The international franchise market - an investor's guide
Are you a 'brand entrepreneur' or a 'corporate developer'? Associate Publisher Paul Cairnie explores the licence models and types of investment options available to investor/developers in the international franchise market
When it comes to franchising in the international market, your mindset and business accomplishments are more important than capital available. You must be clear in your mind whether you are a 'brand entrepreneur' or a 'corporate developer', as this will determine the type of licence and the franchise sector you are most suited to. Are you a brand entrepreneur with a proven track record developing a business within your market, or a corporate entrepreneur with specific sector experience establishing multiple sites?
Franchising has often been described as a 'business marriage' between someone with a blueprint and system for doing business (the franchisor) and someone keen to replicate that blueprint locally, regionally, nationally or on a multi-national basis (the franchisee). The franchisor invests in developing the business, branding, operations manuals, training and support, benefiting from rapid brand development, a motivated investor-developer and bypassing the need for corporate investment. The franchisee invests capital, time and effort in developing the business, enjoying proven systems, support, training, collective brand value and fast-forwarding past the business conception and developmental phases.
In recent years a number of new terms have emerged to describe the different franchisor/investor relationships that have come into play on the world franchise market. The main terms are:
Single Unit or Multi-Unit Licence Typically requiring a low investment, these will usually be acquired through a Master Franchisee already established in a country. If a Master is not in place, it is rare for a franchisor to sign such agreements as this brings direct responsibility for providing training and support for franchisees onto the franchisor, who may lack the local market knowledge required. There are exceptions, especially for single units located in internationalised locations such as major airports; this process is known as Direct Franchising.
Regional Master Licence A fast growing method of international franchising where a country is divided into regions, for example the UK could be divided into seven regional territories, with each Regional Master Franchisee sub-franchising.
National Master Licence In this case, the Master Franchisee takes control of an entire country and operates a policy of sub-franchising, although some corporate expansion may also take place, especially in establishing a pilot operation.
Regional Corporate Developer Licence Again dividing a country into regional licenses, but with no ability to sub-franchise. Development of the territory is carried out entirely through the corporate investment of the Regional Corporate Developer.
National/Multi-National Corporate Developer This arrangement is reserved for large corporate entities with the investment capital to fully exploit the market(s). There is usually an agreement with the franchisor to open 'x' number of outlets in 'y' years in order to maintain the exclusivity of the agreement.
The geographical areas franchisors tend to target for expansion can be divided into three: the Americas (USA, Canada, South America and the Caribbean); Asia (China, South East Asia, Australia and India); and Europe (Western and Eastern Europe, Scandinavia, Russia, and Turkey, plus areas in the Middle East and Africa).
In addition, you can divide the world franchise market into three broad sectors: Food, Beverage & Hospitality; Retail; and Services. You can marry each of these with the type of licence typically offered by franchisors from that sector. In Food, Beverage & Hospitality most franchisors are seeking National or Regional Corporate Developers. This means that organisations can make a significant investment in opening a number of restaurants across their territory, be it national or regional. In this sector it is rare to find a Regional or National Master Franchise arrangement involving sub-franchising. The picture is the same in retailing, with the exception of concessions and product licensing. Where franchisors are offering a business format franchise, they are usually only looking for Corporate Developers to train in how to operate the business rather than teaching an organisation or individual about the market from scratch.
Corporate Developers are typically suited to Food, Beverage, Hospitality and Retail. A Corporate Developer with have previous or existing Food & Beverage or retail operational experience with significant funding to develop a brand within a region with little or no sub-franchising.
Within the services sector, there are as many opportunities available as Food, Beverage & Hospitality and retail combined. This sector can also be divided into three: business-to-business, business-to-consumer and professional services. To qualify for a licence from these areas you will need to be a brand entrepreneur with a good business marketing background, but not necessarily industry experience. For instance, you don't need to know about will writing to take on the development of a will writing brand, or have previous experience in business brokering to become the Master Franchisee of a business brokering brand.
Where we encounter entrepreneurial individuals looking at international franchising, they tend to steer towards the services sector. The typical profile of a Master Franchisee in this sector is an individual who has already developed a successful business in his or her own market. They have most likely exited their company and want to get back into business but without starting from the beginning and reinventing the wheel. Rather they want to take a proven system and brand and use their own market knowledge and skills to grow that brand in their market.
Brand Entrepreneurs are typically suited to service franchising. Service franchising lends itself to Master Franchising at National and Regional level with the growth of the network fuelled by sub-franchising.