For investors, the thought of being the sole owner of a string of successful franchises in your country is enticing. McDonald’s, Marriot, Hertz and Century 21 are but just a few everyday names that have leveraged international franchising to their great success.
International franchising, otherwise known as international licensing allows stand-out companies to enter new territories by using their brand and intellectual property (trademark and know-how) in return for royalties and product sales.
This form of strategic partnership encourages businesses to grow internationally with low-risk incentives. For the franchisor, it requires very little up-front investment as it's the franchisee who will have to satisfy the financial requirements in return for the keys to the company. In exchange the franchisee gains unprecedented access to an established brand, with the added benefit of proven know-how. Of course, there are no guarantees when it comes to new businesses. However, having the ongoing support of the franchise headquarters in your back pocket is a handy bonus. At the end of the day, it's in both parties’ best interest for the franchisee to succeed.
So how do you move forward in this global licencing practice? Well, there are two main ways international franchising is achieved.
Direct Franchise Agreement
The first and most simple is a direct franchise agreement. This is a direct contract between the franchisor (or sub-franchisor) and the franchisee. Similar to that of a domestic franchising agreement, direct franchising requires a lot of resources from the franchisor to assist in training, recruitment and the support process. The process is typically a centralised practice. This approach works most effectively when moving into similar cultures with the same cultural and legal norms. An example of this is Sweden to Norway – or even the United States to Canada.
Master Franchise Agreement
The second and most common way international franchising is conducted these days is through a master franchise agreement. This is more of a territorial approach where the franchisor grants exclusive rights for the franchisee to establish the brand in another country, state or region. The franchisee gets unprecedented access to a known brand, and with the know-how, has the potential to quickly take a maket share of the new region. While for the franchisor, having a local person with local knowledge taking personal responsibility can help mitigate potential political and bureaucratic issues more easily in an unknown region - and even helps to minimise costs and risks invovled with researching a new territory.
In a master franchise agreement, the franchisee pays a larger than normal initial fee to have the exclusive rights to a designated region. The master franchisee will have to open an agreed number of operational units in the region over a specific amount of time. Another benefit of being a master franchisee is the right to recruit other franchisees in their jurisdiction. In other words, the master franchisor becomes the middle link in the company system. Still not the king, but more like an earl over the land it covers. As such, the master franchisee then gets to retain all, or the majority of fees paid upwards from franchises in their territory. This kind of investment has the potential to be highly profitable if executed in the right market.
International agreements are governed through an International Franchise Agreement. Some of the downsides may include lengthy legal procedures shrouded in red tape and the potential added cost of legal and ongoing agency fees.
If it sounds too good to be true, it probably is! We recommend, as with any new business, to do your homework and research. Just as the company will investigate and analyse if you are the right master franchisee, you must also research to see if the company is the right place for your investment.
Also, don’t assume just because a company has worked successfully in one continent that it will automatically be successful in another. You must conduct in-depth market research looking into different demographics and even cultural norms. Then consider if you have the resources, but most importantly, the dedication to make it work - as international franchising is often more expensive from an investment point of view.
Franchise systems can be broken into sub-sections for a better understanding on how they specifically operate. This includes types of business activity, system organisation or types of know-how.
Franchising is a style of business cooperation between independent entrepreneurs. Put simply, a franchisee pays the franchisor a fee to use their brand and industry know-how.
The European Franchise Federation gave itself a mission in the early 1970’s to bring clarity to the rights & obligations in a franchise contract by developing the European Code of Ethics for Franchising.
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