Introduction to International Franchising

The following article was submitted by Guest Author, Kathryn Rookes. Kathryn is an experienced franchise attorney and a member of FSB Legal, a virtual law firm. She is one of the very few franchise attorneys in the United States with experience in a government regulatory practice (Maryland Division of Securities), private practice, and as in-house counsel. With this diversity of experience, Kathryn understands the issues that franchisors face on a daily basis.

Introduction to International Franchising
as submitted by Kathryn Rookes, Attorney, FSB Legal

Introduction

Many franchisors perceive international expansion of their franchise concepts to be a great way to generate cash on a short term basis and do not fully appreciate the long‐term commitment that successful international franchising requires. The level of commitment and resources required to expand internationally is often greater than that required for domestic expansion. This article provides a brief overview of the requirements for international franchising and identifies a typical international deal flow process. We also have included several resources that contain additional information for further research.

Evaluate Your Resources

When making the decision to go international, you must consider the additional resources that you will need to successfully expand and support your new international franchisees. Areas of increased costs to consider include telephone and postage, travel, marketing, trademark registration, preparing international franchise agreements and disclosures, costs of goods due to export/import controls, foreign taxes, translations and document registration, to name a few.

Determine What You Will Offer

International deals are normally structured in one of three ways. First are single unit franchise sales (sometimes called direct franchising), much like many systems sell in the United States. The next option is area development rights, in which you identify 1 developer who opens multiple units of its own. The third common option is master franchising (also called sub‐franchising). In this method you identify 1 developer that has the right to open its own units, and also the right to sell additional units to other franchisees. In addition to these three methods, some international arrangements are structured as joint ventures, in which you are an equity partner with your foreign franchisee. Each method has its own risks and rewards, so you must evaluate your goals and your resources to determine which method best suits your needs.

Finding Good Research

Your research on each opportunity generally consists of two areas, research on the territory and research on your prospective franchisees. The internet provides a wealth of information on the territory. The United States Department of Commerce is a good starting point as is its included agency, the International Trade Administration. The trade promotion unit of the International Trade Association, the United States Commercial Service also provides significant help by providing market research, worldwide trade events for promoting your offering, assistance in identifying prospective franchisees, manufacturers and distributors, and individualized counseling on going international.

For research on your prospective franchisees, you are well served to retain the services of one of the many companies that provide due diligence or investigative type services. Research on people and companies in other countries is a very tricky business, as the stability, accuracy and adequacy of information in other areas of the world is often lacking. These companies will be able to evaluate the trustworthiness of the information they obtain, and can educate you on the limitations of the information so that you can make your own decisions on the risks you are assuming by choosing any particular franchisee.

Establishing a Deal Flow Process

The deal flow process for international deals will usually be significantly different from your domestic deal flow process and will necessarily require more time and resources for each deal. We generally recommend the following steps to ensure compliance with Unites States’ and the foreign country’s local law.

1. Determine whether there are any legal or practical barriers for your target country. Legal barriers include the U.S. government’s trade embargos and terrorism sanctions, in which U.S. businesses are prohibited from conducting business in certain countries. You may find this information primarily at the United States Department of the Treasury, Office of Foreign Asset Control website. The primary restrictions involve, as of January 2009, Balkans, Belarus, Burma, Cote d’Ivoire (Ivory Coast), Cuba, Democratic Republic of the Congo, Iran, Iraq, former Liberian Regime of Charles Taylor, North Korea, Sudan, Syria and Zimbabwe. Practical barriers (which also can be legal in nature) might include currency export restrictions (you won’t be able to get paid), prohibitions on foreign investment and/or ownership (you’re not allowed to invest there), lack of governmental infrastructure (you can’t register your trademarks or protect your intellectual property, trade secrets or contract interests due to lack of a stable court system), competition (both laws and actual), taxes (you can’t afford), restrictions on transfer (can’t stop your franchisee from selling out), economic conditions (won’t support your business model) and other such items.
2. Once you have determined that there is no barrier, you should determine whether there is a franchise disclosure and/or registration law in the target country. If there is, you should retain local counsel immediately to draft the necessary disclosure and handle the registration for you. We are happy to assist you with this process.
3. Identify your prospective franchisee and begin your background check on the prospect.
4. Negotiate and document a Letter of Intent that contains the material terms of the new deal. You will normally require a deposit against the initial development fee on the signing of the LOI.
5. Retain local counsel to review your proposed form of agreement to revise the agreement to ensure that it complies with all applicable local laws.
6. Negotiate with your prospective franchisee on any changes to your form of agreement. Once all terms are negotiated, you will finalize the agreement and proceed with signing.
7. Once your agreement is fully signed, you will want to proceed with registering your trademarks in the country, if you don’t already have the marks registered. If you have a large budget for your international expansion, you should ideally move this step up as early as you can afford, even up to step 2 if possible.
8. Once all of the above is accomplished, the real work begins. You now need to arrange for training, import of products or ingredients, site selection assistance, site development assistance, marketing assistance, and all of the other support services that franchisors normally provide.

