International Summit International Franchising · International Summit ... Geo-political and Business Environment –Stability, Corruption and Transparency Legal System –Franchise

International Summit – Track 1, Part 1:Know Before You Go: Practical Considerations in International Franchising

Moderator:Karen Satterlee

Alex Bingham Larry Oberly Susan Grueneberg

Hilton WorldwideSenior Vice President &

Assistant General Counsel

The Little Gym International

President & Chief Executive Officer

Speed Pro ImagingPresident & Chief Executive Officer

Snell & Wilmer L.L.P. Partner

OBJECTIVES FOR TODAY’S SESSION:

● Assessing your company’s readiness to go international

● Steps to take before going international

● Understanding the legal and regulatory landscape

● Best practices for franchisee selection

● Determining the ideal structure for the franchise offering

● Operational issues in franchising abroad

● Exit strategies

Assessing Your Company’s Readiness to Go International

● How do you evaluate if your company is ready for International expansion

- Strength of the concept domestically

- Review existing infrastructure and new infrastructure to launch International support

- What are you willing to invest to launch International

● Trademarks

● Market intelligence

● Do you localize or not

The Decision to Go International

• Are you ready?

– More expensive than you think

– More difficult than you think

– Will draw resources from your domestic franchise efforts

– Will require dedicated personnel

– Less profitable in the short run than you may anticipate

Barriers to Enter Foreign Markets

• Resources (human and capital)

• Legal

• Language

• Marketing

• Prospect Due Diligence

• Political

• Local customs and religious considerations

• Currency

• Supply chain

• Real Estate

Gap Analysis for a Strong International Program

Steps to Take Before Going International

The Nitty Gritty

● Geo-political and Business Environment– Stability, Corruption and Transparency

● Legal System– Franchise Regulation, Disclosure, Contract, IP Enforcement

● Banking and Royalty Repatriation– Central Bank registration required in some countries

● Extraordinary partner

Franchise Industry Research

General Business Resources and Research

BBC Doing Business Guide

Denver University

The Clincher Considerations

● Real estate

● Supply chain

● Equipment and inventory

● Labor costs, laws & Visas and skilled or unskilled work force

● Support and oversight

● Safety

Industry-specific Resources and Research

Segment Specific, Local

● Local Similarities & Differences Home Ownership Rates– Organized v Fragmented

– Regulated v Unregulated

– Employee v Entrepreneur

● Local Segmentation– Rent v Buy

– Re-sale v New

– Residential v Commercial

Sources: Global Property Guide, Housing Statistics European Union, Eurostat, nationmaster.com, allbusiness.com, personal visits to countries

Segment Specific, Global

● Expat Populations

● Students Educated Abroad

● Global Segmentation

- Inbound and Outbound

Sources: Demographia, 11th Annual Demographic International Housing Affordability Study, 2015 and The Economist (Mainland China ) and Kookmin Bank (South Korea)

Affordable Unaffordable

Buying a home in the U.S. is a dream come true

Large Segment Opportunity

Difficult Language, Entry, Operations & Oversight

Large Segment Opportunity

Easy Language, Entry, Operations & Oversight

Small Segment Opportunity

Difficult Language, Entry Operations & Oversight

Small Segment Opportunity

Easy Language, Entry, Operations & Oversight

Understanding the Legal and Regulatory Landscape

Legal Landscape

● Franchise law

● Commercial Agency law

● Technology Transfer law

● Competition Law

● Regulated Industry/Business

Legal Landscape

● Dispute Resolution

● Governing Law

● Tax Considerations

● Intellectual Property Protection

Legal Landscape

● Language and Translation

● Currency Repatriation

● Franchise Association

Regulatory Landscape

● Disclosure requirements

● Registration requirements

● Bonds, escrows

Legal Landmines

● Political Stability

● Borders and Ethnic Conflict

● Business relationships and FCPA

Best Practices for Franchisee Selection

Know Before you Go

Must know the who(BRAND AVATAR)

Before you know the where(TOP 10, NEXT 10, ETC.)

Franchisee Candidates – The Who

● Entrepreneur versus manager

● Marketing & sales vs. administrative

● Liquid capital for three (3) years

● Heavy exposure to the Brand

● Educated in Canada or U.S.

