The checklist below will help you assess the risks and opportunities inherent in franchising abroad. Each country criterion in the checklist is structured according to whether or not it is prohibitive (significantly reduces the chance of opening stores profitably versus the U.S. operation), restrictive (extends the time it takes to open profitable outlets) or conducive to franchising (will add in the speed of opening new stores and or profitability). Unfortunately, determining whether or not a country poses an opportunity is not as simple as adding up the results of particular questions and taking the average. Some criteria, such as language and culture, can be restrictive, and not all criteria are equally important. If the laws of the country prohibit franchising, proceed no further! But if the laws are merely restrictive and the criteria in other areas such as purchasing power and economic stability are conducive, then an opportunity could still exist. We recommend using the checklist to get a sense of the issues that will pose the biggest challenges to a system, rather than as a tool for eliminating opportunities. The countries that pose the best opportunities nonetheless will have their share of restrictive characteristics—success in realizing those opportunities will depend on your ability to overcome those.

The checklist is also intended to convey how much conviction, resources, and creativity are necessary for success. Although many franchisors see it as a low-cost bet, setting up a franchise operation in a foreign country invariably requires significantly more time, capital, and other resources than setting up another domestic one. With an established income stream in the United States, some franchisors see fees from international markets as “icing on the cake.” They reason that brand damage in another country will not bleed over into the U.S. and that they will not have to apply franchisor resources to the international market. “If it works, fine. If it doesn’t, then no harm has been done.” This line of reasoning could not be more misguided.

Contractual requirements will certainly require the franchisor to expend some resources to assist international partners. Further, implied good faith (sometimes legally) requires the franchisor to make a reasonable effort to support an international franchisee. Of course, distance almost always creates the need for enhanced communications and further use of resources. If the expansion fails the brand will be harmed regardless of geography. Not only do you need creativity to get over the hurdles outlined in the checklist, but you may also have to change the franchise to suit the country in question. Vegan burgers in India are essential in all of the traditional hamburger franchises. Papa John’s Pizza franchise varies its take out and dine-in business models based on local customs and zoning laws. The successful international franchisor will be armed not only with good information and contacts, but also with plenty of flexibility and conviction.

The checklist is shown in its entirety in Table 11-1; we then go through the list question by question and give you more detail about how to find and evaluate the answers. Although the international business environment is always in a state of change, we believe this list can become an important part of any international franchise system’s annual strategic review and plan.

Using the Checklist.

Outside the United States, most countries do not have laws that specifically address franchising. The franchise-specific laws that do exist in several countries usually pertain to disclosure agreements, but some go as far as to regulate the amount and duration of the royalties due from the franchisee.

The general application laws^[2] to which you should pay especially close attention are those that pertain to monetary exchange, employment and intellectual property. For example in Europe, such issues as minimum wage, long statutory maternity leave, or paternity leave may affect your decisions. If the government regulates the import and export of currencies, it may complicate, or even prohibit, the export of the payments due you. And employment laws that restrict the firing of employees could also add significant costs down the road. In terms of intellectual property, it is crucial for you to know whether or not the law protects the system’s patents, trademarks, and copyrights. If intellectual property laws exist, you must determine whether or not these laws are being purposefully and effectively enforced. Loosely enforced intellectual property laws put your logo and brand at risk and expansion in those countries carries extreme risk.

Obviously a country that forbids franchising altogether (such as Mexico before 1991)^[3], or that severely restricts currency exchange, would be considered prohibitive. If a country allows franchising but has non-existent or unenforced intellectual property laws, you should consider it restrictive. One that allows franchising by law, and that enforces intellectual property laws according to international standards, is conducive to franchising. Please refer to up to date information regarding intellectual property, patents, and trademarks at the following sites. In the UK: www.patent.gov.uk, and in the U.S.: www.uspto.gov.^[4]

Assessing the country’s legal and regulatory environment for franchising: One useful document that summarizes the existing franchise-specific laws in various countries is available for free download from a company called Franchise Consulting. Visit http://www.franchiseconsulting.net and click on “International Franchising” from the main page to find the download called “Compliance with Foreign Country Disclosure.”