Summary

With proper planning, international expansion of your franchise system can be an exciting new challenge that brings you many rewards. At FSB Legal, our attorneys are experienced in international franchising and have completed deals in over 35 countries. We are happy to help you begin this journey.

Some may call it bragging, but some see it as sharing!

In my quest towards franchise success at all levels, I’ve received testimonials from various business professionals that I would like to share with my readers and future clients.

“I have had the opportunity to observe Paul’s expertise and capabilities as a “coach” working with several different small service businesses and franchise owner groups in the 10 years I have known him. His real world experience and background makes him highly effective in what he does. He has the unique perspective of having owned and sold several successful small businesses and franchises over the years. Paul intimately understands what owner operators are experiencing in their businesses and he offers them invaluable insight into both their unrealized opportunities and the potential mistakes they might be making. I’ve watched him help several clients who without his help, would have watched their business and life savings evaporate. Paul has the unique ability to leverage both his considerable “street smarts” and professional training to help reinvigorate a failing business or take an already successful one to a much higher level. I’d recommend him to my clients and franchise group owners / executives without reservation.” August 13, 2008
Michael A. Garguilo , President & Chief Operating Officer , Brown & Brown of Texas, Inc.

“Working closely with Paul on various public relations projects for a national franchise organization, I’ve seen firsthand Paul’s ability to successfully present ideas and concepts to large and small groups alike. On one occasion, we had the task of lobbying government officials including city council members and the mayor about proposed automotive repair regulation. Paul’s ability to lead the discussion and effectively articulate his opinions ultimately led to favorable decisions that helped protect consumers and opened the door for Paul’s work with the better Business Bureau on similar issues. On another project, I was contracted to coordinate a series of grassroots speaking engagements for Paul to present consumer awareness to various consumer groups. Paul was both informative and compelling in his presentations and within days of each speaking engagement, the company’s local franchisees experienced significant increases in sales. I would not hesitate working with Paul on future public relations projects and would certainly recommend him to my clients in the future.”
August 24, 2008
Bernard Kaplan , President , Kaplan Public Relations

“Paul is an extremely knowledgeable franchising veteran bringing to the table experience as a franchisor executive and a franchisee. His multi-faceted perspective is extremely valuable for someone seeking assistance within the franchising industry, and his willingness to share his deep fountain of knowledge makes him an incredible resource. For anyone seeking guidance in a franchising-related issue, Paul is definitely your “go-to” guy.”
December 26, 2008
Linda Daichendt , CEO / Managing Consultant , DAIMAR Enterprises – including: Strategic Growth, Marketing & HR Concepts divisions

“Paul is best of class gentleman in his industry. I took the liberty of contacting him to seek advice on a consulting endeavor and was very impressed with his generosity of time and expertise. If you’re seeking a very credible expert in the area of franchise consulting, Paul is the only person you should be considering. Robert Feeney Executive Sales Manager Gage Marketing”
January 19, 2009
Robert J. Feeney , Business Development Manager , Gage Marketing

“Paul is a consummate professional. I contacted him to get information about providing workers comp consulting services to franchises. Without any hesitations Paul asked me to forward information about my company. He took the time to look it over and gave me excellent pointers on reaching this market. He did not give me hype, he provided solid direction and positive encouragement. I am very impressed with Paul and his willingness to share his knowledge which is extremely valuable. He is on point and knows his stuff. Thank you Paul – and I would recommend his services.”
March 4, 2009
Margaret Spence, CWC, RMPE , President/CEO , Douglas Claims & Risk Consultants, Inc

Franchisors, Act Now, and Pay What You Can!