Franchisee Candidates – The Who

● Already-successful business person

● Knowledge of one of the two

disciplines

– Your industry

– Franchising

● Government connections

● Passion to leave a legacy

Franchisee Candidate – The How

Leverage multiple lead generation sources

● Company website– Public-facing

– Franchise opportunities

● Referrals

● Social Media

● Public Relations

● Events and Expos

Franchisee Candidate – The Where

● U.S. Commercial Services

● U.S. Chamber of Commerce

● IFA, Affiliates, World Franchise Associations

● Industry Associations

● Franchise Brokers

● Direct Advertising– Business publications

– Trade publications

Franchisee Candidate – The Process

● Don’t chase just one; there’s power in numbers

● Deal sheet with financial model to cull the numbers

● Require Business Plan from each candidate early

● Require candidates to meet at HQ versus you

going there

● Treat due diligence as most critical function

● Be prepared to wait

Determining the Ideal Structure for the Franchise Offering

Unit Franchising

Unit Franchising

● Pros:

– Highest level of control by franchisor.

– No fee sharing

– No one franchisee has leverage over system

Unit Franchising

● Cons:

– Slower growth than multi-unit methods

– Requires more resources

– Liability Concerns

Master Franchising

Subfranchise

Agreements

Master Franchising

● Pros:

- Minimal franchisor resources required

- Localized knowledgeable and support

- Faster Growth

Master Franchising

● Cons:

- Dilution of revenue stream

- Less control over franchise system

- Dependence on Master Franchisee

- Master Franchisees may be difficult to find.

Area Development

Area Development

Agreement

Franchise Agreements

Area Development

• Pros:

– Faster Growth

– More control than Master Franchise, less than Unit Franchise

– Dependency on Area Developer

– Less expensive

Area Development

• Cons:

– Dependence on Area Developer

– Area Developer has more power over system

– Qualified Area Developers may be difficult to find

Area Representative Franchises

Area Representative Franchise

• Pros:

– Market knowledge and support

– Franchisor has more control than in Master Franchise or Area Development

– Fewer Franchisor resources required

Area Representative

• Cons:

– Dependence on Area Representative

– Dilution of revenue

– Controlled growth may be difficult

Joint Venture

Joint Venture

• Pros:

– More franchisor control

– May be easier to terminate

– Local market expertise

Joint Venture

• Cons:

– May still be regulated as franchise

– Need more Franchisor resources

– May be different legal relationship with more duties

Hybrid of the Above

• Mix elements of several systems

• Master Franchise may require that the Master Franchisee operate a minimum number of corporate stores itself

• Joint venture may act as Master Franchisee

Operational Issues in Franchising Abroad

• Decide what model you will use to franchise: this will dictate the way you provide support

• Be sure you choose a partner you trust—no matter what structure you choose, you have less control, simply because of proximity

• Start by using the model as it exists domestically (resist adapting to perceived/local cultural customs before you have experience in the market)

● Be prepared to support the model you’ve sold—it may be different than the way you provide support domestically

– Consider when and how to specialize international service & support

Operational Issues in Franchising Abroad

• Determine your “non-negotiables” from a brand standpoint before you start—prepare to be flexible on other things

● How will your concept translate internationally?

● How will you source the equipment needed for the business, and what impact will that have on local franchisees’ ability to buy in to the business model?

● Consider how you will collect royalties/service fees—what is your recourse if they don’t pay?

● How will you maximize the impact of your international presence while minimizing your risk?

● How will you measure ROI on your international presence?

● From a practical standpoint, what does service look like for you internationally?

Other Operational Issues in Franchising Abroad

• Recognize that there are things that may impact your business internationally that are even more out of your control or are less predictable than they are domestically:

– Politics

– Currency

– Access to capital/real estate

– Ability to move money out of the country

– Internet laws

– Etc.

Exit Strategies

Exit Strategies (Avoiding disasters)

● The right franchisee and market is everything

● If you and your franchisee are disconnected and don’t communicate well – expect an exit

● If you don’t build a strong relationship – expect an exit

● Stay ahead of any and all lapses – predict next steps

Exit Strategies (Avoiding Disaster)

55%

15%

15%

15%

Transfer v Closing

Consolidate v Closing

Run the Business & resell

Exit, lose the country

Exit (with existing unit franchises retained) Strategies

• Terminate the Master Franchise Agreement

• Assign Unit Franchise Agreements

• Pay portion of new IFF to former Master; declining scale

• Transfer the IP and access to systems

• Communicate with network

• Actively recruit new Master

Exit (Close it all down) Strategies

• Terminate the Franchise Agreemento Beware Relationship Laws and Commercial Agency in

