Easing Fears: Bringing Your Franchise Concept to the United States
International franchisors can overcome the challenges of bringing brands to the U.S. with help of established, experienced professionals.
By Michael Seid, CFE
Franchisors looking for growth through international expansion are faced with having to choose where to put their resources — financial, human and time. Opportunities must be prioritized and there is often a tradeoff between where the franchisor sees the greatest opportunity and where a potential franchisee steps forward and asks to bring the concept to their market. It can be tempting to put off entering what is perceived as a difficult market for one that is, in the short-term, easy money.
While the United States offers a tremendous opportunity, at first glance entering the market can also seem a daunting task on two fronts: the size and complexity of the market; and the perceived difficulty of complying with federal and state legal requirements, and the reputation of Americans as a litigious people. Both can be overcome.
Many of our clients have been foreign-based companies looking to franchise in the United States. Those that achieved the greatest success did their homework and created a market driven strategy for establishing their brand in the U.S.
Americans often take for granted our good fortune in having a robust consumer-driven economy. With a population that is educated and highly literate, the United States offers a consumer market with a high level of disposable income. Further (and important to those wishing to introduce a new concept), we have demonstrated a desire to try and accept new branded products and services. We constantly look for providers that can exceed our expectations making new market entrance a possibility. Our population is largely concentrated in urban areas that are diverse ethnically and religiously.
With a population of more than 313 million, the overall penetration of franchise branded locations is still relatively low with a per capita ratio of 379 franchised locations to each person.
Iowa has the lowest per capital penetration of 262 franchised locations per person.
The dynamics of franchising have provided an increasing benefit to consumers worldwide and the United States is still the economic jewel as an attractive place to expand. For foreign franchisors the attractiveness of a robust franchisee base, with increasing acceptance of multi-unit ownership enables a more rapid achievement of brand recognition, critical mass and lower unit support costs possible. Capital for franchisee expansion is relatively easier to obtain in the United States than elsewhere and financial institutions are experienced in lending to franchisees. In addition, the loan guarantee programs provided through the U.S. Small Business Administration make the process of gaining capital by potential franchisees relatively simple, compared to many other countries.
Recently I spoke to an audience of experienced foreign franchisors discussing their plans to expand into the United States and their perception of the difficulties facing them. Each one had existing franchised locations in countries outside their home base. Mainly, they are relatively comfortable with franchise regulations in other countries as disclosure laws are becoming more common. The information and methods of expansion they use in developing their home- and other- country markets are generally easily adapted to the next country they chose to enter. That is not necessarily true when entering the United States.
The most often cited concern about coming to the U.S. was fear. While the United States holds great promise for their brand, they recognize that we are not a homogeneous nation; our diversity and sheer size is intimidating. Many say that our maturity in many consumer and business categories can create obstacles they may not have needed to address elsewhere. A few cited our perceived penchant for solving minor issues with litigation and a handful who were more knowledgeable about current affairs were concerned by the recent focus of labor unions on franchising and spoke to the actions of the NLRB, CFA and others in advancing new issues, including increased labor costs and practices, limitations imposed on locations available to chains operating in some areas, joint employment and proposed relationship laws. However, their greatest concern, surprisingly, is still their perception that the regulatory scheme in the United States, with our pre-sale disclosure, registration in some states and differing laws, is complex and that the cost for compliance in time and dollars is prohibitively high.
It is difficult to argue that for a country that professes a belief in a free market economy, we present a picture to the rest of the world that franchisors in the United States need to jump through governmental hoops and requirements, and often those challenges are not uniform from state to state. However, it is precisely because we have a free market economy supported by a relatively well-defined regulatory scheme, coupled with sophisticated and knowledgeable consulting and legal advisors, that make franchising in the United States such an enviable success story. Without a doubt the costs may be higher for entry into the United States, but from experience, those additional costs are not prohibitive, especially when measured against the opportunity.
Franchise regulations in the United States are based on the premise that the franchisor, within some relatively clear limitations, can choose its methods for expansion and independently define the terms of its franchise offering. Franchise regulation has been a boon to its acceptance in the United States because it has been rooted in the pre-sale disclosure to potential franchisees presented in a structured format and has eliminated to a great degree the fraudulent practices that occurred prior to the regulatory scheme being adopted. Potential franchisees receive the terms of the franchisor’s offering well in advance of their making their franchise investment and are given the time to conduct a proper due diligence on the franchisor’s opportunity.
The United States is a proven consumer-driven marketplace that seeks out and absorbs new products, services and ideas. It is precisely because we have such a well defined and structured regulatory scheme (not a perfect one) that makes the United States one of the easiest markets to enter for foreign-based franchisors. The perception of regulatory complexity is a myth — it just may be different from what the foreign franchisor has experienced elsewhere. While our system may come with some additional costs and delays, when compared to the potential of the market, the additional costs are relatively minor. It is precisely because of regulatory requirements and pre-disclosure that franchisors and franchisees thrive in the United States. The attractiveness of the U.S. market is due to several key factors::
- Largest and most experienced franchise market globally,
- Strong consumer acceptance of franchised concepts,
- Clear, well defined franchise and business regulation,
- Access to capital and financing for franchisees,
- Well defined methods of recruiting franchises,
- Increasing number of multi-unit/multi-concept franchisees,
- Significant brand protection,
- Treaties and low barrier to foreign franchisor entry,
- Significant supply chain capabilities,
- Strong and improving economy,
- Available labor and experienced management pool,
- English is the predominant language.
