Role of disclosure in reducing risk for both parties

Riskmanagement by franchisors is an essential part of their international strategy and roll-out process. Those who fail to identify, reduce, and then manage the remaining risk do so at their peril. They should anticipate spending large amounts of time and money seeking to extricate themselves from the quagmire of litigation.

Author: Mark Abell, International Franchise Consultant

The judiciary are notoriously unsympathetic towards franchisors when they litigate against their franchisees. Perhaps Lord Roskill, the chairman of the Fraud Trials Committee, best typifies their approach in his 1986 report He stated that:

“Fraudsters induce investors to buy franchises holding out the prospect of large returns on the investment But once a payment has been made, the franchise proves worthless .... ”

Despite the reality of the situation, the court generally sees master franchisees and developers as “the little man ” and franchisors as large corporate entities, focused more on profit than fair dealing They are, therefore, usually only too willing to accept the suggestion that the franchisor has encouraged the hapless master franchisee or developer to invest in the franchise by making gross misrepresentations of the truth.

The reality is, of course, somewhat different Whilst some franchisors may make over-inflated claims when recruiting master franchisees and developers, the breakdown of the relationship and any resulting litigation is usually due to a mismatch of expectation between the franchisor and the master franchisee/developer, and not any misrepresentation by the franchisor. In other words, the franchisor has failed to undertake appropriate risk management.

Consequences

Nobody likes to take the blame for their own failure Master franchisees and developers are no different If their franchised business fails, the natural reaction is for them to try and blame the franchisor, rather than themselves for this failure.

Franchisors, who have failed to properly implement a risk management strategy and who are found to have made misrepresentations to prospective franchisees, can find themselves subject to substantial awards of damages. It is, therefore, in the franchisor's very best interests to make sure that it manages the risks by implementing an appropriate disclosure system when recruiting franchisees

The implementation of an appropriate risk management strategy prospective franchisee quality information abo good time before they franchise agreement

In all jurisdictions, franc are subject to the law o master franchisee/developer can sue a franchisor for breach of contract if it does not fulfil its obligations under the agreement, if it makes false representation, and/or breaches an implied term, warranty or representation. UK franchisors usually ensure that their master franchise and development agreements are subject to English law and the jurisdiction of the English courts. They must, therefore, be aware of how English law regulates such things

The Misrepresentation Act 1967 and the Unfair Contract Terms Act 1977 may also afford redress to the franchisee in certain circumstances. The franchisee can sue for damages for loss of the bargain and also in certain circumstances for specific performance

If a franchisor fails to fulfil his obligation under the franchise agreement he may well

About the author

Dr Mark Abell LLB has been acknowledged as a world leading expert in franchising for over 40 years.

Abell now works with a select portfolio of world leading franchise brands on the development and implementation of their international and domestic strategies

DrMarkAbell2022@gmail.com be liable not only for breach of contract, but also for negligence, or even breach of fiduciary duty in which case the franchisee also has a right against the franchisor in both damages and specific performance.

One particular source of protection afforded to franchisees which is often overlooked is that provided by the Company Directors Disqualification Act 1986. Section 56(1) of this is a complicated piece of legislation, but in basic terms it provides that a director of an insolvent company can be disqualified from being a director for a period of two to 15 years if he can be proved to be unfit to manage the affairs of a company. There is not a great deal of case law upon this point.

The Natural Life Health Foods case held that in some unusual cases the court might be willing to “pierce the corporate veil” and hold the director of a franchisor company liable for negligent misstatements. However, on appeal the House of Lords found that this could only happen in exceptional circumstances which did exist in the Natural Life case.

The relevant point to note is contained in section 741 of The Companies Act 1985, which provides that a “director” includes any person occupying the position of director by whatever means, including a shadow director. A shadow director is defined as a person in accordance with whose directions or instructions, the directors of the company are accustomed to act.

