When a business is nearing capacity in its home market, whether or not it operates through a franchising structure in its home country, cross-border franchising represents a very real opportunity to build a business. The options are either to develop and export an existing business format which you currently own and operate in your home country; or to take on the rights to operate a business from elsewhere which does not currently have outlets trading in your country.

Developing a global brand is now a very real possibility for many successful businesses who would never before have dreamed of it. With it come the advantages of economies of scale in both production and marketing costs, which compound the benefits of the relationship for both franchisor and franchisee. In addition, for the franchisor, there is the benefit of spreading the risk of economic downturn. There is rarely a slump all around the world at the same time so if, say, Europe is having a bad time the chances are economies will still be buoyant in the Far East and the franchisor will have at least some reasonable sales opportunities.

The principles of international franchising are similar to those laid out elsewhere in this book for domestic franchising, but we need to establish some new definitions, both for the parties and for the fees, before considering the opportunities.

The franchisor is the company who originally developed the concept which is now to be the subject of the franchise. They may or may not have used a franchising model to develop the business system and brand in their home country.

A master franchisee is the individual, or more likely the corporation, to whom the rights to use the system are exported for them to operate in their own country. A master franchisee may originally operate their own company-owned outlets in their country in order to prove and/or adapt the system, but they will sooner or later appoint sub-franchisees to open additional units according to the agreed development schedule.

An area developer is the individual, or more likely the corporation, to whom the rights to use the system are exported for them to operate in their own country or region. In this case however they will not be intended to operate through sub-franchisees and will only open their own company-owned units. Area developers can also be referred to as direct franchisees since they are in direct contact with the franchisor, whether they have one or 100 units open.

A sub-franchisee or unit franchisee is the individual or company which owns and operates the trading outlets which report to the master franchisee in a given country or territory. Their reporting responsibility, and legal agreement, will normally be with the master franchisee, not the franchisor.

The master franchise fee is the amount the master franchisee pays to get into the game, and it may or may not cover training, rights to use the name and systems, an amount which enables the franchisor to amortise his international development and recruitment costs, and an amount which reflects the perceived value of the opportunity or territory, particularly if it is being awarded on an exclusive basis. It may also be calculated with reference to what other similar systems are charging, and the general market price for franchises, but it needs to be accurately assessed for each system. As stated in Chapter 3, when discussing franchising in general, just because a competitor is charging, say, $300,000 upfront fee doesn’t mean that’s the right figure for your business – again, it may not even be right for their business if they didn’t research it properly!

Note that the upfront fee is not the same as the total set-up costs; the latter includes all the other necessary purchases and expenses of getting the business opened, most of which may go to third parties.

Note also that a developer, whether national or regional, will need to have much more capital available to it than a master franchisee because the developer is committing to opening and operating all the stores themselves whereas the master will eventually be using other people’s money (i.e. his franchisees) to build his network. Developers are likely therefore to be much more substantial businesses than master franchisees.

An international franchisor’s business should not be about selling master franchises and bringing in upfront franchise fees. The long-term goal should be to generate continuing income from successful franchisees building a recognised brand around the world. Not all international franchisors see things this way, so potential master franchisees should beware.

The ongoing fees or management services fees include royalties for continuing use of the brand and systems but these fees are mostly to cover the services provided to the master by the franchisor. The range of services, and the level of management services fees, varies greatly from system to system – even for businesses in the same sector – and once again they need to assessed and set by an experienced practitioner. They must be affordable, and good value, for the franchisee; they must be sufficient eventually to pay for the franchisor’s support infrastructure and provide them with a reasonable profit, good return on their investment, and adequate funding to further develop the network and the business.

The majority of management services fees are charged as a percentage of the master franchisee’s income from their unit franchisees. This will include part of the upfront fees payable by unit franchisees and of their ongoing management services fees. Care must be taken in assessing the appropriate level, as taking too much will leave the master with insufficient funds to grow their network. ‘Half of the upfront unit fees, then ten per cent of their ten per cent’ is often quoted as a reasonable benchmark, but it needs to be a bespoke calculation for every business.

Where the overseas partner is an area developer, the ongoing fees will be a store-opening fee (i.e. a fixed amount every time they open a new outlet) and a percentage of the retail sales.

Alternatively, product mark-up is more appropriate for some franchisors, particularly retailers or manufacturers. Sometimes franchisors charge both, but the temptation to take too much from franchisees in too many ways must be resisted if it affects the viability of their businesses. One of the advantages of being a franchisee is to benefit, not suffer, from being tied to, or part of, a bigger buying group.

A marketing fee may also be charged by some franchisors, and this is supposed to go into a pot to help pay for international marketing and branding activity, although one is tempted to question how many international franchisors are truly capable of providing a good-value return. Local country marketing activity is usually a separate expense, paid for by the franchisee.

