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The Dreaded “F-Word”? International Franchising for the Non-Franchising Company

by Michael Santa Maria, Kevin Maher and Mohammad Alturk

For companies that do not use franchising as a business model for growth, “franchising” may be the dreaded “F-word.” The thought of allowing third parties to use the company brand, related intellectual property (including valuable know-how) and other operating secrets gives them the heebie-jeebies (for lack of a better term). The lack of control over these third parties sends shivers up the collective spine of non-franchising companies. But is this fear well founded—particularly in light of the potential up-side of growing a business internationally—or is it simply fear of the unknown?

A good case study is Enterprise Holdings Inc., owner and operator of the iconic Enterprise Car Rental system. Here is a recent quote from its CEO, Andy Taylor, in a Bloomberg interview published on March 12, 2013:

 ‘Years ago, the thought of licensing was absolutely abhorrent,’ Andy Taylor, 65, said in the interview. ‘We want to control that customer experience. We want our people taking care of customers. But we’re learning that if we’re going to be a global brand, and we need to be competitive in the future, we’ll have to do it a different way.’

Enter the franchise model.

The traditional view is that franchising is a business for fast food companies. Want to develop a sandwich shop on every corner? Franchise. It seems to have worked well for Subway, which recently surpassed McDonald’s for the top spot with the most units globally (now close to 40,000). But what about other types of businesses?

Most people do not think of major industries as franchises, but that is how automobile dealerships and soft drink bottlers often operate; not to mention retailers, hotels, travel agencies, tax and insurance firms, training companies, marketing companies and sports leagues. For a more comprehensive list of companies that franchise, visit the International Franchise Association’s Franchise Directory at www.franchise.org/SearchFranchise.aspx.

Given the wide variety of industries and sizes of companies that use a licensing or franchising model to achieve growth, the use of franchising on the international stage is not surprising.   After all, a franchise has been described—ok, by us, but it is still a catchy reference—as a “license on steroids.” The “flattening” of the world (to borrow from Thomas Friedman) has caused companies today to face the very real prospect of competitors that are able to service customers on a global basis, leaving a purely domestic operator at a strategic disadvantage.

Purely domestic operators are not equipped to do much globally—they do not have the management ranks, depth or expertise; they do not have the desire to open their balance sheets to international scrutiny; they may not have shareholders that expect international exposure.

That said, ignoring the possibility of expanding internationally could prove to be a wasted opportunity for many domestic companies, especially when many:

  • have established products, services, processes or business systems that can be easily leveraged under a franchise model;
  • have developed a local brand and reputation that can be extended into foreign markets (thanks, in part, to the oft-maligned WTO, trademarks and other intellectual property rights enjoy a greater degree of protection globally); and
  • can obtain the leverage of using the human and economic capital of others (i.e., franchisees) to develop cash flows (initial fees and ongoing royalties, typically) that are currently non-existent.

There are also intangible benefits to going global—the added energy and enthusiasm of growth, the enrichment of new learning experiences and the added dimensions and opportunities for professional growth, to name a few.

So, why don’t more companies opt to expand globally through franchising? The most likely answer often revolves around losing control. Allowing someone else to drive the (business) bus without being able to control the route, speed or direction. In addition to franchise-specific regulations and IP considerations, loss of control appears to be the biggest boardroom obstacle to using franchising for international growth. Sadly, this is a passé view with little basis in what franchising has become in the 21st century.

Modern business format franchising is a malleable business model that can be tailored to fit any measure of control. International practitioners are able to advise clients on how to structure a franchise model in order to keep the franchisor in the driver’s seat. With sufficient planning, forethought and coordination, a domestic concern can reap the benefits of international franchising without ever uttering the “F-word.”

 

Michael Santa Maria and Kevin Maher are partners at Baker & McKenzie LLP and can be reached at msm@bakermckenzie.com and kevin.maher@bakermckenzie.com, respectively. Mohammad Alturk is an associate at the firm and can be reached at mohammad.alturk@bakermckenzie.com.

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