Historically, Canadian franchisors have not ventured into foreign markets in great numbers. When they have, it has mostly been to the massive, franchise savvy, U.S. market, with very mixed results. However, times have changed. Today, we see more international expansions from Canadian franchisors, and more are expected in the future. What is causing this change?
Many factors may explain this shift in strategy. I believe the important factors are the increased franchise knowledge among Canadian franchisors; the growth of successful franchise systems, both in number and size, and the steady increase in demand around the world for North American franchises.
To be successful in Canada, given the diversity of the Quebec market and the immense geography, with widely spaced populations, in the rest of Canada, a Canadian franchisor has to develop many of the skills and resources common to international expansions. Additionally, Canada is seen by the rest of the world as very similar to the U.S. and reflecting the American know how, when it comes to business and franchising in particular.
Another factor is the immigration laws of Canada, which have resulted in Canada becoming a very multi-cultural country with many strong bonds with and connections to foreign markets. This also boosts a Canadian franchisors access to personnel who understand the language and culture of foreign markets.
Also, international expansion of Canadian franchise systems is being facilitated by some of the same forces affecting franchisors everywhere. The increase in global travel, exposure to international media and the ability to communicate instantly on the Internet are raising awareness of the products and services of Canadian franchises and allowing Canadian franchisors to understand and connect with customers in foreign markets more than every before.
Of course, expanding a franchise system internationally is challenging. The risk of failure is high and the risk of surviving without really thriving is even higher. Some of the most common reasons for failure are choosing the wrong master or multi-unit franchisee, not having enough financial resources to support the master or multi-unit franchisee properly and lack of or poor adaption of the business concept for the local market.
For a franchisor to be successful in an international expansion, it is necessary to navigate and plan effectively. Below are some of my thoughts on the key legal and business considerations for an international franchise expansion.
Plan Early and Take Into Account the Local Laws
Not surprisingly, franchisors are faced with many business decisions when embarking on an international franchise expansion. Some of these include: which markets to expand to first and when; deciding on capital and human resources requirements; and what adaptions should be made to the concept. The list goes on.
Importantly, many of these business decisions are impacted by the legal system of the target country. As such, they should be considered at the planning stage, not just at the time of implementation. For example, when expanding into the U.S., less capital is needed if the first states selected do not require registration or do not have franchise specific legislation. Franchisors have similar considerations when deciding which countries to enter first. For example, the U.K. has no franchise specific legislation, so registration and creation of franchise disclosure documents is not required. This saves time and money.
Branding and Supply Chains
With the importance of brand in franchising, comes the need to ensure that the franchisor can legally secure and license its trademarks in the target market. As well, supply chains need to be established in the new market, which may require local suppliers or be import-based ones, all of which are determined or influenced by local laws.
Adapt Documents to Adhere to Local Laws
Documentation, such as the franchise agreement and the franchise disclosure document, if required, will have to be adapted to comply with local laws. Even the operating manual needs a legal review and possible translation and the local tax laws, including such things as withholding taxes, should be evaluated.
As a final caution, a Canadian franchisor will want to know that it can protect its system in the target market effectively and within manageable budgets. The franchisor’s Canadian legal counsel can and should have input into many of these and other areas at the earliest stage possible and before major decisions are made and strategies created.
Finally, on the implementation side, Canadian counsel can be more helpful and effective for the franchisor if they have a solid and extensive network of international legal firms who are experienced and capable in franchise expansions.
The future is bright and full of promise for Canadian franchisors wishing to expand outside of Canada. Success will breed success, as more Canadian franchisors take the plunge into foreign markets. While caution, adequate resources and good planning are essential for success, the old adage of “nothing ventured; nothing gained” is so very apt for Canadian franchisors who have the ambition and smarts to establish themselves in the world.
* Edward (Ned) Levitt is a Certified Franchise Executive, a partner at Dickinson Wright LLP, Toronto, Canada, and provides legal services to Canadian and international clients on all aspects of Canadian franchise law. He was General Counsel to the Canadian Franchise Association (2000-2007) and is a member of the American Bar Association Forum on Franchising, the International Bar Association and the International Committee of the International Franchise Association. As a member of the Ontario Franchise Sector Working Team, Ned was instrumental in the creation of Ontario’s franchise legislation and has had significant input in the franchise legislative process throughout Canada. Among his many publications is the leading text, Canadian Franchise Legislation (2001, LexisNexis/Butterworths). Ned can be reached at 416.646.3842 or firstname.lastname@example.org.
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