The chosen structure and fee arrangements will vary from country to country, even for the same franchisor, and they need to be the subject of some detailed research by experienced advisers to get the optimum version. As with all franchise arrangements there is no generic right way to do it. There is simply the right way for the business in question, and this needs to be deduced from all the options and experiences available to specialist advisers.

Generally speaking, a business which does not franchise in its home country would be ill-advised to appoint a master franchisee in another country as it (the franchisor) will have no knowledge or experience of appointing and managing sub-franchisees and will therefore be unable to pass on any such knowledge and experience to the master franchisee. This may not be such a problem if the master franchisee already has experience of running other franchised networks, but then there is the risk of them knowing more than the franchisor and of the tail then wagging the dog.

Therefore the arrangement tends to work best if a business which operates a company-owned chain in its home country appoints area developers abroad. A business which operates a franchised network in its home country can safely appoint either master franchisees or area developers.

So, what about the opportunities for the various parties?

THE FRANCHISOR

A business may have established itself well in its home country, and indeed may even be reaching capacity there. To continue to grow, it has a number of options, not least finding other products or services to supply through its established distribution system (in which case it could even consider becoming a master franchisee or area developer for someone else’s system). Alternatively it can look beyond its own shores at the possibilities of duplicating its success elsewhere.

Naturally there are a number of options, including setting up a wholly-owned subsidiary or going into a joint venture arrangement with a business which has appropriate knowledge of the local market. This entity can then open either or both company-owned and sub-franchised outlets. Subsidiaries and joint ventures both carry greater risk than a franchise arrangement, where someone else will be providing the capital and human resources, but of course the more you own the more of the profit you retain.

The advantages are the same as those of choosing to grow a domestic operation by franchising – put simply, you can grow quicker using other people’s money and you have less day-to-day hassle because someone else is operating the business. If you can find five different organisations to duplicate your operation in five different countries, you can probably expand at five times the speed you could if you did it on your own. Of course, there are potential problems, but there is now much more experienced professional advice available than was the case even five years ago, so problems can at best be avoided, or at worst anticipated.

THE MASTER FRANCHISEE

For someone who is of the mindset of a typical franchisee, i.e. not too entrepreneurial and looking to be part of a proven system with established support structures, master franchising can offer far greater potential than simply running a single franchised outlet – and in many cases the required initial investment may not be all that different. For example, the master franchise rights for a van-based mobile franchise operation coming in from abroad could be available for around £100,000. To open just one reasonably sized restaurant outlet could cost three times that – even a quick print outlet could be nearly twice as much.

The advantages, compared to starting your own new network, should be similar to those for individual franchisees – proven system, known name, established way of operating, and marketing and training support. Of course, despite what the franchisor will tell you, just because a business works in America or Australia doesn’t mean it will work in the UK, or vice versa, certainly not without some local adaptation, but at least it’s a start.

As suggested elsewhere, it would perhaps not be a good move to become a master franchisee of a system which is not franchised in its home country unless you already have experience of running a franchised network. Having said that, there are increasing numbers of skilled practitioners who can assist you on either a consultancy, short-term contract or employed basis until you are confident to proceed on your own – and hopefully you’ll always have the support of your franchisor.

Being a successful master franchisee requires the same skills as becoming a domestic franchisor – recruiting, training, monitoring and motivating individuals who want to run an independent business outlet. Fortunately these are skills which are increasingly recognisable and definable, and are therefore trainable by experienced training providers. It also brings the same advantages compared to opening company-owned stores – quicker expansion and more motivated local management.

THE AREA DEVELOPER

Area developers need a lot more capital available than do master franchisees because they are going to have to create their own infrastructure and open all their own outlets. Nevertheless, for companies experienced in a particular field – say, food retailing or building facilities management – who have the management expertise but perhaps lack the creativity to develop their own new products or services, or the finance to create a new brand from scratch, taking on a proven system from abroad can present enormous opportunities.

New products for an existing client base or distribution network, or even an opportunity to convert existing stores to a new brand, can quickly transform a business which has perhaps grown tired. Potential conversion works to the advantage of both franchisor and area developer as they can more quickly achieve brand awareness than they would by opening one store at a time.

Having an established network available for conversion is also a good bargaining point for the prospective area developer in reducing the up-front fee on the grounds that income flow from ongoing fees will grow more quickly.

THE UNIT FRANCHISEE

Becoming a unit franchisee for an incoming franchise, through a master franchisee, is no different to joining a domestic franchisor at an early stage of their development, and all the usual caveats apply. On occasions opportunities arise to become a unit franchisee reporting directly to the franchisor, whose support office remains in his home country. This can be a very risky proposition because most likely nothing will have been tested or proven in the destination market, and help could be a long way away and a long time coming. Of course, such a situation could also present opportunities to be in on the ground floor, to negotiate a favourable deal, or even to go on to become the master franchisee, but it should only be considered by someone with a more risk-taking profile than the average franchisee.

The techniques for becoming an international franchisor, or a master franchisee, and finding appropriate partners, are covered in Section 3 of this book.