Case law also uses the term “de facto director” which is basically the same as a shadow director. This means that it is quite possible that the franchisor could, in certain circumstances, be deemed by the court to be a shadow or de facto director of a franchise company, and if the franchisor behaves in a commercially culpable manner (e g does not perform his obligations under the franchise agreement) it may well be that he could be disqualified as a director.

A mere distributor or licensee could obviously show that any directions were given under a bona fide arm ’ s length commercial agreement The franchisor, however, is far more intimately involved with the franchisee and has power to control most aspects of its business, including management and accounting procedure, coupled with powers of inspection.

Indeed, most franchise agreements provide for the franchisor to manage a franchisee’s outlet in certain circumstances, such as the franchisee’s incapacity or even death. This would mean that not only could an individual franchisor be prevented from being a director of his own company, he could also be disqualified from being a shadow director of another company, and therefore from being a franchisor.

This bar is not restricted to individuals, but extends also to corporate franchisors. Thus, the UK law arguably goes further than most others in this respect in providing protection for franchisees

If it could be shown that the franchisor, in acting as a shadow director, has lacked commercial probity, or even been merely negligent, he could become subject to a disqualification order. This grey area of law really requires some clarification; ideally by franchisors being expressly excluded by statute

However, until such amendment passes into law, the franchisor must take steps to monitor carefully its franchisees and ensure that it avoids acting without commercial probity or is negligent

It should also be noted that any dishonesty by the franchisor could be an offence under the Theft Act 1968, punishable by fines and penal sentences.

Legal regulation of franchisor disclosure

In a growing number of jurisdictions, the risk management process is in part proscribed by legislation The legislature takes the view that appropriate disclosure is so important that it is something that needs to be specifically provided for in the law and cannot be left to voluntary codes, enforced by toothless trade bodies Even though the agreement may be subject to English law, the franchisor must still comply with the local disclosure law

The U.S.

The protection afforded to franchisees in the U.S. is often held up as a model which the UK should adopt by those favouring a statutory regulatory system. In the U.S, where franchise sales are seen as basically dealings in securities, there is a complex web of federal and state laws imposing differing requirements upon the franchisors.

At federal level, there are the Trade Commission’s “Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunity Ventures”, which have recently been amended and updated These require franchisors and area developers to provide would-be franchisees and sub-franchisees with the franchise agreement, or related documentation, and a disclosure document.

Matters included in the disclosure document are:-

● the franchisor’s litigation and bankruptcy histories

● the histories of the franchise to be purchased

● details of any initial and continuing payments

● details of any obligations to purchase goods

● details of available finance

● the precise nature of the franchisee’s participation and,

● a summary of the termination, cancellation, training, site selection and reporting provisions of the agreement.

It is common practice to use the Franchise Disclosure Document (FDD) developed by the American Securities Administrators’ Organisation in place of the actual disclosure document. Timing is crucial and disclosure must be made at the earlier of either the first “personal” meeting, or the time for making the disclosure (at least 10 business days prior to the execution of a binding agreement or the payment of consideration by the franchisee).

All related documentation, including the agreement to be executed by the franchisee, which is materially different from the standard form of agreement must also be registered within five working days before execution Further, unless the FDD is used for disclosure purposes an “earnings claims document” must also be delivered to the franchisee if the franchisor makes projections of earnings or incomes of the franchisee or discloses history or information concerning the company and/or franchise operations However, if the claims are made in the media the separate earnings claims document is compulsory, even if a FDD is used.

Most states also have registration/disclosure requirements as well as provisions for covering such things as termination and renewal These requirements are many and various, and the interface between state and federal laws requires a great deal of consideration and keeps the American franchise lawyers well supplied with highly remunerative work At present there are a number of proposals to increase this level of regulation still further.

The problems in such a system for UK and other foreign franchisors is that they find it difficult to deal with the administration and the highly technical rules tend to gain a momentum all of their own. The rules continually change as their shortcomings become evident.

