from Michel Gagnon, President and Senior Consultant, Davier Consultants Inc.
A few years ago on a trip to some North African and Middle East countries, we presented a series of seminars on franchising to local business people.
With the support of the regional Canadian Embassy Trade Commissioners, we were witnesses to a growing trend to start franchise systems from existing businesses and a strong interest to acquire the master franchise rights from North American franchisors and in particular from Canada.
Franchising has really taken a growing role in the world economy
Over the last 10 years, as more and more countries have made modifications to their legislation to recognize issues such as intellectual property protection, trademark registrations, and other legal aspects important to franchisors.
Many countries in Western Europe are already quite heavily involved with franchise systems of their own, such as France, Germany, Italy, to name a few, which have tens of thousands of franchisees from thousands of different franchise systems already in place.
Countries like China and India are interested in attracting established Canadian, American and European franchisors in their country with eager potential master franchisees interested in developing known and serious brands in their market. Already the two largest countries in the world have thousands of franchisees.
Australia is a well-developed franchise market and always looking to expand outside its borders. Already there are a few Australian concepts in Canada, with Canadian master franchisees!
A country like South Africa, the largest franchised African Country which boasted over 430 franchisors and almost 24,000 franchisees in 2002, has been expanding some of their brands in North America and in Canada in particular.
Morocco is now a relatively large franchised market with hundreds of systems either home grown or from Europe and a few from Canada.
This opens up the door for Canadian systems, which are welcome in mostly all countries in the world, to seriously consider expanding outside of the continent and into markets where the consumer is eager for new products and services delivered in a constant and recognizable format.
There are interesting opportunities for Canadian growth in North African markets, some of which have gone through dramatic changes recently. Eastern Europe markets are also embracing franchising as their middleclass grows and demand for North American products and services increase.
Typically, Canadian franchisors will cover well their home markets: Ontario, Western and Eastern Canada and Quebec, and then will expand in the rest of Canada. When that is accomplished, they have covered a market potential of 32 million people spread over thousands of kilometres. There are markets in the world with that many people in a city! (A slight exaggeration, of course!)
It is time for Canadian franchisors to spread their wings on a global basis. Of course, international expansion is not for everyone. It should be reserved for mature, structured, flexible and patient franchisors.
It should not an opportunity for a quick cash grab of initial franchise fees and then leave the local master franchisee to himself or worst sell the rights to the first organisation with money but with no valid expansion plan in mind or competency in building a franchise system.
Choosing the right master franchisee
This is in fact more complex than recruiting our local franchisees as you can appreciate. Business conditions, consumer taste and behaviour will very likely be different. Building conditions, real estate, financing, the legal environment and procurement must be mastered locally. The master franchise organisation must have proven success in growing a business in that market and provide management competency and not only have a large bank account.
There must be a sharing of some core values and a shared long term vision. This will only be achieved with face to face meetings in both countries.
We teach new Canadian franchisors to think long term and consider that the real objectives are the royalties on growing sales from an increasing number of franchisees and not to rely on initial franchise fees as the main source or revenues. International is the same or should be viewed as the same objective.
How do we accomplish our goals in Canada?
With proper franchisee selection, good training programs, strong real estate selection, creative marketing strategies, adequate financing and ongoing support in all aspects.
It is no different in another country but we typically partner with a local and knowledgeable master franchisee who will work with the franchisor reaching the same objectives!
Let’s discuss the financial considerations
When a franchisor grants a franchise here in Canada, the typical arrangement is as follows:
There is an initial franchisee fee paid at the time of signing the Franchise Agreement. The average fee as we know is $25,000 for a five to 10 year agreement with renewal options. The initial fees is meant to cover the costs related to recruit and train the franchisee and absorb some the initial set up costs of the franchise system. Thereafter there is an ongoing royalty on sales, averaged at 6 per cent of sales. Of course there are many permutations to both this initial franchise fee and the royalty rate, but to simplify this article, I am using the averages as indicated in the usual franchise publications. The royalty is the main source of revenues for most franchisors and the fairest as it is tied to growth for both franchisees and franchisor.
If the system includes a master arrangement in another province such as Quebec for example or an area franchise arrangement is put in place, there is a sharing of these initial fees and royalties with the master or area franchisee which will be based on the sharing of the duties between franchisor and area franchisee.
With a master agreement for a country, the logic is the same. The fair deal is to arrive to a compromise in which all parties can make money by growing the franchise system. The initial franchise fee will typically be higher since the master has now the opportunity to recruit many franchisees and collect franchise fees and royalties. But the master franchisee will have substantial costs in setting up an organisation to recruit and develop the brand in a new market. It is common at this stage to agree to the potential of new franchises in the market over time in order to determine a sensible initial fee for the rights to the country.
It is crucial that the master franchise candidate and his senior management team be properly trained at Head Office and probably on site. It is common that the agreement insists of the setup and running of at least one corporate unit for a certain time as well.
Usually there will be a sharing of the ongoing initial franchise fees collected by the master from his own franchisees. The master should retain most of these fees since he is doing most of the work in finding, recruiting and training these franchisees.
The same should be done for the ongoing royalty stream. The franchisor usually collects between one and two per cent of sales, leaving the master to retain the balance in order to provide for a strong support team and organisation to grow the system.
The key is to find the right people, make sure that you have done jointly your homework on what needs to be done to have your brand successful in another country and properly train and support your partner and he must do the same for his franchisees.
Opportunities are created every day
Canadians should embrace change and play a greater role in the international arena and franchising is one of them!