Middle East and South America

• Protect the IP

• Return materials

• Disconnect access to systems

• Communicate with network

• Monitor post-exit for continuing operations

CONCLUSIONS:

Key Nuggets

• Growing international is not the cure to having a sick domestic network

• You can’t just be interested, you must be committed to international expansion

• The legal side of international franchising isn’t harder than the domestic side, but the risk of failure and supporting the operation is much higher

• Each country and market is different – Adapt your concept to the environment

Key Takeaways

1. Don’t be opportunistic, be strategic

2. Many good reasons to go international; but the financial commitment can be very high

3. Different markets may necessitate different expansion models and agreements, customize with experienced local counsel

4. Expect the unexpected and think about the potential before you enter

5. The most important thing is the quality of franchisee

International Summit – Track 1, Part 2:International Market Selection & Analysis

Kay Ainsley Rogelio Martinez

J. Perry Maisonneuve

David Humphrey

MSA Worldwide / Managing Director

Fast Cloud Consulting / CEO

Northern Lights Consultants /

Founder & Principal

ECP-PF Holdings / CEO


● Provide a thoughtful framework for assessing international markets and their suitability for your franchise system

● Present a case study of one business expanding internationally

● Explore in detail how you might approach the most popular international market for American franchisors: Canada

● Overall, help franchisors match the strengths of their franchise systems with the characteristics of international markets

Kay Ainsley

MSA WorldwideManaging Director


● To identify critical factors in selecting markets for international development

Critical Factors in International Market Selection

● Giving consumers in other countries the ability to experience your concept

● Expanding your brand and selling product in international markets

Two Philosophies


● Internal review

– What makes you successful in your home market?

●What is core to your concept

– What can you support?

●What resources can you put toward international

●Gaps determine franchisee profile

– Which franchise vehicle?

Getting Ready


● Markets with similar success attributes

● Markets that can be effectively supported

● Define objectives for international expansion

– Determine strategy

●Follow the leader

●Beachhead

●New concept or new brand

Pick the Low Hanging Fruit


● Push vs. Pull

– Ability to quickly evaluate all opportunities

– Market vs. Franchisee

– Well qualified candidates have more choices

Market Assessment


● Step One – Is this a place we can/want to do business

● Step Two – Is this a person/group we with whom we are interested in doing business

● Step Three – What is the potential of the market and is it worth committing our resources

● Step Four – Can we reach a win-win arrangement

Market Assessment


● General and Administration

Developing a Market Evaluation Matrix

– Ease of doing business (World Bank rating or Heritage/WSJ Index)

– Trademark and IP protection

– Legal

– Economic

– Supply chain

– Political


● Franchising

– Known/accepted

– Disclosure/relationship laws and regulations

– Administrative cost of compliance



● Market potential

– Demographics

– Psychographics

– Economic ability

– Competition

– Language and cultural barriers/ brand translation

– Infrastructure

– Supply Chain



● CIA World Fact Book - www.cia.gov

● Heritage/WSJ Index of Economic Freedom -www.heritage.org/index/ranking

● World Bank/IFC Study – www.worldbank.org and www.doingbusiness.org

● The Transparency Index – www.transperancy.org/research/cpi

● The Fraser Institute – www.fraserinstitute.org/studies/economic-freedom

● The Cato Institute – www.cato.org

Sources of Information

http://www.cia.gov/

http://www.heritage.org/index/ranking

http://www.worldbank.org/

http://www.doingbusiness.org/

http://www.transperancy.org/research/cpi

http://www.fraserinstitute.org/studies/economic-freedom

http://www.cato.org/


● Franchise candidate

● Market visits

● Suppliers and vendors

● IFA and local franchise associations

● DOC

● Local trade associations

● Web search of country, cities, competitive concepts

Sources of Information


● Not having a plan – being reactive

● Not doing the proper homework

● Selecting the wrong franchisee

Common Pitfalls

CONCLUSIONS:

● Successful international market selection requires franchisors to:

– Have a pro-active plan

– Have the ability to quickly evaluate all opportunities

– Be selective about choosing the right franchisee

Rogelio Martinez

Fast Cloud ConsultingPresident

The 4-step approach to go internationalCase Study “The Language Academy”

● Business language programs

● Global leadership and language programs for kids and teens

● Over 40 different languages

● Global corporate accounts

1. Who buys my service? Build a Persona

● Young, aspirational professionals

● Young, mid-high level income families

● Global Accounts representatives

2. Why am I unique in the target market?

● My strengths and weaknesses differ based on the target market

● How is the competitive landscape?