Australia

In Australia, a specific franchise law was first proposed in 1986 along the American lines. However, at the time the development of Australia’s common law, which is basically the same as that of England, was thought to afford more than adequate protection to franchisees and so the proposed law was abandoned

A voluntary regulatory code was established following the recommendations of a parliamentary working party headed by David Beddell M.P. Its lack of success has been well documented As a result, in June, 1998 a new franchise law, providing for mandatory disclosure by franchisors to their franchisees, was adopted. This has become a heavy burden for franchisors.

Japan

In Japan, the Ministry for International Trade and Industry (MITI) has agreed a voluntary code with the Japanese Franchise Association which, if complied with, exempts JFA members from extensive laws covering distribution in general. The Fair Trade Commission has issued guidelines on desired disclosure by franchisors.

South Africa

The Franchise Association of Southern Africa (FASA) has been given powers to consider complaints by franchisees under the Consumer Code for Franchising introduced by the South African government.

This approach has much to commend it as it combines the “teeth” of legislation with the flexibility and industry knowledge of a national franchise trade association A new law is currently being considered

France

It is widely stated that the Loi Doubin was the first franchise specific law in any EU member state. That is not technically correct The Loi Doubin does not specifically refer to franchising Rather, it focuses on networks which operate under a common brand. This neatly avoids the courts becoming embroiled in highly technical arguments over what is a franchise and what is not.

The Loi Doubin was adopted in 1989 It was enacted by Decree Number 91-337 of 4 April, 1991 and makes pre-contractual disclosure mandatory for most franchising operations. Although the law does not actually mention the word “franchise” its main impact is upon the franchising sector. It provides that any chain that is licensed to use a trade name, mark or sign on an exclusive or non-exclusive basis must comply with the disclosure requirements to prove bad faith on the part of the franchisor to establish liability. If bad faith is established then the franchisor may be convicted of criminal fraud Failure to comply with the disclosure requirements can lead to an order for damages being made by the courts.

By and large the Loi Doubin has been successful at ensuring that franchisors impart relevant information to potential franchisees before they sign up This success has inspired Spain and Italy to take a similar approach to the regulation of franchising.

Spain

The story in Spain is somewhat different to that in France, even though the laws are partly based on the French law

Despite the fanfare that heralded the introduction of Spain’s franchise laws in 1988, 13 years on they can only be seen as a failure and underline the need for any franchise law to be based upon rational assessment rather than emotional selfrighteousness

There is a disclosure and a regulation law.

The disclosure law applies to all franchises being sold in Spain, including master franchises. The disclosure requirements are detailed in Article 3 of the Royal Decree 2485/1988 and under Article 62 of Law

7/1996 of January 15, 1996

Disclosure must be made at least 20 days prior to the signing of the franchise agreements. Breach of this will render the franchisor liable to a fine It is not necessary

The franchisor is required to provide basic information 21 days before closing a deal with a franchisee. By and large this law is complied with.

The Franchisors’ Registry was set up in 1988 as a national registry to guarantee the centralisation of all relevant information about franchises operating in more than one autonomous region of Spain

The law aims for a transparent system, which enables potential franchisees to identify reputable franchise systems by reference to the register. However, to date this aim has not been achieved

The original idea was to create a registry in each region under the jurisdiction of the Central Registry based in Madrid. This has yet to be achieved nationwide and several regions do not have a local registry.

Further, a lack of uniformity in criteria has meant that the registries have been operating without proper admission rules

As a result, the registries have admitted and, therefore, given credibility to systems which are not business-format franchises. This in turn has lead to the registries failing to achieve their aims of establishing a list of quality franchise systems

Thus, ironically, a system designed to make life more difficult for disreputable franchisors is currently endorsing some of them as ones in which potential franchisees can safely invest.

To address some of these issues, the Spanish legislature recently passed Royal Decree 419/2006 which introduced amendments to the previous Royal Decree. The new decree creates additional disclosure requirements regarding the length of time the business has been active and any master franchise agreement

Foreign companies will have to translate all legal documents into Spanish and register them Further voluntary requirements will include registering the company ’ s quality certifications, any mediation or ADR in use in the network, any observance of the Spanish Code of Conduct and any consumer complaints system.

