What is international franchising?
When it comes to franchising in the international market, your mindset and business accomplishments are more important than the capital available. You must be clear in your mind whether you are a ‘brand entrepreneur’ or a ‘corporate developer’, as this will determine the type of licence and the franchise sector you are most suited to. Are you a brand entrepreneur with a proven track record developing a business within your market or a corporate entrepreneur with specific sector experience establishing multiple sites?
Franchising has often been described as a ‘business marriage’ between someone with a blueprint and system for doing business (the franchisor) and someone keen to replicate that blueprint locally, regionally, nationally or on a multi-national basis (the franchisee).
The franchisor invests in developing the business, branding, operations manuals, training and support, benefiting from rapid brand development, a motivated investor-developer and bypassing the need for corporate investment. The franchisee invests capital, time and effort in developing the business, enjoying proven systems, support, training, collective brand value and fast-forwarding past the business conception and developmental phases.
With reference to the above subject, structuring the arrangement internationally, the preferred structure has been the master franchise agreement. However, the area development structure has been relied upon by many experienced franchise companies.
Ordinarily, the master franchisee is granted the rights for a specific territory and a specific number of units to be developed. The franchisee is also given the right to sub-franchise the concept to other franchisees.
When granting a territory, it is important to assess the financial and operational capability of the potential franchisee. The ideal master franchise candidate will have prior business or franchising experience, be reasonably well capitalized to develop the brand, and have local resources, personnel and or experience in real estate, financial matters, and training and education. Many franchises have found themselves contractually obligated to a franchisee that was unable to develop the entire territory granted in the agreement. It is critical to assess the potential of the territory and match it to the capability of the franchisee. Some countries and regions should be divided into multiple territories.
International franchising is in a rude state of health and the current downturn has done nothing to reduce the enthusiasm for it, particularly in the retail, food and beverage and hotel/hospitality business.
What is master franchising?
Master franchising is the most common structure adopted globally. It involves the franchisor granting the master franchisee the right to grant unit franchises to independent third parties in the territory.
This extends most of the advantages of franchising into the international arena. It enables rapid growth with minimal capital requirement compared to the establishment of a subsidiary or a subordinated equity arrangement and minimal managerial requirement compared to direct franchising. It also allows the franchisor to take advantage of the local expertise of the master franchisee including its knowledge of the local market.
The disadvantages are that there is a lower element of control over the unit franchisees as this task is delegated to the master franchisee.
So, franchising is a popular and versatile tool for the rapid and less capital and resource intensive international expansion of business. It is a specialised type of intellectual property licence covering brands, know-how, design rights and copyright. A variety of legal structures are adopted, depending upon a number of factors such as geography, market factors, culture, infrastructure and the required capital investment, amongst other things.
An increasing number of jurisdictions have adopted franchise specific regulations. These often involve precontractual disclosure, mandatory terms and registration at government agencies. The contents of franchise regulations are clearly determined by their overriding purpose with the foreign trade/investment regulations showing clear and obvious differences from pure franchise regulations.
Director Franchise – US Dollar Store Inc.