Excessive franchisee litigation was the second most cited concern about conducting business in the United States. While franchisee/franchisor litigation is not uncommon, overall litigation in the United States is only slightly higher than that found in the United Kingdom. Less than 30 percent of franchisors have any litigation to disclose in their disclosure documents and most of that is found in the larger franchise systems. Coupled with the pre-sale regulatory scheme and the advance of better management practices in working with franchisees, the rate of litigation in U.S. franchise systems is remarkably low considering the size of the franchise marketplace.
As with anything new, it is a mistake to assume that, as a foreign franchisor, you can simply modify your existing legal agreements in order to meet the legal requirements of the United States and succeed. Regardless of where your franchise is operating and into which countries you plan to expand into you still need to plan your market entry. This requires some inward assessment of your strengths and capabilities, and understanding of whether your products and services will meet with consumer demand, and whether you will be able to effectively support your franchise organization to achieve your financial and other objectives.
Consider the following questions:
- Are you ready to expand and do you have the necessary financial and human resources?
- Do you have realistic expectations of the time and money it will take to enter the market and your ROI in the early days?
- Are your supply chain, information technology and point-of-sale systems sufficient to meet your expansion goals?
- Do you have the resources to conduct a marketing program sufficient to introduce your brand and build a loyal clientele?
- Is there a market for your business and do you have any advantage against the established competition both as a consumer offering and also as a franchise system?
- What modification to your “retail” and “franchise” offering will be needed for you to be competitive and, are those changes acceptable to you?
Most importantly, can you and your franchisees achieve an acceptable return on investment in an acceptable timeframe?
- There are many decisions and adaptations that are needed when you enter into any new market, including:
- The selection of the market based on language, culture, customs, age segmentation, consumer behavior, frequency of purchase, etc.,
- Whether or not there is a qualified and adequate pool of labor available and your capabilities in providing training and support to franchisees,
- Your ability to adequately assess franchisee performance and enforce your brand standards,
- Your supply chain, distribution costs and capabilities. Impact of shipping, duties, etc. on inventory requirements and pricing,
- Decisions regarding product, concept, operating system, advertising and marketing, location and design adaptations,
- Unit economics including development costs, seasonality, pricing and marketing strategies,
- Selecting the proper structure of the franchise offering and franchisees that are most suitable to support your needs (single unit operators, multi-unit developers, investor groups, direct operators, conversion, strategic franchisees, master franchisees, area representatives, etc.)
- Preservation of alternative channels of distribution,
- The availability and methods to attract a sufficient number of franchisees necessary to meet your critical mass requirements, and
- Your management team’s capabilities and commitment in executing your strategy.
There are a variety of methods franchisors have used in entering the United States and many foreign-based franchisors almost instinctively determine that offering master franchises is the right approach for them. However, choosing the right penetration and support approach requires significant thought and analysis. Master franchising and area representative structures used overseas are less commonly adopted by franchisors in the United States and making the correct determination for your brand requires considerable evaluation of the alternatives.
Where do you start? Although the scale is larger, the steps needed to enter the U.S. market are the same you would use in evaluating any new market. Below is a list of steps, each of which requires greater explanation.
- Gather your competitive research and understand not just the overall U.S. opportunity but the individual markets within the United States best suited for your brand. Develop a strategy for introducing your brand in area(s) where it will be easiest to gain acceptance, build critical mass and plan to expand from these bases.
- Assemble outside professionals, including franchise consultants and lawyers, and begin the process of structuring your franchise opportunity.
- Establish realistic goals for your system in the United States. Make sure that your executive management team is in full agreement as, with any international expansion, it may take longer or cost more than originally expected.
- Project the financial performance of your franchise system and conduct an internal review of your current capabilities in key areas to determine if you are ready to expand into the United States.
- Develop an initial U.S. location or two (direct or indirect) or determine if you can effectively enter the market with no U.S. prototype open and operating, and then monitor and evaluate your initial unit(s) performance.
- Establish solutions to your supply chain requirements.
- Determine how much of your existing operational support and capabilities can be leveraged for the United States. Do you need an office in the United States — if not immediately, when?
- Design and develop the terms of your U.S. franchise offering:
- Its strategic structure and terms,
- Model the economics of the intended franchise system, including fees, for the franchisor and each intended franchise vehicle (single unit, multi-unit, area developer, etc.) to be offered,
- Discuss with your accountant and tax advisors establishing a U.S. subsidiary as the franchisor and whether to repatriate royalties or use them in the United States to support your franchisees and franchise sales efforts,
- Make sure your U.S. trademark registration is up to date,
- Develop the required franchise and other legal requirements with your U.S. legal advisor including forming your franchisor entity and, as required, having its financial statements audited.
- Modify your operations manuals and training programs,
- Determine your human resource requirements and begin the process of engaging the necessary franchisor staff,
- Determine your franchisee sales strategy and tactics — internal sales, brokers, etc., and
- Identify and prioritize your tactical execution.
One great advantage for those wanting to franchise in the United States is that strong consumer acceptance of consumer brands has given rise to more than 3,000 different franchised concepts which have fueled a well-established group of experienced professionals from attorneys to consultants, accountants to IT providers, and advertising and public relations firms that can provide the assistance a franchisor needs in establishing, promoting and managing a viable franchise network. Entering the U.S. market may not be the right move for every company, but the reason for not coming to the U.S. should be based on solid business reasons, not fear.
Michael Seid, CFE, is founder and managing director of franchise advisory firm MSA Worldwide. Find him at fransocial.franchise.org