In addition, the new decree creates procedural red tape such as an obligation to notify the Spanish Registry of changes of registered office, the closing or opening of franchise establishments, and an obligation to supply the Registry with an annual report on the franchise network.

A more considered approach to the practicality of the law before it was enacted could have avoided these problems Other European jurisdictions should study and learn from the Spanish experience.

Italy

The Italian law defines franchising as a contract by which one party grants to the other, for a consideration, the use of a combination of intellectual property and/or industrial rights, know-how, and technical and commercial assistance, as well as the opportunity to be part of a franchising network.

The law stipulates that the contract must be executed in writing (otherwise is null and void), and the franchisor must have previously tested its formula in the market The duration of the contract must take into account the time necessary for the franchisee to recoup the investment and, in any event, must be at least three years, except for early termination in case of breach of the agreement. The contract must specify certain basic matters. The franchisor must deliver a disclosure document to the franchisee at least 30 days before the date of execution of the contract.

Belgium

After several years of contemplating a wide variety of proposals - some bordering upon the bizarre - the Belgian Parliament has followed the lead of France and Spain by requiring franchisors to make formal precontractual disclosure to their potential franchisees. The proposed new franchise law came into force in February, 2006.

It requires franchisors to deliver a formal disclosure document to potential franchisees a month before they enter into it Failure to do so will potentially render the franchise agreement unenforceable.

The document comprises two separate sections, the first summarises the main terms of the agreement, and the second details “information relating to the correct evaluation of the commercial partnership agreement” they obtain “with a view to entering into a franchise agreement, and may not use the information, either directly or indirectly, other than for the purposes of the commercial partnership agreement to be entered into”.

In the event that the franchisor fails to comply with the disclosure requirements, the franchisee will have the option to have the agreement become null and void within a period of two years of the date of the agreement If the disclosure document fails to properly summarise the terms of the franchise agreement, those terms will not be enforceable.

Romania

Romanian law also requires pre-contractual disclosure to franchisees. Unfortunately the law was adopted without a great deal of thought as part of a general attempt to present post-communist Romania as a modern country subject to the rule of law. As a consequence, the law has many shortcomings.

Sweden

After many attempts in the Swedish Parliament to enact a franchise law, a precontractual disclosure law was passed in 2006.

The Netherlands

A franchise disclosure law was adopted by the Dutch government after heavy lobbying by franchisees As a result it is one of the more arduous franchise laws in the EU

Risk management

What should UK franchisors embarking upon an internationalisation programme be doing as regards risk management? If there is a disclosure law in the target country the franchisor has no choice but to comply with it

Both parties are placed under a duty of confidentiality as regards information that

However, franchisors must take responsibility for their own situation and properly manage the risks involved in recruiting master franchisees/developers, regardless of the absence of statutory disclosure obligations in many countries.

If the franchisor is at fault, then it should take the blame Sharp practice amongst franchisors can damage the reputation of franchising as a whole. However, legitimate franchisors must also accept responsibility for their own actions. They must take pre-emptive steps to ensure that there is no mismatch of expectation between them and their prospective master franchisees/developers, whilst at the same time not putting the latter off all together. It is a delicate balance. An art rather than an exact science. An int i l f hi disclosure documen essential.

The master franchise proper legal and fina franchise and speak franchisor’s existing m possible before ente agreement. The mas also be brutally hone g to whether or not it is cut out for the role markets they must come to terms with the need for proper disclosure, not only in countries such as Italy, France, Spain and Belgium with “franchise laws”, but also in countries such as Germany, Austria and Switzerland which have so-called “soft” franchise laws that afford franchisees a level of protection that is far higher than that offered in the UK and other jurisdictions.

The franchisor must make sure there is as little scope as possible for misunderstanding. This means identifying the risk to which it is exposed through any alleged misrepresentation, reducing that risk as much as possible by implementing an appropriate disclosure procedure as a key part of its recruitment process, and managing the remaining risk by ensuring that the disclosure process is properly implemented on an ongoing basis.