3. Show me the money! (to my franchisees)

● Could my franchisees get their return on investment in 2-5 years?

● What will my market price be and how it compares to the competition?

4. How am I going to support my Franchisees?

● Time zones

● Self-serve support communities

● Mentorship programs

● Field visits

● Language

J. Perry Maisonneuve

Northern Lights Consultants Corp.Founder & Principal


● The Franchising Landscape

● Canadian Franchisee Demographics

● Geography: Its Impact on Expansion and Support

● Franchise Legislation

● The Impact of Corporate Concentration

● Market Entry Strategies

● Summary and Conclusions

International Market Selection & Analysis: Canada

● 1,300 franchise systems

● 78,000 franchisees

● 64% of franchise systems have less than 15 units

● 10% of systems have more that 100 units

● 57% of CFA member brands are based out of Toronto

The Franchising Landscape


● Displaced Executives: “50/50 Rule”, NAFTA, Corporate Concentration

● “New Canadians”: Recent Immigrants – 20% of Canadians born elsewhere. 60.8% of pop increase

● Franchisee residence: Ontario: 57%; Alberta: 18%

● Education: College / University: 62% Graduate: 29%

Canadian Franchisee Characteristics


● Most Desired Qualities of a Franchise System:

– Brand Recognition: 38%; Level of Investment: 22%

● Available Investment capital:

– $50K to $100K: 24%; $100K to $300K: 25% $250K - $500K: 14%

● Desired Franchise Sectors:

– Food: 26% Services: 25% Retail: 23% Home-based: 20%

Canadian Franchisee Characteristics


● Urban concentration: 71% live in CMAs

● Census Metropolitan Areas: 71% of Canadian Population

– 6 CMAs = X > 1 mil population

– 11 CMAs = 250K pop < X < 1 mil pop

– 16 CMAs = 100K pop < X < 250K pop

● 7 hour flight from coast to coast; 3 ½ time zones

● 2 different language groups

Geography: Its Impact on Expansion and Support


● CMAs within one day drive of Toronto:

– 16 million out of population of 35.9 million (45%)

– 19 out of 33 CMAs (58%)

● Best practice: “Cluster Development” by CMA

– Targeted franchisee recruitment

– Efficient operational support

– Sustainable retail brand development

Geography: Its Impact on Expansion and Support


● Franchise Legislation exists in 6 out of 10 provinces

● Largely US style pre-grant disclosure

– “Open” (“All material facts”) versus “Closed” (US style “Prescribed List”)

● Relationship components: “Good faith and fair dealing”, “Reasonable commercial dealings”

Franchise Legislation


● Banking

– 5 National Chartered Banks, all members of Canadian Fran Association

● Real Estate

– International instability drives direct investment in US (Toronto & Vancouver)

● Supply Chain

– Product (Food, equipment)

– Labour: skilled and unskilled.

● First impressions count!

The Impact on Corporate Concentration


● Masters / Area Representatives (“Sub-Franchising”)

– Traditional US Entry Strategy

– Now mostly limited to Quebec

● Area / Multi-Unit Developers (Franchisees with Two or More Locations)

– Now most common

● Single Unit Franchisees

Market Entry Strategies


● Canada is the first obvious choice for International Expansion

● Franchising is a well established business strategy

● Predisposed to US Brands

● Close “Cultural Proximity” to US language and culture

● High “Rule of Law”

● Franchise law: Similar approach to US legislation

● “If you can franchise in Canada, you can franchise anywhere!”

Summary and Conclusions

CONCLUSIONS:

● Carefully selecting international markets is every bit as important –and difficult – as carefully selecting U.S. franchisees

● Successful international expansion requires thorough study: both desk research and fieldwork

● Canada is a natural starting point for many U.S. franchisors, but is still a very different country, likely requiring thoughtful adaptions from your U.S. operating model

● Our panelists have been there and done that – and are available to talk further as you consider options for international growth

Documents

International Summit International Franchising · International Summit ... Geo-political and Business Environment –Stability, Corruption and Transparency Legal System –Franchise