For many years, franchise companies have been exporting their brands to countries all over the world. In the last 20 years a number of international brands have made South Africa home.
Related: Expansion Readiness
This is an exciting business dynamic, as it gives franchisees a fantastic way to take advantage of business concepts that may not exist in the domestic market or that have a unique twist. That said, this dynamic also raises a number of questions in the minds of many prospective franchisees.
“How safe is investing with a foreign-based franchise?”
The franchise must provide you with a full and audited disclosure document. Use the Internet to find out information about any company anywhere in the world.
Most prospective franchisees don’t find any significant difference in the research process of a foreign-based franchise company compared to any other, so the fact that they are foreign-based should not, in and of itself, affect your risk in a negative way.
“What corporate structure do foreign-based franchises typically use?”
Most successful international franchising uses a master licensing arrangement. In this scenario, the franchisor finds a domestic partner that they contractually agree will develop the franchise in the selected country. In the case of foreign-based franchises, this is the most typical structure we see.
The foreign-based company will research the franchise business in South Africa, then interview and select a master licensee that will own and control the franchise rights in this market.
The foreign-based company may own some percentage of this entity or may simply require the entity to pay it fixed or variable fees in exchange for the development rights. The most common alternative to this structure is for the foreign-based company to create a wholly-owned subsidiary in the new country and then hire local employees to run the operation.
“What extra research do I need to do?”
It’s always a good idea to check out the track record of any franchise company in relation to its past results. In the case of foreign-based franchises, you effectively have two companies you should research: The local master licensee and the foreign-based main franchise company.
You also need to know that they are strong enough financially to last and support your efforts in the long-term.
In relation to the foreign-based franchise company, you may want to gather additional information about the franchisor’s operations in other foreign countries to see how well they follow the standards and values of other established franchises here.
“What if I am the first local franchisee?”
There’s an old adage used in relation to smart money investing in franchises: “When in doubt, send a scout.” The simple fact is that being the first franchisee, or even part of the first group of franchisees, in any system under any circumstances always involves far more risk than waiting until later.
Related: A Model Franchise
No matter how much experience a franchisor has elsewhere, each country they go into is different. Until they are tested in the real world, the company simply doesn’t know how well their operating systems, marketing, training and brand are going to work. If you do decide to be a test subject for them, one advantage you may have relates to bargaining power.
The very least you should do is negotiate for some form of an early bird discount of costs, such as the initial franchise fee. This approach will help you, but it still doesn’t change the fact that you will be entering the business with a fair degree of uncertainty.
“What are the red flags I should be on the lookout for with a foreign-based franchise company?”
There is really just one, and that involves the transition of their opportunity into a different culture. Make sure you have taken this into consideration prior to making any investment.
If the company has not been operating in the domestic market long enough to prove the effectiveness of its concept, you have exactly the same risk as with any other start-up franchise and you should therefore be cautious.
One final piece of advice: When in doubt about anything, ask the franchisor. Don’t be bashful about this, since they have probably been asked the same thing by many others before you and should have the answers to your tough questions all ready to go. Research thoroughly, take the time to do this properly and you should be fine.