By mastering the gentle art of disclosure, UK franchisors will save themselves both time and money n

So, in conclusion when UK franchisors decide to take advantage of foreign statutory disclosure obligations in many countries.

Inthis fast changing world, and heightened globalisation, what are the basic routes to successful international franchise expansion and what are the structures available?

Author: Farrah Rose, Head of International Development at The Franchising Centre

International expansion is the obvious next step for any brand well-established in their home market which wants to tap into highly lucrative overseas markets. After all, there’s a big wide world out there with coming up on eight billion potential customers!

You don’t have to look far to find countless brands who have used the opportunities and tools franchising presents for them to export their tried and tested systems.

Big brands like McDonald's, Subway, Hertz, Water Babies, Jani King, F45, are examples of businesses that have used franchising almost from day one with incredible success.

However, there are also examples of brands such as Marks & Spencer’s and Costa, Bread Ahead, who are company run in their home turf, but have used franchising to take their systems and concepts overseas.

There are various shades in between these two examples, but all of them have recognised franchising as the best way to bring their products and services to new consumer markets without the risks and demands on capital which opening an owned and managed network overseas usually entails.

Essentially, there are six different models which brands have used to successfully embrace the power of international expansion:

1. Company-run operations

This model can be very attractive for brands as it allows them tighter control over the establishment of pilot outlets in their prospective territories, and how the brand and systems are implemented

As a result, brands who have been successful in their home markets with company owned branches may feel an affinity for this model, but it can also be fraught with problems and complications.

Cost is the obvious issue, but so is maintaining management and brand standards, and appointing the right people for new leadership roles. Every detail needs to be meticulously planned and overseen, requiring a great deal of capital and time. Organic growth using this model can be slow and expensive, especially if multiple new markets are involved

Then, of course, there are the many cultural, political, employment and legal differences to negotiate. Every market has its own characteristics, and a companyowned model will naturally be at a disadvantage compared to local brands who already understand exactly how to make things work on their home turf

Challenges such as how much to pay for sites, how to employ staff and how to make sure the products or services are positioned correctly for the local market, mean there is a very steep learning curve There will be hard lessons along the way, and the effectiveness of many corporate brands has been blunted by costly, even disastrous, mistakes over the years.

About the author

Farrah Rose has unrivalled experience in international franchising and has been operating in this field since 1984

Initially working for major corporations, such as Burger King and Arcadia Group Plc, Rose began advising businesses as a consultant in 1996. During this time she has worked with organisations of all types from family businesses to major Plc companies and high profile brands, helping them to expand their businesses into global markets farrah@thefranchisingcentre.uk www.thefranchisingcentre.com

Rose works with 76 associated offices in 103 countries and is now recognised as one of the leading authorities on international franchising.

That’s not to say that some brands have not found success using the company-owned model but using a franchising model has been shown time and again to offer faster expansion, and with the benefits of significantly reduced risk and capital expenditure, following a thorough market research and local adaptation. By using franchisees from the local market, you can tap into their knowledge and expertise of the territory to not only drive expansion and development, but also avoid many of the challenges and pitfalls a newcomer to the market faces.

2. Management franchising

In this model, a franchisee buys a licence from the franchisor to use its brand name, and will then invest in setting up the business, but pay the franchisor’s team to run the operations

This is a very rare way of expanding internationally, and not suitable for most brands’ goals. It is often used for complex and hefty investments such as hotels, schools, and universities

3. Direct franchising

This is an extension of how a brand might have already expanded in their domestic market, where a franchisor recruits franchisees individually in an overseas territory and manages the entire process directly Their systems and operations will likely be very similar to those used in the home market, but with a number of adjustments to deal with international issues and modifications to the systems, such as service and products modifications, IT adjustments, pricing and cost structure amendments, currency conversion, taxes etc. The franchisor provides direct support and back-up to franchisees just as it does with its existing domestic franchise network

Again, on the surface, this is an attractive model as franchisors may see the potential for greater control, but the opposite may be true in practice. Supporting franchisees, driving growth, and maintaining standards can be very challenging over distance, even with modern technology For example, virtual meetings are all very well, but managing a number of single units/territories, over multiple time zones can be a serious burden. The key question is … How can you be sure the right person is available at the right time to deal with an issue?

