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GOING OFFSHORE? YOUR NEXT STEP

by Stephen Giles & Win Robinson,
last updated 28/07/2011

Franchising lends itself well to the international business environment - but how should you go about it? Stephen Giles and Win Robinson present a checklist for international expansion.

Franchising has always been an international activity. Multi-national corporations in industries such as petroleum, motor vehicle distribution, soft drink manufacture and food have long been using franchising techniques as a core element of their global expansion strategies. However, in the past two decades there has been a dramatic increase in the breadth and diversity of franchise organisations operating internationally. 

This is not surprising, as franchising lends itself well to the international business environment. Once a franchise system has a proven record of success in its domestic market, the obvious entrepreneurial challenge for the franchisor is to seek to replicate that success internationally. Logic dictates that country boundaries should not be a barrier to concepts, products and services with more universal appeal. Similarly it is logical that franchising as a business technique should prove just as effective internationally as it has proven domestically in most developed and many developing nations.

Franchisors are motivated to expand their system offshore for the same reasons as other entrepreneurs.  There are a variety of reasons why a franchise business may choose to expand internationally, including:

  • a desire to access new markets and increase revenue and profits. International expansion can deliver significant profits from initial and ongoing fees by replicating local success internationally. Success in the Australian or New Zealand market, which features the logistical difficulties of many foreign markets without the benefits of the population size, is a good grounding for success in other markets.

  • a need to continue to grow to retain the growth dynamic that is often important to owners and senior management of franchising companies; declining rates of growth and network development in the domestic market as it approaches saturation, or at least maturity.

  • a desire to capitalise on a proven system and build an international brand.  The most valuable assets in the world are now brands. A franchisor that has created a brand can achieve global recognition of its brand, increasing consumer awareness and raising overall brand and company value.

  • increased competition in the local market for the product or service provided by the franchise system.

  • a desire to enhance overall competitiveness by broadening customer appeal into international markets, gaining international knowledge that is of value locally and securing critical mass against multi-national competitors.

  • economic downturn in the local market, or a desire to diversify to mitigate the impact of any local downturn.

  • favourable macroeconomic, demographic, regulatory or political conditions in a particular country or region.

  • personal satisfaction or intangible factors

In some ways, international expansion is a logical extension of the current business but in other ways it is like starting the business again. The purpose of these notes is to provide some information as a starting point for those considering international expansion. In the first part we discuss the methods of possible international expansion. In the second part we provide a checklist for international expansion.

Methods of International Expansion

There are essentially four main methods of international expansion if we exclude the internet and e-commerce, each with various permutations and subsets. They are:

  • company-owned only operation, or the establishment of a branch operation or subsidiary;

  • direct franchising, including area development;

  • some form of master franchise arrangement;

  • a joint venture.

After deciding the expansion method for the country it is necessary to consider the structure and form that the business or franchise takes in the offshore country. Is it company owned, single-unit franchising or one of the different multi-unit forms? A detailed discussion of these options is beyond the scope of this paper, but we will touch upon the key distinctions in our presentation.

Checklist for International Expansion

This checklist highlights some of the key issues for those seeking to expand internationally. As with all checklists, the issues have been deliberately simplified, and there are likely to be many other relevant considerations. It assumes a pro-active rather than reactive international expansion strategy, and is developed on the basis that the local partner plays essentially an operational role in the local market. In some situations, neither of these assumptions may be valid.

 

1. Assess export readiness:

    achieved sufficient local market success to have the experience, credibility and financial resources to tackle international markets;

    system is sound, with good marketing, strong management and solid business fundamentals;

    local franchisees are profitable;

    success is not due to unique local factors;

    franchisor has the management time and money to devote to international expansion given other priorities;

    owners and senior management committed to international expansion;

    products or services ready for the international market.

 

2.   Determine the desired expansion markets:

    conduct preliminary investigations of market suitability, using Government and generally available information;

    examine available grants and eligibility, and consider overseas trade missions and industry events;

    prioritise international markets after considering ease of entry, market potential, logistical issues, legal system and other relevant factors;

    evaluate foreign country risk in terms of risk of failure, legal risk and business risk;

    assess cultural and local market factors and determine extent of customisation;

    develop a detailed expansion plan, including a comprehensive financial model and a legal compliance matrix;

 

3.   Establish the necessary infrastructure:

    protect trade mark(s) and any other core intellectual property in all countries where expansion is reasonably foreseeable;

    conduct more focused market research in identified priority markets to thoroughly understand target market;

    obtain advice on international structure from a corporate, intellectual property, legal and tax perspective;

    determine realistic budgets for expansion;

    allocate management responsibilities;

    determine characteristics and resources required by ideal local partner.

    prepare necessary documentation and consider making any necessary amendments to structure:-

(a)      Non-disclosure Agreement, including non-compete clauses and strong IP protection provisions;

(b)      Prepare template Letter of Intent with core commercial and legal terms;

(c)      Prepare template International Master Franchise Agreement.

 

4.   Commence execution phase:

    develop a draft marketing plan for the local market;

    test products and services in the local market and refine offer;

    determine local suppliers and resolve logistical, supply and support issues;

    determine local pricing;

    establish a pilot operation;

    determine ideal split of responsibilities for local market;

    decide ideal initial fee and ongoing fee split;

    develop local offer documentation;

    seek local partner with desired characteristics and resources.

 

5.   Establish local partner relationships

    assess actual characteristics of local partner and select best long term candidate;

    conduct due diligence on local partner to verify characteristics and resources;

    revise expectations, plans, financials, local market responsibilities and fee split based on actual characteristics of local partner;

□    establish agreed expectations and key performance indicators for local partner in terms of market development, sales, quality etc;

    execute required documentation, amended as appropriate, to record agreed management;

    establish systems, training and support arrangements to ensure an efficient and effective ongoing relationship with the local partner.

 

6.   Work cooperatively to ensure local market success:

    establish processes to ensure strong, frequent and appropriately comprehensive two way communication flows;

    ensure local market visits are sufficient, and meet the needs of the local partner;

    monitor carefully system compliance;

    ensure local brand building is occurring;

    review performance against key performance indicators;

    develop own local market expertise to avoid over reliance on local partner input;

    ensure there are appropriate mechanisms to highlight and resolve issues before they escalate;

    continually review the business fundamentals to ensure ongoing relevance to the local customer.

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