There are a variety of options, for example:
- Master franchise
- Area franchise
- Individual franchise network
Master franchising is where you appoint a company or individual to be your Master franchisee in a territory. This individual/company then recruits franchisees in that territory and develops a franchise network for you. The Master franchisee recruits, trains and supports the franchisees, helping them to develop and market the brand in that territory and grow the business. You may provide some support and will want to control what the Master franchisee and the franchise network does. Often the Master franchisee will have its own stores too. The Master franchisee gets its income from franchise fees and usually a fee based on sales turnover. You receive your income generally from the products which are sold (usually by way of a mark up).
This is similar to the Master franchise but the Franchisee is given an area rather than a territory to develop.
This is where the brand owner develops a number of franchises themselves by recruiting the franchisees direct. The brand owner is then the Franchisor and he supports, trains, and polices the brand to develop the network. This can be slower to develop – the advantage of a Master franchisor is that it tends to have good local connections.
Franchise fee – franchise fees tend to cover the cost of the franchisor’s support rather than being a revenue generator. Sometimes a franchise fee is known as a territory fee. Often no franchise fee is payable.
Where franchise fees are agreed they are often called a Design fee (e.g. in the Middle East) – it’s called a design fee to avoid the need to pay withholding tax which applies on franchise fees in some countries.
Management or Marketing fees – These are usually charges in UK Franchise Agreements and in Europe. However, they don’t tend to be charged in the Middle East, China or Russia because of difficulty collecting them. Franchisees often ignore them. The preferred method is to increase the price of products to include the costs or by royalty based on turnover.
Fiona Boswell is a Senior Associate Solicitor at Freeth Cartwright LLP and Head of FC Franchise Build, Manage, Grow, Exit ™ Unit. You can contact Fiona on 0845 070 3812 or e-mail firstname.lastname@example.orgWhilst every effort has been made to ensure the accuracy of this article, it does not provide complete coverage of the subjects referred to, and it is not a substitute for professional legal advice and should not be relied upon as such.
A recent BBC article details the rise of franchising in Brazil over the last 10 years. In a country where starting a business from scratch is so difficult, franchising is being heralded as a simplest and safest way to start a business.
For UK based franchisors that are considering taking their franchise overseas, an important factor is looking to where the growth markets are and where franchising is really booming. It’s great to see an example of where franchising is really out do-ing the traditional business start up in terms of providing a business platform for keen entrepreneurs eager to start up their own business. The BBC article goes on to explain that the risk of failure in Brazil of a non-franchised business start up is 80% while the same risk with a franchise is just 15%, (according to business support organisation Sebrae). This is a telling statistic in itself and a great reason for any aspiring business owner to choose a franchise business.
The other factor that has really pushed franchising to the forefront is the many hoops that a start up business in Brazil has to jump through. Basing your business on a franchise helps alleviate the process as there is already a proven system to follow to get through the start up process and get up and running as quickly as possible.
If you are considering exporting your franchise overseas, make sure you get professional advice from franchise consultants who fully understand the culture and nature of doing business in the target country. They should be able to assist with sourcing a master franchisee in the target country who can then begin to establish the network there by recrtuiting area franchisees. Other countries that you might also want to consider in your expansion plans are India and China where franchising has been shown to be increasing rapidly.
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.
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.