W ithout a solid leadership structure immediately to hand, it is all too easy for franchisees to diverge from the model, which can have a negative effect on growth, productivity, and how the brand is represented in their market. As a result, the cost and impact on the overall franchise structure will likely be much higher than other franchise models

W ithout local leadership, and the market specific expertise and experience that comes with it, there will be challenges in co-ordination of development, or consistency in quality There is a place for direct franchising, but usually on a limited scale, such as in piloting in a new market relatively close to home.

4. Developmental franchising

Often also referred to as area development agreements, this model involves the franchisor granting the rights to an individual, company, or investor group to develop and operate several outlets within a particular territory or region The most famous example of this is Starbucks and Burger King, who I think we can all agree have done extremely well out of it!

The advantage of this model for the franchisor is that it only has one key franchisee to liaise with in that market, rather than a large network, as with direct franchising Generally, that franchisee will also have significant resources, and a proven track record of operating successfully within that local market. As a result, they require less support and have the investment capability to build and grow the operation on a scale which aligns with the franchisor’s goals

As this model is focused around said franchisee, company or group growing a multi-unit network, development agreements typically require that a specific number of outlets must be opened within a prescribed period, say one store to be opened within the first 12 months, with a required openings schedule stipulated over the following years. In return, the investor/franchisee gains long term rights and exclusivity over the new market.

The franchisor will usually charge a significant upfront fee for these rights, often running into six or seven figures This not only reduces the capital expenditure needed for overseas expansion, but also serves to highly motivate the franchisee to stick to the developmental schedule in order to see a timely return on their investment

W ithin this agreement, there will also likely be an initial franchisee fee paid for each outlet which opens, and an ongoing fee based on sales As with domestic franchising, there will also likely be a commitment to spend a certain amount on marketing, and/or a percentage of sales which should be paid into the global marketing fund. There will also be a set policy in place on how the developer will run the network and infrastructure within their territory

5. Master franchising

Similar to a development franchise, master franchising is one of the most popular structures in international franchising. Historically, it has been seen most frequently in the service sectors, especially Food & Beverage, but has expanded into a cross section of industries It is especially effective where the business or service requires the cloning of multiple outlets, each with a hands-on owner/operator.

Like a development franchisee, a master franchisee will usually put down a large sum up front to secure rights in a territory and be committed to paying the home franchisor an ongoing percentage and/or fixed fee for each new outlet.

The difference is that the master franchisee themselves is not directly responsible for operating all the outlets themselves (though they may do so in a limited capacity, see below), but rather will act as a sub-franchisor within a country to grow the franchise network with sub-franchisees.

The master franchise agreement will, like the development agreement, usually involve a commitment to open a certain number of outlets within a specified timeframe This is an essential element in reducing risk for the franchisor that a target market will be underdeveloped There will also likely be an agreement that the master franchisee must open and operate a number of pilot operations themselves to prove the system works in the culture, market and business environment of the overseas country

These company-run outlets allow for adaptation of the concept and its operations to the local market and provide a base for training and development as the master franchisee recruits local franchisees to open new outlets. They are also very beneficial for the master franchisee in that they provide a useful source of revenue for their expanding enterprise while new franchisees are being recruited and developed.

On top of this, master franchisees will need to provide the training and support necessary for their franchisees and commit to the franchisors tried and tested systems – within the context of their local market conditions, of course. The master franchisee will also be contractually obliged to monitor sub-franchisees’ performance and, ultimately, to enforce these sub-franchise agreements.