During this economic downturn that continues to surround us, there have been several reports of restaurants and other small businesses offering their services for whatever the customer wants to pay. When asked, these small business owners claim this is being done as their part to help stimulate the economy and help those in need. The common thoughts and sentiment behind their actions are “we’re all in this together, and we all need to help each other if we’re to survive. It’s for the good of the entire country.”

In the franchise community, mature, emerging and startup franchisors alike, have been affected one way or the other by problems stemming from the nation’s current economic problems. Many franchisors have expressed concern about declining franchise sales. Startups are worried about failing before they get a chance to start offering their franchise opportunity. Mature and emerging franchise organizations are exploring ways to improve franchisee revenue as it directly affects franchisors’ royalty stream. All seem to have the desire to be proactive in making things happen to remedy the situation but many have their hands tied by decreasing revenue and limited budgets. Here’s where I’ll do my part to help the franchise community address survival and growth issues.

Just like the small business and restaurant owners described above, I will offer my services to franchisors for what they are able to pay. This is a very bold initiative but I’m willing to help, just as I am currently mentoring franchisors (at no charge) that have requested my assistance. Why not keep the ball rolling? Sure, I’d like to see my business grow and hope franchisors I help will be satisfied with my services and will continue working with me in the future. And, although my business has steadily grown over the past year, I need to continue developing the business as well, and every little bit certainly helps.

My offer has few restrictions. One, I ask that franchisors be fair as I am being fair. Obviously, I can’t work for nothing as anyone else could not work for nothing. Two, I expect client participation in whatever project we agree upon, as our mutual goal is to make the project a success. Last, I ask that the payment amounts we agree upon be remitted promptly, as for me to be able to continue doing business under this offer positive cash flow takes precedence over profit.

The process to take advantage of this offer is quite simple. First, contact me so we can set up a telephone conversation to discuss your current situation and desired results. Next, I’ll present you with my recommendations. These will include the normal cost to implement the recommended plan of action. Upon your review, you will tell me the amount you could pay. Last, we’ll discuss the same to make sure we both understand each other’s expectations, and ability to accomplish the same, in order to move forward.

A complete description of my personal experience, and my organizations’ services and capabilities, can be found on my various websites and profiles including franchisEssentials, 21st Century Franchise Coach and Paul Segreto Linkedin Profile.

For further discussion, or to find out how I can help your organization achieve its goals and objectives, please contact me at segreto.paul@gmail.com.

Why are franchise sales lagging?

Besides the obvious factors of economic uncertainty and tight credit, what other factors are contributing to dismal franchise sales across the industry? Are we contributing to the problem? Are we doing a disservice to franchise candidates, the very people exploring options for a better future?

Recently, Franchise Update’s own mystery shopping (posing as a qualified buyer and phoning in and emailing to 148 franchise companies who represented 57,000 units) revealed such fundamental flaws as:

no callback within 48 hours (58%);
not taking a name (24%);
not taking a phone number (45%) or email address (40%); and
not asking for a time frame for buying/opening a franchise (67%).

The ironic thing is that the industry routinely pays out 20-30-40% commission on franchise sales.

In light of recent poor performance and, high expense in actually awarding a franchise, can the franchise industry continue its franchise development efforts in the same manner as it has for the past ten or so years AND expect to grow?

Franchise Success and Web 2.0

I believe anything a franchisor does should be done to benefit the franchise relationship and Web 2.0 plays perfectly into this philosophy as it affords interactivity at all stages of the franchise relationship. From prospecting for qualified franchise candidates to supporting current franchisees, the utilization of Web 2.0 tools creates environments that strengthen relationships, shares information, provides two-way communications, and provides points of reference for follow up. It creates a multi-tiered platform of information that benefits both franchise development and customer generation efforts alike. Often, simultaneously.

For franchise startups, the founder’s vision of the concept is paramount to future success. They are perceived as the concept. They are essentially the brand. At least until a significant number of franchises are awarded and brand awareness is established across multiple markets, they are the inspiration for franchise candidates. The benefit to spreading this message through Web 2.0 outlets such as social networking, video sharing, blogs, etc. is that these tools and associated strategies will generate direct excitement about the business concept while generating subliminal, subtle interest in the franchise concept. This establishes a perfect foundation for growth. It also defines a very worthwhile, visible support mechanism for franchisees.