At Faegre & Benson, Brian Schnell is the lead corporate franchise lawyer for more than 80 franchisors. He helps franchise systems navigate the legal process of expanding internationally, including understanding the ramifications of international marketing and sales decisions and how those decisions can effect your established brand.
Brian has taken the time to provide the readers of The Side Note insight into his experience.
Many U.S. franchisors are looking to overseas expansion as a way to continue growth for their franchise brand and system. Franchisors who have successfully expanded internationally always emphasize the importance of finding the right international franchise candidates, rather than emphasizing getting a deal done and collecting a big upfront fee. In order to maximize the opportunities for successful international deals with long-term success, franchisors are encouraged to focus on the following principles:
1) Award (Do Not Sell) International Franchise Rights
The key distinctions between awarding and selling are the attitude and resulting relationship both parties have once they sign an agreement. If the international franchisee buys the rights to their country or a territory within their country, they likely believe they own those franchise rights. This is particularly true when the franchisor tells the international franchisee to modify the operating system for local customs. This purchase mentality is reinforced if the international franchisee has master franchise rights and immediately begins subfranchising. Subfranchising often happens before the master franchisee truly understands the business, the marketplace and in general, what it means to be a franchisor.
Contrast this sell/buy mentality with awarding franchise rights. The difference starts in prospecting. It needs to be clear in the beginning that the international franchisee will own its business assets, but those business assets include a license to use the franchisor’s trademarks and operating system, which is being awarded to the franchisee. The smart franchisor focuses its presale discussions with the international candidate on the franchisor’s brand opportunity in the country, the roles that the franchisor and franchisee will play in rolling out the brand and the importance of collaborating in building the brand and the brand’s customers. This subtle difference channels both the franchisor’s and franchisee’s efforts on mutually working together, rather than the behaviors that ensue when the international franchisee believes it has purchased something.
2) Build an Emotional Bond with International Candidates
With the appropriate awarding mentality in place, the franchisor can spend less time on selling its franchise opportunity and more time on determining if the international candidate is prepared to make an emotional commitment. Successful brand building and successful franchise building is more about emotion than pure economics. Most international franchisees have the financial strength to do the deal, but if the international franchisee is not fully invested emotionally, than the chances of long-term success in the country are greatly diminished.
Too many franchisors overlook this key issue in their search for international candidates. Statistics show that most international franchisees fail to meet development schedules throughout the life of the deal. One reason this occurs is that the international candidates have been sold, not awarded, their rights. No emotional bond exists between the franchisor and franchisee. Therefore no emotional bond exists between the franchisee and the brand. If the emotional connection is not established in the beginning, the international franchisee struggles, loses confidence and interest, and likely makes a half-hearted effort in developing the brand in the country.
3) Establish the Importance of Your Culture and Brand
The franchisor must emphasize the culture of the company and the role it plays in the franchise system, both domestically and internationally. An international franchisee can properly change certain aspects of the operating system when it expands in its country, but they should not change the franchisor’s culture. Further, a franchisor’s culture is akin to the brand culture, as this is the foundation for promises that are made to brand customers (we promise/we deliver). The emphasis on the culture is often overlooked in the international sales process, when it should be a core component. If the international franchisee does not understand and embrace the franchisor’s culture or brand, frustration and miscommunication will result and breakdowns will occur.
4) Focus on the Mutual Fit
During the initial conversation with an international candidate, the franchisor should clearly explain the objective is for both parties to determine if the fit is right. Is the candidate a good match for the franchisor and is the franchisor the right fit for the candidate? In the end, if both parties have determined a mutual fit exists, then the next steps of the relationship (building, expanding and operating the brand in the country) take on a collaborative tenor. Furthermore, when a challenge arises (and challenges will indeed arise), the established relationship will allow the parties to work through those challenges quicker and more collaboratively.
5) Be Prepared to Walk Away
If the focus is in on mutual fit, then the parties should have an understanding that if at any time one of the parties determines the fit is not right, then both parties will part ways and wish each other the best. International failures are often results of signing deals instead of walking away. Often the franchisor gets too focused on finalizing a deal and receiving the upfront franchise fee that warning signs against the match are missed or ignored.
The bottom line is that successful international franchisors understand the critical nature of the approach they use in their development. The franchisor should design an approach and structure conversations with potential franchisees that focus on fit above all else.
About Brian Schnell
Brian Schnell is a leader of the Faegre & Benson franchise practice. He counsels both emerging and mature franchisors in a variety of industries on all aspects of their franchise programs. He is the lead corporate franchise lawyer for more than 80 franchisors, ranging from companies with thousands of locations worldwide to companies in the initial stages of building their franchise systems. Brian is a past chair of the International Franchise Association Supplier Forum and a member of its Legal and Legislative, Awards and Membership committees. As the first male to receive the IFA Women’s Franchise Committee Crystal Compass in 2009 based on his leadership in franchising, he is recognized nationally as a leading franchise lawyer and is a frequent speaker and author on franchising topics.
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