The term of the master franchisee’s agreement must be long enough to allow it to recoup its investment in building a proper country infrastructure, and to issue sub-franchise agreements with a term long enough to attract sub-franchisees and enable them to do the same

Due to the large scale of the investment, and the substantial up-front fee required, master franchising generally only attracts high-net worth individuals who have considerable experience and ideally, proven skills in running medium to large businesses. This has obvious advantages for the home franchisor but, of course, there is no such thing as completely removing risk from any relationship.

The home franchisor still needs to inure itself against the possible failure of the master franchisee, and have structures to address what will happen if they should decide to sell up, go bankrupt, or if the agreement needs to be terminated due to poor performance.

As a result, there still needs to be significant investment in putting policies, procedures and legal framework at two levels, franchisor to master, master to the sub-franchisees - in place, even if the franchisor has been extremely careful about selecting their master franchisee.

It is sensible to include options and pre-emption rights to buy-out the master franchisee which will be triggered both by an impending sale or business failure, and on termination.

Franchisors should also consider ways to recover the existing network the master franchisee has built up, should they move on for any reason, keep the franchisees up and running, and make sure they can still benefit from whatever growth has occurred. There could still be a significant income stream in place that the franchisor will not want to lose.

There is a lot to think about, and requires a good knowledge of local market conditions, availability of suitable master franchisees, local legislation, country demarcation, probably obtained from a regional consultant, market intelligence expert and local legal advisors.

Suffice to say, master franchising is definitely not suitable for a brand which does not yet have knowledge and experience in how to be an effective franchisor, nor has the necessary robust systems in place to pass those onto their master franchisees to support their respective local sub franchisees.

However, for the right brand which is willing to put in the necessary preparation, it can certainly be an incredibly effective route for international expansion

6. Joint venture

Another variation on the above two models, but in this case a home country franchisor becomes a shareholder in an overseas company to be built and run by a foreign franchisee In exchange for shares, usually valued at anything from 25% to 50%, the franchisor grants the overseas franchisee developmental or master franchise rights for the territory.

There may be a number of reasons for doing this Firstly, it allows the franchisor to take a larger share of local profits than they might under a development or master franchise agreement. The profits replace the large upfront fee of the other models, but it may be that the financial projections show this to be beneficial. It also has the added benefit of attracting prospective franchisees who have a the franchisor needs, b capital necessary for de master franchise agree capital but are looking more in depth involvem commitment to the ma franchise.

Secondly, laws in certain countries desirable for expansion may simply not allow for classic franchising structures, particularly when it comes to charging royalty fees or foreign ownership. This model allows for share dividends to be paid instead, which is usually more feasible.

While this model has its own pros and cons in terms of revenue that will always be specific to each market, it also has both issues and benefits on a more strategic level. The franchisor will have more control as a shareholder and therefore have more rights over the joint venture company, but it can also mean they have more duties and obligations, and all the resulting extra capital and human resource burdens that come with them deployed in a non domestic country.

So, which model is right for you?

After assessing whether or not it is the right time for your international expansion, deciding which model works best for you is likely to be the biggest decision you need to make about your overseas expansion strategy, in both the long- and the shortterm. All these models have their benefits and drawbacks, and there is no such thing as a one size fits all. However, the evidence is overwhelmingly on the side of effort of conducting thorough market entry study

You might rightly be very confident and enthusiastic about taking your brand into lucrative new markets, but my biggest piece of advice would be not to rush. You might be keen to see results but spending that extra time and resources now to ensure you are prepared will save you from potentially, very costly mistakes and reentry attempts, down the line.

Whatever model you choose, here are my top tips for any overseas expansion strategy:

Don’t take your eye off the ball at home

Overseas expansion is going to require a considerable amount of your time and resources. Don’t be so fixated on the goal that you forget what got you to where you are today. That’s your home market and it still needs looking after It doesn’t matter how much new growth you enjoy if the foundations it’s built on are starting to shake.

