I wrote my last column on international franchise expansion from a café in the thriving city of Istanbul, where I confess I didn’t see any Canadian franchise brands and wondered “why not?”
Come to think of it, I didn’t see many American ones either, although there are plenty of Starbucks and at least one Marks and Spencer, neither of which are franchised.
International expansion of a franchised business is risky, and all the riskier when your international location, or locations, are thousands of kilometres from head office, operate under a different legal system, and customers and staff work in a different language. And there will often be different cultural norms to deal with.
From the food business perspective, menu items that work well in North America might go over poorly in other parts of the world for cultural reasons, lack-of-supply reasons, or even presentation reasons. For example, in Japan customers normally want to see what the meal looks like before they order it, so the front of many restaurants feature a display case with plasticized models of your lunch or dinner options. The Muslim world won’t be interested in pork ribs. In a Hong Kong McDonalds, I once ate a “Shogun Burger,” which I’ve never seen in North America.
Oh, and you can drink wine at McDonalds in Paris.
So you can’t expect that if a concept works well in Toronto or L.A., you can replicate it exactly for Istanbul or Sapporo. Things will need to change to deal with the fact you’re not in Kansas any more. And sometimes (like wine at McDonalds in France), it might be a good thing.
But if you’ve made the decision to open a franchise in Istanbul, Bogota, Havana or Dubai, or even Seattle, how do you do it structurally?
Although your company could directly franchise one location to an international franchisee, I’d have to say that in my experience, this rarely happens. In part, it’s because the resources to ensure consistent quality and supply of inventory, as well as brand protection, training and support, just isn’t worth doing for one outpost. Also, why “sell” one location in Turkey or South Africa for $50,000 when you might sell the entire country for a million or more?
When franchise companies expand internationally, they normally do it in one of two ways. Either they master-franchise the country (or individual provinces or states in that country) to a local operator, or they use a local area developer to “develop” the new territory. Either way, you should be dealing with someone from that country who speaks the language, knows the cultural norms, has experience in the industry, and knows how business has to be done “on the ground.”
There are many individuals and companies in other countries who are interested in acquiring North American franchised brands for their countries.
Here’s the essential difference between a master franchisee and an area developer:
When you master franchise a country (or part thereof), you enter an agreement with the local operator that he or she has the franchise rights for that country (or part thereof) and that all franchise agreements with individual franchisees will be with that master franchisee.
If the country, province or state has franchise disclosure requirements, it will be up to the master franchisee to do its own disclosure for all its individual franchisees, although you might have to prepare a disclosure document for the grant of the master rights.
There will be a fee for the master franchise rights, which will always be more than the franchise fee for one location, because you’re selling more than one location, aren’t you? You’re selling a geographic territory that can conceivably support many locations. So the fee for the master franchise rights may be a function of how many individual locations are likely to be opened in the territory.
Initial franchise fees and royalties paid by individual franchisees to the master franchisee in the territory will normally be split on a one-quarter, one-third or one-half basis, with the local master franchisee taking the larger chunk. There will normally be a development quota in the agreement, where the master franchisee must open so many locations in years one, two, three, four and beyond to keep those master franchise rights, otherwise he or she could lose them and the franchisor in Canada could sell them to another person.
Certainly the Canadian franchisor would want to approve the form of unit franchise agreement that its master franchisee in another country is using. And there is a plethora of other issues that the master franchise agreement will have to cover, from currency exchange to local laws, to trademark protection, to tax, to franchisee and location selection criteria, to levels of support and service the master franchisee must provide to its unit franchisees, to what happens to the existing unit franchisees if the master franchisee is terminated.
The other way it’s normally done is by way of “area development.” A local operator will be granted the rights to develop the franchised system in the territory (again, it could be an entire country or a select province or state in that country). The area developer will pay a fee to obtain those rights, just like a master franchisee. And initial fees and royalties will be split in much the same way, as will development quotas and location criteria.
However, all individual franchise agreements are still with the Canadian franchisor. The area developer is really responsible for recruiting franchisees, selecting locations and servicing franchisees. All contracts with the franchisees on the ground are with the franchisor in Canada.
Whether international expansion is by way of area development or master franchising, the key thing to remember is not to expand internationally until you have found a person or company with the financial, operational and human resources to do so.
Special to the Globe and Mail
Vancouver franchise lawyer Tony Wilson is the author of Buying A Franchise In Canada – Understanding and Negotiating Your Franchise Agreement and he is ranked as a leading Canadian franchise lawyer by LEXPERT. He is head of the Franchise Law Group at Boughton Law Corp. in Vancouver and acts for both franchisors and franchisees across Canada, many of whom are in the food services and hospitality industry. He is a registered Trademark Agent, an Adjunct Professor at Simon Fraser University and he also writes for Bartalk and Canadian Lawyer magazines.