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Franchising Goes Global

Many foreign-born franchises are looking for master franchisees to bring their concept to the U.S. How can you get in on the trend?

Of course, the U.S. remains, by far, the world's biggest net exporter of franchising. And while the number of franchisors coming to the U.S. from abroad continues to pale in comparison to the hundreds of new franchise concepts created in the U.S., some of these franchise imports are experiencing real success-and many more are looking for master franchisees to help them break into the U.S. market.

For a non-U.S. franchisor, the U.S. holds a great deal of allure. It is among the largest consumer market in the world in virtually any industry that might be franchised. It has some of the world's most affluent consumers and most ardent shoppers. And it has the world's largest appetite for franchises-with a new franchise opening every 13 minutes, day or night.

Moreover, the U.S. market remains the melting pot of the world. Want to introduce a Vietnamese Pho concept? Most major U.S. cities have a Vietnamese market that could be a good spot for a launch. A Polish Kolache concept? There are more Poles in Chicago than any other city except Warsaw.

However, despite the size, strength, and diversity of these markets, franchise imports face a number of significant challenges. The sheer size of the market alone, not to mention the complexities brought about by significant regional differences, can make market penetration a daunting task.

In addition to the U.S. being among the largest and most affluent markets, it is also the most competitive-both from a consumer and from a franchise perspective. Depending on the estimate you use, the franchise market boasts between 2,600 and 3,600 active franchisors. By comparison, most countries outside of the U.S. have only a few hundred native franchised brands.

Moreover, the U.S. market is complicated by the fact that it is one of the most highly regulated when it comes to franchising. A franchisor attempting to enter the U.S. from outside its borders must concern itself not only with the federal law governing franchising, but also with the complexities of numerous state laws governing both franchising and business opportunities-and, under many circumstances, these laws must be complied with before the non-U.S. franchisor even begins talking with prospects about franchising. The net impact, of course, is that these foreign franchisors, like their U.S. startup counterparts, need to investigate significant resources in legal documentation and filings just to be able to explore a market in which they may not have even tested their products or services.

Beyond the market and its legal complexities, a foreign franchisor faces the same challenges that any transnational franchisor faces in entering a new market: different customs, business adaptability, different construction costs, consumer acceptance, local competition, economic climate, available labor pool and differences in labor rates, product availability and sourcing, intellectual property protection, and taxation and tariff issues. All these elements will contribute significantly to the franchisor's costs of market entry.

The bottom line: A non-U.S. franchisor needs to have significant resources in place in order to make the leap into one of the most competitive markets in the world.

Coming to America
Franchisors can enter new markets in a number of ways: through joint ventures, master franchising, or direct franchising. Invariably, the franchisor's strategy for market penetration dictates the responsibilities of the various parties. Before getting involved, you need to understand how much a prospective non-U.S. franchisor will invest in the U.S. market and what your various roles will be as a master franchisee.

Traditionally, most international franchise relationships have been structured as master franchises. In a master franchise relationship, the master franchisee takes on all the responsibilities of a traditional franchisor.

As a first step, it's often your responsibility as a master franchisee to build, open, operate and perhaps refine a U.S. prototype that serves as the basis from which U.S. franchise operations are launched. As with any U.S. franchisor, your goal is to create a replicable business model that provides franchisees with a return on investment of at least 15 percent after deducting both a franchisee's salary and a royalty.

Once you refine the business model, you need to develop the necessary legal documents to act as a franchisor in the U.S., and obtain appropriate state registrations.

You also need to refine the operations manual to U.S. standards. You need to add information on various U.S.-specific laws and practices, ranging from Equal Opportunity Laws to the Americans with Disabilities Act to obtaining an FEIN. The revised operations manual also must incorporate concept changes or other modifications in the concept that were necessary for market adaptation.

Likewise, it's your responsibility to build a franchise organization and to market and sell franchises. You need to develop or adapt franchise marketing materials. More important, perhaps, you need to generate leads for your franchise sales efforts. This may be complicated by the newness of the concept to the market-after all, it's much harder to market Kolache franchises if the franchise buying market does not know what a Kolache actually is.

Because your role as a master franchisee will be a combination of prototype developer, franchisee and U.S. franchisor, you should expect that the foreign franchisor will have significantly higher standards in the qualification process. You need to have enough capital to start at least two businesses-both the franchise unit and the franchisor company-and need the business acumen to do so as well. You are expected to follow the system at the unit level, but to exercise much more initiative in your franchise development activities.

Finding Needles in the International Haystack
One of the reasons for this recent mini-proliferation of franchise imports is the way in which the internet has downsized the world. Both consumers and prospective franchisees are becoming increasingly sophisticated and knowledgeable. Twenty years ago, the next new trend was likely to come from California or maybe New York. In today's digital age, though, the next new trend can now come from anywhere in the world.

So how do you spot the newest trend and import the hottest new franchise? How do you spot a franchise import with potential?

Given the number of competitors in the market, the most important element in any international import is uniqueness. If you study successful franchise imports, one of the first things that jumps out is the fact that these opportunities often had no direct competitor when it entered the U.S.

In fact, many successful franchise imports are pioneering new markets in the U.S. Years ago, The Body Shop out of England pioneered the U.S. franchise market for bath products and toiletries. More recently, Aussie Pet Mobile was the first to introduce mobile pet grooming as a franchise opportunity. Action International was among the first to offer a small-business consulting franchise. Cartridge Exchange was one of the first to offer a franchise retailing refilled printer and toner cartridges. Metal Supermarkets has pioneered a niche as "the convenience stores of the metal industry." Likewise, Bevinco has pioneered "profit management for bars and restaurants" by regularly weighing liquor onsite using scientific scales. One of the most recent market imports, Beard Papa, appears to be the nation's first cream puff franchise.

In 1982, Howard Schultz needed to travel to Milan's espresso bars to understand how the European version of coffee could transform the world-and Starbucks as we know it today was born. Today's world traveler, however, can do most of their research in their spare bedroom, as the internet has brought the world's fastest growing franchisors to his fingertips.

Likewise, making contact with these international franchisors is now as easy, and as instant, as the internet-with e-mail and web pages facilitating much faster research, due diligence and negotiation.

Once you've identified the target franchisor, of course, you need to understand key responsibilities and structural issues. Who will have the responsibilities for prototype development and market adaptations? How much support will the foreign franchisor provide? Do they have the resources necessary to sustain this support over the long haul? And are they committed? How will the relationship be structured relative to fees and performance requirements?

Ultimately, in assessing the opportunity for any foreign franchise, you are faced with the same risk versus reward paradigm that you must assess when looking at any franchise opportunity-but for all the reasons discussed above, it is likely that the risks will be significantly higher. And high-risk ventures must be accompanied by high returns to be acceptable. It is only by understanding potential returns that you can assess whether any risk is excessive.

But regardless of the risk, one thing is clear: As the world continues to shrink, the U.S. will see an increasing number of foreign franchisors-and yesterday's franchise balance of trade may soon be far less one-sided.

Mark Siebert is the CEO of the iFranchise Group, a franchise consulting firm that has worked with 98 of the nation's top 200 franchisors. He can be reached at 708-957-2300 or at info@ifranchise.net.
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