This said however, don’t shy away from periodically assessing whether or not you are ready for internationalisation with genuine experts, who truly understand the necessary steps in the journey you are about to take Sometimes, a franchisor’s uire a considerable amount e so fixated on the goal that ou are today... that’s your ing after. stem and concept may be ripe for owth, but fear of unknown may cause inertia which will lead to significant loss of opportunity

Do your research

This may seem obvious, but don’t forget that not everyone does business in the way you ’ re used to. There are hundreds of overseas markets, and billions of people to work with, so make sure you know as much as you can about your target market W ill your business concept actually work in your target country, or are there cultural, economic, commercial, or industrycompetitive differences that are likely to present barriers?

Eating, shopping, leisure habits, use of technology and working patterns are likely to vary a great deal too, as will taxation and employment law impacting both you and your franchisee as the employer. All may require you to tweak your business model in a different way for each market. Increasingly, many countries also are adopting franchise-specific laws which must be addressed at the very early planning stages.

Plan, plan, plan… and plan again

I know you want to get stuck in, but before you make your move, remember the ‘ticking time bombs’ of gaps or poorly prepared DIY franchise offers, which may have worked domestically because you are situate, in charge but may not work in international, substandard franchise documentation, or drafted provisions of agreements which have been done by those with insufficient experience of international transactions.

You won’t necessarily know something is wrong until later when it is way too late. W ith the speed of communications and technology these days, failure in one country can go viral around the world in seconds

On a more strategic level, spend some time analysing and prioritising overseas markets. The world is a big place and you can’t expand everywhere all at once. Discover, and focus on exactly where you want to be in the next 1,5,10 years and beyond

The devil’s in the detail

When you ’ re busy focusing on the big picture, it’s all too easy to lose sight of the nitty gritty, and it’s those little details that can come back and bite you later

Plan for, and resource, your exploratory steps sensibly. Flights, accommodation, key management time away, and finding and evaluating potential partners, adaptation of systems, research, all have a cost. Ensure that the domestic operation can bear it and budget for it realistically

Carefully work out your franchise offer package in advance. Don’t negotiate on the hoof, and please ensure your fees are realistic. The latter can be especially challenging if you ’ re considering the development or master franchise route Put in the time to work them out thoroughly so that they are set at a level which both covers the expenses you will inevitably incur in finding, training and establishing the franchisees in business, as well as permitting a reasonable long-term income stream to flow back to the home country.

They must not, however, be set so high that the master franchisee will feel under pressure, either not to invest sufficiently in its support infrastructure, or to charge subfranchisees fees which are disproportionate to the scale of their businesses and the profits which they will need to generate to make the proposition attractive.

The same goes for your legal frameworks. Make sure you have structures in place that cover all possible eventualities and are appropriate to the local market without restricting operations too much. The same also goes for your franchise package, documentation and legal agreements. You want to manage expectations and build in certain controls, but still make sure your proposition is attractive You will also need to consider how you will protect your trademark, patents and intellectual property across multiple legal systems.

Don’t underestimate the power of IT systems in monitoring and supporting your international franchisees – this is now a must for any franchisor

It's not how many franchisees, it’s the right franchisees

If you take one of the franchising routes, it is all too easy to see it purely as a numbers game. You might be especially keen to get that master franchisee in place, but getting the right country par very serious problem

Don’t rush in, please a robust recruitment diligence processes, sensible criteria and ideal country or regio decent lead channel right people for the j anyone who has the cash

Don’t write anyone off from any unsolicited contact, either. If someone has taken the time to recognise your brand has huge potential for them and their market, and has reached out to you, they are worth spending time with. These could be exactly the characteristics you need

Don’t be afraid to ask for help

No one person can be expected to be an expert in every single nuance of all 195 countries in the world, and all their various subcultures and markets.

Seeking out support from international franchise experts with depth of experience and local experts and consultants is essential in making sure both your brand offering, and franchise package, are optimised for the local market. Experts on the ground who can provide you with the best local commercial data, franchise intelligence and legal advice are worth their weight in gold

As a ‘wise’ man once said… there is no one way to franchise a business, but there is the right way for you to franchise your business. n