If you’re considering investing in an international franchise brand, tread cautiously, Richard Holden, head of franchising at Lloyds banking group, advises
Some of the most successful franchise brands operating in the UK originated abroad, so it’s natural to think that international prospects may offer an investor the next big money making opportunity.
Investing in an international franchise brand that’s new to the UK may seem an attractive option, particularly if it’s already successful in its home market. However, there is some necessity to tread cautiously.
QUESTIONS TO ASK
It’s important to understand why the company is looking to develop its brand in the UK and what research it’s undertaken to identify the UK as a viable new market. How does the company intend to approach franchising in the UK? Will it provide a direct franchising opportunity or develop with the support of a master franchisee or even regional master franchisees?
Each development model has its advantages as well as its drawbacks and any would-be investor needs to recognise these benefits and pitfalls before considering an overseas brand to invest in. Occasionally an international franchisor will look to develop a support office in the UK and directly franchise its brand and operating model to investors. This investment by the franchisor shows its commitment to succeeding in the UK, although it would need to have a good understanding of the market here to be able to advise franchisees about issues which may impact their businesses, such as locating premises, territories, employment legislation, market trends, taxation and the supply chain.
Be guarded about international brands that offer remote support without having a true, on-the-ground presence over here.
It’s more common for international brands to develop through a master franchisee. This is someone who has purchased the licensing rights to operate the franchise in the UK. The master franchise model allows for a large business operation to be built within a relatively short period of time with a concept that’s already been developed by the franchisor.
An advantage with master franchising is that the individual or company that has purchased the rights should have a good understanding of the UK market. It is, however, the master franchisee’s responsibility to prove the franchise model works and is viable in the UK before starting to recruit, train and support franchisees investing in the brand.
The franchise opportunity is only as good as the master franchisee supporting it and, in the early stages of its UK development, the master franchisee will often make mistakes that could impact a franchisee’s own business.
Regional master franchising is a variation of master franchising, where you may have several people recruiting franchisees regionally, rather than someone operating across the whole of the UK.
The possible pitfall with this model is that regional master franchisees are likely to have varying strengths and weaknesses. The level of support offered could, therefore, vary widely, bringing with it inconsistencies across the UK.
One of the major considerations with master franchising is that there is another layer in the arrangement, so the business model doesn’t only need to be profitable for the franchisee and franchisor, it needs to be ultra-profitable, as the master franchisee will also be taking a cut of the franchisee’s revenue for providing training and ongoing support to the network.
Checking out the background and experience of the master franchisee is equally important as considering the viability of the franchise brand and operating systems. Master franchisees are likely to be much more entrepreneurial than the sub-franchisees and real life experience owning or running a business beforehand is helpful. Sales and marketing experience will also be valuable, as well as great people skills, if they want to build a successful franchise network.
The master franchisee’s main responsibility will be to act as a business support consultant to franchisees and help them succeed in their own businesses.
In today’s economic climate, more international brands are looking at the UK as an expansion market. If their franchise models are structured in the right way, many of them stand a good chance of adding to the success of overseas brands that are already established franchise opportunities in the UK.
Many international brands have tried and failed to successfully launch over here, so it’s important investors undertake thorough research and choose wisely before making any commitment.