STRATEGIC GUIDELINES FOR TAKING YOUR FRANCHISE PROGRAM ABROAD
By Andrew J. Sherman, Esq.

Just as the overwhelming popularity of franchising has captured the attention of the U.S. economy over the past ten years, it has also begun to recently attract attention in the overseas markets. U.S.-based franchisors are currently operating in more than 160 countries worldwide. The reasons for this foreign expansion are strikingly similar to the reasons for domestic growth, including a greater demand for personal services, higher levels of disposable income, and an increased desire for individual business ownership. Foreign franchisees are responding eagerly to the greater levels of profitability and lower levels of risk which are inherent in the marketing of an established franchised system.

Domestic franchisors taking their products abroad in many ways face an already receptive consumer market. The established fascination with our products and lifestyles can often pave the way for successful business operations overseas. Beyond the fundamental interest in our products, many countries, particularly the less developed ones, view franchising as a readily acceptable source of technological development and system support which introduces know-how to a fledgling business community in a cost effective manner.

Here are some of the basic commandments of successful international franchising:

1. Know Thy Strengths And Weaknesses . Before expanding to another country, be sure to have a secure domestic foundation from which the international program can be launched. Make sure that adequate capital, resources, personnel, support systems and training programs are in place to assist your franchisees abroad.
   
   
2. Know Thy Targeted Market . Going into a new market blindly can be costly and lead to disputes. Market studies and research should be conducted to measure market demand and competition for your company's products and services. Take the pulse of the targeted country to gather data on: economic trends; political stability, currency exchange rates; foreign investment and approval procedures; restrictions on termination and non-renewal (where applicable); regulatory requirements; access to resources and raw materials; availability of transportation and communication channels; labor and employment laws, technology transfer regulations; language and cultural differences; access to affordable capital and suitable sites for the development of units; governmental assistance programs; customs laws and import restrictions; tax laws and applicable treaties; repatriation and immigration laws; trademark registration requirements, availability and protection policies; the costs and methods for dispute resolution; agency laws, and availability of appropriate media for marketing efforts. There may also be specific industry regulations which may affect the product or service which you offer to consumers (e.g. health care, financial services, environmental laws, food and drug labeling laws, etc.). Many overseas franchisors have made the mistake of awarding a single master license to a company for the development of the United States or even all of North America, only to subsequently discover that they lack the resources and the expertise to adequately develop this vast marketplace which encompasses well over 300 million people. To avoid the fallacy of the "single" master licensee in large and diverse markets, we advise our foreign clients to pursue a regional approach, more closely tied to the actual capability of the regional licensee as well as the anticipated market demand for the products and services offered by the business format within the targeted region.
   
   
3. Know Thy Partner . Experienced international franchising executives around the world will tell you that the ultimate success or failure of the program will depend on three critical things: Finding the Right Partner, Finding the Right Partner and Finding the Right Partner. Regardless of the specific legal structure selected for international expansion into a particular market, the master developer or subfranchisor in the local market should always be philosophically and strategically viewed as your "partner." And, just as there should always be a dating period before a marriage or a due diligence period before an acquisition, such is also the case in selecting an international partner. There is no substitute for face-to-face negotiations between parties, regardless of whether this individual is interested in a master development agreement or a single-unit franchise. The most promising candidates will often be those with proven financial resources who have already established a successful business in the host country. What systems do you have in place for recruiting and selecting the right candidate? What procedures will you employ for reviewing their qualifications? What fallback plan do you have in place if you wind up selecting the wrong person or company? These are critical issues and strategies and procedures which should be in place to ensure that you make the right selection before embarking overseas. Beyond a certain point, however, only careful negotiating and contract preparation will provide any degree of protection for a franchisor risking entry into a new market.
   
   
4. Know Thy Value . Many franchisors entering overseas markets for the first time have grandiose ideas about the structure of the master license fee and the sharing of single-unit fees and royalties. Reality and patience are the two key buzzwords here. If you overprice, you'll scare away qualified candidates and/or leave your partner with insufficient capital to develop the market. If you underprice, you'll be lacking the resources and incentive to provide quality training and ongoing support. The fee structure should fairly and realistically reflect the division of responsibility between you and your partner. Other factors influencing the structure will be currency exchange and tax issues, pricing strategies, market trends, the franchisor's availability of resources and personnel to provide on-site support and which party will bear responsibility for translation of the manuals and marketing materials as well as adaptation of the system, products and services to meet local demand trends and cultural differences. Franchisors must be patient in the expectations of return on investment and profits from overseas expansion. In addition to normal economic cycles and break-even analysis, certain countries dictate legal structures which are essentially "forced joint ventures," placing restrictions on a franchisor's ability to "quickly" pull out capital from the targeted country. In structuring the actual master franchise agreement, the franchisor should carefully consider the structure of the relationship, the term of the agreement and the scope and length of non-disclosure and non-compete clauses. These provisions and their enforceability will take on increased importance when complicated by distance and differences in legal systems. Franchisors should also give careful thought to the structuring of the financial provisions of the franchise agreement. It is tempting to try to mitigate potential downstream losses by seeking a higher initial fee. This alternative, however, often results in uneasiness on the part of the prospective franchisees with respect to the franchisor's long-term commitment to the host country as a whole. In light of these considerations, a more balanced approach to fees and ongoing royalties should be considered.
   
   
5. Know Thy Trademark . As a general matter, trademark laws and rights are based on actual (or a bona fide intent to) use in a given country. Unlike international copyright laws, your properly-registered domestic trademark does not automatically confer any trademark rights in other countries. Be sure to take steps to ensure the availability and registration of your trademarks in your targeted markets. Also be sure that your trademark translates effectively in the targeted country and native language. Many franchisors have had to modify their names, designs or slogans because of translation or pirating problems in new targeted markets.
   
   
6. Know Thy Product and Service . The format of your proprietary products or services which have been successful in your home country may or may not be successful in another country. Be sensitive to different tastes, cultures, norms, traditions, trends and habits within a country before making final decisions on prices, sizes or other characteristics of your products or services. Conversely, be careful not to make drastic changes to your product or service at the cost of sacrificing quality, integrity, uniformity or consistency. There are many comical (yet expensive) lessons and stories which can be told about domestic franchisors who have learned the hard way that what works well for you at home may be very different abroad.
   
   
7. Know Thy Resources . Access to resources and experienced advice is a major factor in the success of an international franchising program but does not always require the help of expensive advisors or market research studies. In addition to the extensive resources available at the International Franchise Association in Washington, D.C. (202-628-8000), over thirty (30) different countries have established national and regional franchise associations which may be an excellent starting point for gathering data about a targeted market. In addition, the International Trade Administration within the U.S. Department of Commerce, the U.S. Chamber of Commerce and the economic bureaus of most embassies maintain extensive economic and political data on countries around the world.
   
   
8. Know Thy Rationale . Franchisors often have widely varying reasons for selecting a targeted country or market. Sometimes they are "pulled" into a market by an interested prospect who is familiar with their concept (often as a result of being a temporary resident, tourist or student in the franchisor's home country), which is especially dangerous if the franchisor relies only on the assurances of the interested candidate that there is a demand for products and services. Other franchisors "push" their way into a targeted foreign market (sometimes due to market saturation or a lack of opportunity in their domestic market) by ranking the likelihood of their success by measuring certain factors of overseas markets. These factors include language and cultural similarities, geographical proximity, market and economic growth trends, risk level, cooperative attitude and potential return on investment.