Because most countries do not have very specific laws, the first order of business in determining the level of intellectual property protection in a country is to determine whether or not the country is a member or observer of the World Trade Organization (WTO). All members of the WTO must sign on the Agreement on Trade Related Aspects of Intellectual Property Rights, or the TRIPS agreement. For a list of WTO member and observer countries, visit the WTO online at: http://www.wto.org and click on “The WTO.” It is also helpful to use the site’s search option to find and read an explanation of the TRIPS agreement and the intellectual property law enforcement rules that it contains.

Although a country’s membership in the WTO is highly significant, it is important to keep in mind that this alone does not guarantee that its intellectual property laws are well enforced. For example, China and Mexico are two WTO members that have had major grievances filed against them in the area of intellectual property piracy. To find out what the actual climate for intellectual property protection is in the country, we recommend referring to the U.S. Department of State’s Country Commercial Guides. These useful tools may be found online at http://www.export.gov. From the main page, click on “Country and Industry Market Research.”

The franchisor may have to import raw materials and supplies to its franchises in the given country. These inputs will range from intellectual property and training personnel to raw material, For that reason, it is important to determine the state of the country’s supply infra-structure and import and customs procedures. If the franchise is a restaurant and heavy import duties are imposed upon certain foodstuffs, those added costs might make the country a restrictive or prohibitive place to do business. Likewise, if customs procedures are overly complex or inconsistently applied and enforced, the effect may be deleterious to a new franchise venture. For example, McDonald’s in Russia built food-processing plants to supply their restaurants and to ensure quality. Low import duties and efficient customs procedures consistent with international standards will of course be conducive to a franchising operation.

Assessing the country’s import and customs procedures: The U.S. Department of Commerce has an excellent system in place for determining what the import tariffs and duties will be for specific products going to specific countries. This information can be found online by going to the DOC’s International Trade Administration website at http://www.export.gov and clicking on “Tariffs and Taxes.” Simply enter the information about the products to be exported and select the country of interest, or call 1-800 USA TRADE for assistance. The aforementioned Department of State Country Commercial Guides provide relevant information about the country’s customs procedures, and will usually make a note if they have received complaints from U.S. companies about customs procedures.

No one wants to do business in a country that takes too much in the way of taxes. The nature of franchising is such that the franchisor will likely only have to pay taxes on the income earned from foreign royalties to the United States’ IRS. However, the franchisee will certainly will have to pay taxes to the foreign government at its tax rate. The franchisee is already paying royalties and advertising fees to the franchisor based on revenue, not profits. Therefore, a high foreign tax rate on top of that could mean the difference between a franchise that is profitable, and one that is not. Before setting up an operation abroad, you must have a complete understanding of the tax structures in place for that country. A foreign tax rate that is above 35% could be restrictive or prohibitive whereas one that is below would be conducive to franchising.

Assessing the country’s corporate tax rates: A number of print and online resources exist for investigating foreign tax structures (although the best resource is a good foreign tax advisor). Consult “The Worldwide Corporate Tax Guide,” published by Ernst & Young. The most recent edition is always available online for free downloading. Visit http://www.ey.com and do a search based on the title of the document. Tax rates and related information can be found by country. Another resource is the International Monetary Fund’s (IMF) Country Information page. Visit http://www.imf.org and click on “Country Information.” These comprehensive country reports give extensive coverage in the area of tax policy.

When it comes to franchising, labor affordability and availability are often key ingredients for success. In the current world environment, we often see two extremes. The first is the high cost of labor in developed countries such as Japan and Germany, in which the labor pool is limited, people are relatively well educated, and the cost of living is high. The other extreme is found in developing countries in which labor is cheap and abundant, but in which workers may be less well educated and training is difficult and/or expensive. Depending on the type of franchise, either of these extremes can be prohibitive or restrictive to franchise development. However there are many nations, such as China or the countries of Latin America that have sufficiently sophisticated labor at a lower cost than in the United States. Labor environments like these would be conducive to franchising.

