International franchising advice from HSBC
Cathryn Hayes - HSBC Head of Franchising
A diverse range of sectors lend themselves to successful international franchising. A common example is retail, particularly the fast-food sub-sector.
In recent years there’s been a growth in service industry franchises such as in the cleaning and maintenance sectors, as well as management consultancy, and there’s been a big increase in home care. Numerous successful home care franchises are being operated all over the world, including in the UK.
Well-known British franchises
Several established UK brands – including Marks & Spencer – have sold international franchises for years. Providing jobs for more than 75,000 people worldwide, there are currently more than 300 M&S stores in 40 territories, many of which are successful franchises. Other well-known examples include Costa Coffee, Clarks and Toni & Guy.
Some UK businesses sell franchises in the UK and beyond, while some only sell overseas. To increase their chances of success, some UK businesses set up overseas subsidiaries or joint ventures first to establish their brand and then, armed with greater local market awareness, they begin selling franchises. Importantly, the business model must translate and provide returns for both parties.
Franchise agreements
Buying a ‘master franchise’ can give rights to an entire country. Other options include a regional/area franchise, down to a single-unit agreement. Bigger geographical exclusivity comes at a price.
The franchisee usually pays the franchisor an initial sum upfront. Then they pay a monthly fee – normally a percentage of turnover. The franchisor provides training and ongoing support. Some agreements simply involve the franchisee buying products from the franchisor, rather than paying a monthly fee.
Welcome cash injection
International franchising can provide brand owners with a welcome cash injection and a regular, predictable income stream, without the risks, investment and resource commitment of establishing their own presence overseas. Franchisees are no less motivated to run the business successfully, and it is firmly in their interest to do so.
As well as enhancing a brand – providing its reputation stays intact – franchising can be a way to spread development costs across a wider set of markets. The overseas franchise must be properly resourced and operated if standards are to be maintained. Potential partners must also be carefully selected and should understand and respect the brand.
UK business models may need some tweaking, if they are to work in overseas markets. There are questions of language and culture that need to be considered, too. The cost structure in another country could be very different, which could have implications for your franchise.
Key recommendations for UK businesses considering becoming international franchises
Early on, it’s a good idea to speak to a specialist international franchise consultant affiliated to the British Franchise Association (bfa). You should also make sure your intellectual property is safeguarded, and seek tailored legal and tax advice. Agreements should be drawn up by a qualified professional – preferably an experienced franchise lawyer affiliated to the bfa.
Someone within the organisation needs to take charge of managing and developing franchising activity. This must also be properly resourced and can mean significant people, time and money.
Research is crucial, too. You must consider which franchising model is best for your business and identify territories in which your franchise is most likely to succeed – it might not work in some places. Carry out thorough due diligence on all prospective partners. Pilot your franchise before making it generally available. This enables you to iron out any minor problems before committing major resources.
- Visit the website of the bfa. See the organisation’s international page for links to international franchise organisations.
- Visit the International Franchising Association website.
- For information about overseas markets, visit the UK Trade & Investment website.
- Find out about how HSBC can support your efforts to become an international franchisor. You can email us or call 0800 234 6224.
6 Steps to Building Trust with Prospective Franchisees
Steven Frost - Partner, Smith & Henderson
Recent events have made it difficult to build trust. The forced nationalisation of banks, for example, saw many life-long customers queuing for hours to withdraw their savings. The MPs expenses scandal hardened the public’s widely-held scepticism about politicians and the phone hacking scandal damaged the media’s integrity.
Closer to home, franchisors are now likely to find that they need to give prospective franchisees more “reasons to believe”. Rather than just saying that their training and support are good, franchisors need to prove it. Otherwise, prospective franchisees may perceive the risk too high and either choose an alternative to franchising or worst still, their competitor.
In addition to the need to build trust in today’s business climate, there is another factor that makes this more critical. There are now around 1,400 franchise opportunities in the UK competing for the same talent and the figure is increasing. Franchisors can, however, build trust with prospective franchisees in a variety of ways.
1. Communicate your approach
There is an old saying in franchising – good franchisors award franchises, bad franchisors sell them. By explaining to prospective franchisees at the start of your process that you turn away many more candidates than you recruit, you start to exude trust. For example, instead of using an email address like sales@franchisor.co.uk think about a more appropriate message.
2. Display your trust badges
A major benefit of joining the BFA is being able to include its logo in your franchisee recruitment marketing. Many prospective franchisees use this (or the lack of it) to form an opinion about your franchise. Membership of other organisations, like Investors In People, can also provide positive associations for your professional standing.
