditions as well as linguistic differences.

Most regions have their own laws, and some are more complicated than others. You need to gain an understanding of the laws across the jurisdictions in which you plan to operate to ensure your brand is protected and your agreements are aligned with laws that will protect you. You will also need to ensure you are in compliance with all relevant legal and regulatory obligations.

If you are new to international franchising, you first need to develop and refine your franchise business case. You may need to convince key stakeholders that franchising is beneficial to the brand and build your international franchise business plan and list of target countries.

Each country and region has its own unique features with varying degrees of legal complexities and operational challenges. To support your globalisation, you need to determine whether you need to make adjustments in store design, product range and menu offering, or for example, whether to consider a hybrid model of franchise and company-owned stores.

When selecting your international franchise partners, it is vital to undertake proper due diligence including background checks on franchise candidates as part of your wider anti-corruption, anti-money laundering or compliance programs. Many global brands also create a comprehensive franchise partner selection and approval process.

As a franchisor, your brand designs and know-how are valuable assets. You need to plan early to ensure that your trademarks and patents are available and/or protected in your target markets and that your intellectual property is adequately protected from potential copycats or pirates.

Before entering into an arrangement with a local partner you need to ensure that your brand is fully protected by way of trademark registrations in the target market and that any franchise fees or royalties are structured tax efficiently so as to avoid withholding taxes. That requires some expert professional advice before negotiations start.

There are countries where the registration of a trademark can take between two and four years. This can result in promising negotiations aborting because the trademark situation is unclear until registration has been achieved. Early planning is therefore key.

“While opportunities abound, franchising beyond your home market can be challenging and you should consider and plan for such issues when attempting to globalise your brand”

A challenging but rewarding journey

If you are looking for an innovative way to grow and expand your business internationally, franchising may well be the silver bullet you have been looking for. The journey as a global franchisor or master franchisee can be complex, but highly rewarding when undertaken properly with the right legal structures, systems, people and planning in place.

The author

Babette Marzheuser-Wood is the managing director of Dentons Franchise Consulting.