Assessing the country’s cost and availability of labor: The IMF is a good place to start looking for information on the labor markets of specific countries. The country reports at http://www.imf.org also contain facts on labor cost and availability. The United Nations Statistics Division is also an excellent source for broader socio-economic demographic information. This site gives literacy rates and education levels, broken down by age and sex for over 100 countries. It also segments population according to age, geographical location and more. Find these and other statistics at: http://www.un.org/Depts/unsd/.

The purchasing power of any given population is generally related to the issue of cost, availability and literacy of labor. We have found that education levels can be a good indicator of real purchasing power of a target segment. If 50% of the population is illiterate and only a third of the population has more than 7 years of schooling, chances are that labor costs and purchasing power will be low. Conversely, a highly educated and literate population usually indicates a high cost of labor and good purchasing power. When it comes to franchising, low purchasing power need not be an indicator of a prohibitive, or even restrictive, environment for franchising. For example, fast food franchises have done well in developing countries because they offer a relatively high-quality though inexpensive product. However if purchasing power is too low, the environment will be prohibitive, because no one will be able to afford the good or service being offered by the franchise. Thus, an environment conducive to franchising is one in which the purchasing power of the population is appropriate to purchase the good or service you plan to offer.

Assessing the purchasing power of the population: In theory, finding the purchasing power of the population in a given country should be a matter of converting the foreign GNP per capita into U.S. dollars at the prevailing exchange rates. But the major problem with this method is that it assumes a dollar in one country buys the same amount of good or service as it does in another. As anyone who has purchased a Pepsi in Mexico knows, prices are relative; some things are more or less expensive depending upon the country where you buy them. As a result, purchasing power is better measured using the principal of Purchasing Power Parity (PPP), which takes into account differences between countries in measures such as inflation, price and wage controls, and import tariffs. The World Bank has calculated Year 2000 Gross National Income using the PPP method for over 200 countries. This data is available by visiting http://www.worldbank.org/data/. Click on “International Comparison Program” and follow the links for “PPP” data.

Perhaps the greatest risks in franchising abroad are those that involve political and economic disruptions. Wars, coups d’etat, nationalizations, runaway inflation, governments in default—these create an international businessperson’s nightmare. And as we have seen over the last ten years, these events can disrupt countries that the conventional wisdom has said were safe bets. Take, for example, the truncated moves to an open economy in Venezuela or the economic morass in Japan. We gauge economic and political stability by how long a country has managed to ward off these kinds of disruptions and keep its economy and political system in relative equilibrium. A country that has experienced stability for fifty years or more is one that is conducive to international franchising. Countries in this category include those of North America and much of Western Europe, as well as Australia, and New Zealand.

Countries that have experienced disruptive turmoil in the past twenty years are restrictive, and one that is in turmoil is prohibitive to franchising. Eastern Europe is a clear example of the turmoil, risk and opportunity in the last twenty years. As always in business, with greater risk comes greater potential reward. Because almost every developing economy has experienced disruption in the past twenty years, it is up to you to do the necessary research and decide whether the return is worth the risk. As the next section will illustrate, many have determined that it is.

Assessing the economic and political stability of the country: The level of economic and political stability of a country is often referred to as country risk. The most authoritative evaluator of country risk is the International Country Risk Guide published by the Political Risk Services group (PRS) (http://www.prsgroup.com; http://www.prsonline.com/.) This expensive resource is used by finance professionals and researchers the world over. The survey covers 140 nations and is compiled using a complex methodology that analyzes economic, financial and political factors for risk. Other less exhaustive (and free) resources includes the Central Intelligence Agency’s World Factbook. These country profiles are available online at: http://www.odci.gov/; click on The World Factbook under Library and Reference on the main page. The Department of State’s Country Reports contain information about the economic and political environment of countries. These can be found at: http://www.export.gov by clicking on Country and Industry Market Research. Finally, the Economist Intelligence Unit is an excellent source of up-to-date country information at: http://www.eiu.com/.

