How do you franchise a business overseas?
In our latest interview with a trainer from the Institute of Export & International Trade, we talk to Dick Brentnall – the Institute’s services expert. You can also read our discussion about classifications and the practicalities of exporting services.
What are the key considerations a business needs to make when it comes to the possibility of franchising the service they deliver?
A service exporter has many choices on how they get their service to the overseas market – many do it directly. Franchising is appropriate when it allows a service exporter to have a visual and tangible presence in the end-market.
Franchising is only appropriate when the service being offered is transferrable to that market to then be given to a third party. The current service company will need a strong brand and tangible consumer good will – i.e. evidence of a good service, and a potential offering to the new market.
The critical issue we’ve had with franchising is that a typical potential franchiser thinks about what they can offer but doesn’t consider the end-market franchisee. From the franchisee’s point of view, is it attractive and is it worth their time and effort.
The other key point is that there needs to be an identifiable and unique business format that can be transferred to the overseas market. You can’t franchise an idea – you have to have a structure. And will this business structure benefit the entrepreneurial management in the market and the individual owners who are the franchisees?
You need to be able to prove some success in the delivery of the service. There has to be a track record of success already here in the UK. If it’s just sold to a franchisee as a proposed idea as opposed to a proven structure and process, it won’t do so well.
Given there must be some sort of management and admin involved, is it appropriate to smaller businesses or is it something more appropriate for larger organisations?
It’s more to do with whether there is something tangible – i.e. a transferrable structure – rather than the size of the operation.
Retail operations are a very tangible example of franchising around the world. Legal & financial operations also franchise because they have a tangible structure.
That’s the key – not how big you are.
How do you actually do it? What are the practical steps towards setting up a franchise?
The first thing is to get a lawyer. Get legal advice for both here and in the end-market so that you can ensure that the liabilities for either party have been thought through.
Franchising, effectively, is the granting of the rights to sell, offer or distribute a certain service, under a particular marketing scheme that is devised by you the franchisor.
You would normally go and make a contact with the local franchise association in the market. You would not normally attempt such an enterprise in a less sophisticated market that doesn’t have an association of some sort. Most sophisticated markets around the world will have franchise associations set up to protect franchisees but also to provide appropriate advice to any potential franchisor.
Here in the UK I’d recommend to contact the British Franchise Association. Though they are not too interested in the exporting of a UK franchise offering itself, they will give advice and information, much of which will be online. They’ll also help you to understand if the type of concept you’re looking to franchise would appeal in a new end-market.
How does franchising impact a business once it is set up?
They key thing is finance. The thing you have to do at an early stage is figure out what will be the return of franchising compared to another approach.
Generally speaking franchising will offer less of a return because you’ll be getting a fee, as a negotiated percentage of the local service, and that will have to be put alongside the cost of marketing and supporting the franchisee in that market. All this will need to be compared to what the cost would be managing and delivering the service by yourself with no local cost. It’s a comparative question.
The second question is the ability of the exporter to genuinely support the franchise. You can’t just set up a franchise in an overseas market, with franchisees hired, and then leave it.
To be successful and to meet legal and contractual requirements, the exporter needs to be able support the local operators in a variety ways, including training, promotional activity, on-going management, checking that the agreed standards are being achieved, and so on.
Topics: Finance, Getting Started, Legislation & Regulation, Market Research, Operations, Product Development, and Sales & Marketing