Globalization, as we all know, is both good and bad news. US companies grow by expanding internationally and American consumers benefit by enjoying low prices on imported goods. That’s the good news. Meanwhile, American workers are laid off and US exports decline. That’s the bad news.
There is one aspect of globalization, however, that so far seems nothing but good news for all concerned when it works right. That aspect is international franchising. When American franchisors sell licenses abroad they improve the balance of trade and they bring revenue home to owners and stockholders. Because the “product” they are exporting is intellectual property – their name and system of doing business – there are no tariffs to be paid and no American jobs are lost. The same is basically true of any country that franchises across its borders.
"International franchising is the process whereby a franchisor in one country sells a license to operate the franchisor’s business to a company or individual in another country. Typically, these licenses are for master franchises consisting of a specific number of units in a large geographical area – sometimes an entire country. Rarely are the licenses for a single unit. Indeed, “license” is the word of choice internationally because laws pertaining specifically to franchising are found primarily in the United States."
In a recent Financial Times article titled, ‘Sale of Yum Brands China franchise stalls’, such threaths are highly prevalent and unavoidable for any business looking to venture outside their geographic borders. Going international is not a step to be taken lightly – especially by companies new to franchising. Pitfalls are plentiful.
Here are 6 key consequences of going international:
1. High Fees
It may be possible to sell a territory for several hundreds of thousands of dollars. But unless you’ve calculated the costs of training, support, and international travel (airfare, hotels, rental cars, living expenses, salaries) very carefully, you may find you have a new international licensee but little to show for it. This is especially true in countries where the dollar is weak.
This means, of course, that what- ever franchise fee you seek may be considered a bargain in countries that employ the euro, but in those countries you must be especially careful when assessing your support expenditures.
2. Market and Culture
Consider Japan. On the one hand the population is large – about half the population of the United States. On the other hand, the country’s land mass is small. Japan would fit easily into the state of California! Yet 76 percent of Japan is uninhabitable! Fifty-two percent of Japan’s population is located in a 300 mile corridor between Tokyo and Osaka! Talk about population density! It’s an area made in heaven for businesses. Knowing facts like these can be extremely helpful in establishing a franchise there. But that’s not all you need to know. There’s the Japanese culture to be considered.
Since 1980, Francorp has worked closely with Roy Fujita, a valued partner in our Francorp Japan operation who has been bringing US companies to Japan and Japanese companies to the US. Our experience has been that if you sell the rights to your franchise for all of Japan, and the buyer is located in Tokyo, that franchisee may never venture out of the Tokyo market. For this reason, if you go franchising in Japan you will either want to establish strict performance requirements or sell only the rights to Tokyo, perhaps with options on other cities.
3. Your Name
Make sure the name of your business can be translated to the local language would be appropriate and/or changeable. An example would be Church’s Chicken in UAE; it is called Texas Chicken due to the religion culture of the country.
Would you get sufficient funds after the tax deduction? Would it be profitable after it? How much ROI would it leave me? These are such questions to be answered when it comes to this subject matter. Make sure of your pricing strategy before you conform on the agreement.
Japan takes 10 percent in taxes on all royalties going out of the country. You will also pay US taxes. If your royalty is 5 percent and Japan takes 0.5 percent and the US takes 0.5 percent that leaves you with 4% percent. Will the deal work at 4 percent? Be sure of your pricing strategy before you sign.
Laws of the chosen country could limit yourself in doing what you want when franchising globally as this could cause some limitations if not followed correctly. Copyright and trademark laws vary differently with each country and if not appropriately pursued; it could strain expenses to the business in the long run because of the legal fees.
Buyers of your franchise may have an abundance of funds but not the qualifications you need to run a business. This could cause sloppiness at work therefore causing a negative impact on the brand.
Francorp became involved in international franchising early on. In 1976 we were invited by Jollibee, a four-unit hamburger restaurant chain in the Philippines, to help them franchise through- out the Philippines. Much later we assisted their entry into the United States. By 2007 they had 500 units in the Philippines – more than McDonald’s – and twelve in the US. What spurred their success? Tony Tan Oak- tong, chairman of Jollibee, positioned his company as the Philippine version of the American fast food restaurant, a la McDonald’s. He recognized before many others that some aspects of American culture are highly marketable to people outside the United States.