One of the surest ways to determine the viability of a particular country for franchising is to see which franchises are already doing business there. Chances are, if someone has achieved success, so can others. If there were no franchises at all in a given country, that location could be a prohibitive one to move into unless you are willing to commit significant resources. If there are but a few there, or if the number of franchises is declining, the country is probably restrictive of franchising. But if there are a number of franchises operating in the country, and if they have grown steadily in number, then that country is probably conducive to franchising.

Assessing the number of franchises in a country: In its Country Reports, the Department of State usually mentions the number of U.S. franchises operating in the given country. It will also specifically note franchising as a good opportunity for U.S. franchisors if it sees significant growth in the industry. The International Franchise Association has compiled this existing franchise data for 52 countries into concise reports which can be found online at: http://www.franchise.org/international.asp. Click on Franchisor Services for the reports.

Another approach is to look at the World Franchising website where the Top 50 international franchisors in food, service and retail are listed: http://www.franchiseintl.com/. From there, you can investigate individual companies to see in exactly which countries franchises have opened. There is some correlation between travel patterns of U.S. tourists abroad and the viability of U.S. franchises. Of course, the specific context of the country is crucial. We doubt that Jiffy Lube would work in India (too many small workshops by the roadside), or a lawn care franchise in Singapore (too few houses with lawns).

Although language is one of the biggest hurdles in realizing international business opportunities, it is a surmountable one. You will have to have all documents drawn up in duplicate, one in English, the other in the foreign language. It greatly helps if you speak the foreign language in question, but even if you plan a large-scale overseas initiative, it may be unrealistic to expect to be fluent in ten languages. Finding bilingual franchisees whenever possible and hiring a consultant, a tax professional and an attorney from the local area who can assist you with communication and paperwork will greatly reduce the language barrier risk. Many franchisors have found that partnering with a Master Franchisee from the country in question makes the most sense. For example, Cartridge World is an Australian franchisor that sells large regional franchise rights to franchisees who can then re-sell those rights or operate the large territory. The company’s business strategy combines refilling printer cartridges for inkjet and laser printers, photocopy and fax machines with fast customer service at convenient retail locations. The combination of retail and office business makes it more difficult to define territories. Larger territories make it easier for a Master Franchisee, who knows the territory better than the franchisor to build the right number of outlets. Using this method, you can manage franchisee operations for the whole country (or region, if it’s a large country) and minimize the points of contact. Of course you need to find the right individual, but that is a necessary task in any relationship-based business arrangement.

Unfortunately, there is no guidebook available for determining which foreign countries would be most receptive to franchising, but culture can be a make or break factor in setting up internationally. You can start by looking first at the nature of your offering or menu and then on the physical service delivery system. For instance, in India beef is not widely eaten for cultural reasons, therefore a fast-food franchise such as McDonald’s must take this fact into account when developing their menu there or suffer the consequences. In other countries, décor and signage might have to be adjusted to suit local tastes, or the actual products and services offered might have to be altered. High Street locations in Great Britain often have severe signage restrictions.

The best way to get a sense of the cultural differences in a country is to go there and to see first-hand how comparable local businesses are set up. Cultural differences present a complex set of variables. For example, companies that do business with the U.S. Government must adhere to the Foreign Corrupt Practices Act wherever they trade. While we agree with this anti-corruption law, it can severely limit opportunities in cultures where bribery is a normal way of doing business, can be charged to the P&L and provide the local competition with a financial competitive advantage. Additionally, we recommend looking at what the existing franchises have done regarding cultural differences to make themselves fit in locally and to be successful.

Getting Serious: After You Have Selected a Country. Once you have selected the country to enter, it is time to begin forging business relationships in that country. At this stage, the best resource available to U.S. franchisors wishing to set up shop abroad is the U.S. Government. The government has a vested interest in seeing U.S. business expand overseas, and it has an excellent system for facilitating this through the Department of State and the International Trade Administration. The U.S. Commercial Service has offices at U.S. embassies in over 100 countries with the express intent of assisting U.S. companies that wish to enter those markets. For a relatively small fee, this service will conduct primary market research, locate potential partners (Master Franchisees and franchisees), find proven local consultants and tax and legal professionals, conduct background checks, and even host networking events at the embassy. To find out more about the Commercial Service visit http://www.export.gov and click on Country & Industry Market Research.