3. Enter the awards
Marketing collateral doesn’t come much better than being independently recognised as being the best at what you do. Invest time in submitting strong entries for franchising and trade awards. If you are shortlisted, don’t forget to exploit the PR opportunities.
4. Offer case studies
Success stories act as testimonials and what makes these even more powerful is when prospective franchisees can relate personally to a franchisee, perhaps because they are from
a similar background.
5. Provide evidence
Share statistics about how many of your existing franchisees renew their agreements. Be specific about the level of support you provide, the length of your initial training and the investment that has been made in your brand.
6. Prove it
In the US, Canada and Australia, hundreds of franchisors participate in annual franchisee satisfaction surveys. These are independently administered and provide franchisors with insight to improve their franchise system and also unique marketing collateral. Rather than just say how good their franchise is they can prove it by sharing details of the percentage of their franchisees who would recommend it.
Closer to home, Smith & Henderson launched the Franchise Satisfaction Benchmark in June 2011. It works by inviting existing franchisees to complete an online survey about their franchise ownership experience. Franchisors receive a free franchisee satisfaction summary report and can also upgrade to a 20-page analysis of the results. They can use these independent statistics, such as the proportion of existing franchisees that would recommend their franchise, to boost their marketing and instantly win trust.
Within four weeks of the launch of the scheme, 18 franchisors have registered to participate in the benchmark. For more information please visit www.FranchiseBenchmark.co.uk
Franchise re-sales – asset or share?
Cathryn Hayes - HSBC Head of Franchising
It is inevitable that at some point franchisors will be faced with franchisees who wish to sell their business – particularly mature franchise systems.
There are two types of sale that the franchisee can employ: share sale or asset sale. These are very different, and it is important that both the buyer and seller understand the implications of each.
In a share sale, the buyer purchases the shares in the trading company. The ownership of the company changes, but the trading business stays exactly as it was before the sale.
In an asset sale, the trading business is transferred from the seller to the buyer. After completion of the sale, the seller will be left with a shell company (subject to any assets or liabilities that the buyer chooses not to take), the assets having been transferred to the buyer. The business is operated by the buyer through a different legal entity.
The asset sale is probably the easiest for all parties concerned as it gives the flexibility to pick and choose which assets and liabilities will transfer. However, a share sale is typically more tax-efficient for the seller.
To put this in perspective, with the right structure a share sale may incur a Capital Gains Tax liability of 18% (reduced to 10% as Entrepreneurs’ Relief is likely to be available). An asset sale could incur a tax liability of over 50%, as Corporation Tax is paid by the company on the sale price and then Capital Gains Tax or Income Tax is paid by the individual extracting the profit from the company.
However, share sales pose a greater risk to the buyer as they will inherit all liabilities, known or unknown. This can include unpaid tax, property liabilities and possible litigation by customers or staff. Therefore, buyers will need to gain a thorough understanding of exactly what they are acquiring before committing themselves, and we would recommend independent legal advice is sought.
If there are any existing finance agreements in place, with an asset sale there will be a change in legal entity and the lender’s consent would be required. This is not the case with a share sale, but ‘change of control’ provisions are becoming increasingly common, which allows the finance agreement to be terminated.
If the franchise operates from premises then there are further issues to consider. If an existing lease is to be transferred to the buyer, the landlord’s consent will be required. This consent is also required for an asset sale and Stamp Duty Land Tax will be payable, another cost which must be factored in.
If the franchisee employs staff, the type of sale will affect them in different ways. If the buyer wishes to reduce the number of staff, Transfer of Undertakings Protection of Employment (TUPE) rules will apply in an asset sale. This is not the case in a share sale as the employment contract continues as before.
Kate Legg, Commercial Associate at Higgs & Sons Solicitors specialises in franchise law and has experience of franchise re-sales. She commented, “Some franchise networks do not have any formal re-sale procedures in place and those that do usually have a process geared towards asset sales, but not share sales. This is an area that needs to be considered carefully. Different processes will work better for different networks – it is not the case of ‘one size fits all’. Having established what process fits with the network, the franchise agreement should then reflect that”.
In summary, there are pros and cons to both the asset and share sale options. Sellers would usually choose a share sale, while purchasers tend to prefer the simpler and less risky asset purchase. If any of your franchisees are thinking of buying or selling a franchise, it is essential that they take legal and accounting advice at the outset and consult with you throughout the process.
Posting from the monthly HSBC Connections newsletter. For more information or to get on the mailing list for the newsletter please email franchiseunit@hsbc.com