International Market Entry Strategies. A U.S. franchisor can be lured into entering a foreign country by an enthusiastic and wealthy prospective franchisee. This generally happens when a foreign entrepreneur comes to the United States, sees or uses a U.S. franchise, and then gets excited about launching the concept in his or her home country. A large franchise fee, and the perception that if the opportunity goes poorly abroad it won’t hurt the company’s U.S. image, can lead the franchisor into a hastily conceived relationship. These relationships seldom result in financial success.

There are no shortcuts. Entry into a foreign country from a U.S. base is a “back to basics” task that should always begin with an examination of the opportunity using the Franchise Relationship Model. Then, you can make use of this chapter as a guide to further international due diligence. Finally, you should develop and execute your entry strategy for the international launch.

Franchise Launching into a Foreign Country. There is a wide spectrum of strategies to enter an international market, described in Table 11-2. From left to right, the spectrum identifies the extent of franchisor involvement in the unit operations.

Figure 11-2. Spectrum of Market Entrance Strategies

The sale of a single franchised unit is the most problematic approach to entering a foreign market. There is typically little or no brand awareness in the foreign country. One unit is at best a “beta site,” as described in earlier chapters, but with the franchisee as the risk bearer. This can seem appealing because it brings in fees with what seems to be little brand or capital risk. However, your ability to gain real market intelligence and market share, and hence your probability of success, are limited. To support the site you would have to commit major resources for training, field operations, and marketing. Putting that overhead in place for one franchised unit might not make financial sense.

You may want faster growth and larger up front franchise fees and decide instead to sell territory franchise rights to a select well-capitalized franchisee. They will likely be a national of the foreign country and committed to an extensive development and operation of outlets. Marketing the sale of large franchise territories is often directed to bankers, lawyers and accountants in the targeted nation. These professionals often provide a communications conduit to wealthy business-minded nationals. Territory franchise sales usually include a large up front franchise fee and incremental payments along the way that help underwrite franchisor support. Thus you will have incentives to ramp up support for the franchisee as development increases. Multiple territory franchisees can be sold in a given country in an attempt to build critical mass. However, this “carpet bombing” approach can also magnify new country entry, operations, and marketing glitches.

The next level of involvement is to establish a relationship with a master franchisee, by selling him or her rights to share in your benefits and responsibilities in a country or section of a country. In a Master Franchisee arrangement you assign rights and responsibilities in the license agreement. The master franchisee is then responsible for opening outlets under his or her ownership or selling outlets to other franchisees that they will support in the fashion of a franchisor. That usually includes site selection, training, marketing and field operations support. The master franchisee receives a percentage of the royalty fees that you would normally receive.

An explicit partnership is the joint venture. In this case, the franchisor becomes a partner with the franchisee, bearing a percentage of both the new outlet capitalization requirements and the management functions. This is a way for the franchisor to enter a market with a partner “on the ground,” but also to have significant control of the operation. However, because capital requirements are expressly shared, this scenario is also a much more capital-intensive strategy for entering a foreign country.

Lastly, the franchisor can take a “grass roots” approach similar to the strategy we recommend in the opening chapter of this book. The franchisor opens company owned stores in a methodical manner to test the service delivery system in the context of the foreign market. After initial success, you can build upon the initial markets, and upon further success, you can begin selling franchises or even offer the company owned outlets for sale to franchisees.

It is also worth mentioning the issue of physical proximity of a new base of operations from a franchisor’s U.S. headquarters. Many franchisors tend to base their first international headquarters in Great Britain for several reasons: the relative close proximity to the Eastern U.S., the similarity of language and culture, and the relative closeness to other parts of Europe, Asia, and the Middle East.

Mendelsohn, Martin and Brennan, Michael. The International Encyclopedia of Franchising. London: Kluwer Law International, 1999.

Eds. Asbill, Richard M. and Goldman, Steven M. Fundamentals of International Franchising. Chicago: International Bar Association, 2001.

International Institute for the Unification of Private Law. Guide to International Master Franchise Arrangements. Rome: UNIDROIT, 1998.

www.franchise.org

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