Avoiding franchise failures

Avoiding franchise failures article image

pitfallsAre you contemplating the leap from running a successful domestic franchise to taking your business global? Here are five mistakes franchises make when going global and five ways to avoid them. With our domestic market necessarily limited by population and geography, taking your franchise global is a very attractive step. As franchise expert David Stafford of DC Strategy comments: "Australia represents less than two percent of world GDP [gross domestic product], so there is more opportunity in the rest of the world than there is here for most businesses. And with the economic downturn, there are some really good opportunities at the moment." Adding to the attraction, Australian franchises are highly regarded internationally. For instance, each year the Franchising and Licensing Association in Singapore invites a single nomination from each of the 36 member countries of the World Franchise Council, for recognition in the International Franchise of the Year awards, held in Singapore. In 2008, it was an Australian franchise, freight and logistics company Pack & Send, which was named runner-up to the winning Chinese company, Inner Mongolia Little-Sheep Catering Chain. Being considered the second-best franchise in the world was an enormous boost for the company, which has 92 stores across Australia, in the United Kingdom and New Zealand. Taking your franchise global brings with it the possibility of great reward and financial success, but it also brings a fresh raft of challenges. Happily, most of these can be avoided with research, preparation and the right advice. Primarily, it’s important not to go too early and risk taking an immature business global. Significant expansion cannot be expected unless the fundamentals are well and truly in place. With 85 percent of businesses that try to go international failing to reach their development objectives, it’s critical your strategy be a sound one, from day one.

5 mistakes franchises make

1. Trying to expand an immature businessThere are three basic non-negotiable conditions that must be in place before you even entertain the thought of going global.

  • Strong cash flow and capital base, and profitability.
  • Strong market position, meaning a solid proportion of domestic growth has been already achieved. This demonstrates also that your business systems and processes are in place and no longer need to be subject to refinement.
  • The business must have the requisite senior management resources that can be taken from the Australian business and devoted to expansion in the foreign market.

"Unless those three conditions are met, most people struggle. And struggle badly," says Stafford. "Traditionally what happens is an email arrives from a fan, who says ‘saw your brand, really liked it, it belongs in my country, I’m really good at what I do, why don’t you come here?’ And this deal fever erupts and all of a sudden you’re letting a stranger dictate your international expansion strategy." Usually in these cases, the business gets established in the marketplace but stagnates as there is no system or plan for growth. 2. Selecting the wrong business model Sometimes business owners don’t really understand what the most appropriate business model is, be it a franchise model or other structure. Deciding what roles and responsibilities each party will have in the business model is critical, as is understanding and communicating who is going to do what. 3. Selecting the wrong country Due diligence cannot be underestimated in choosing your overseas market. "Most people do this poorly," says Stafford. "They make a decision on the basis that they know a little bit about that market or they went there on holiday-those sorts of subjective reasons-when really the decisions need to be based in some good solid robust research." 4. Having inappropriate cultural assumptions Just because things are done a certain way in the originating country, doesn’t mean that it’s done that way everywhere else in the world. It’s important to do your research and make sure your business fits with the cultural environment. One example is McDonald's in India. Whereas elsewhere in the world, McDonald's is famous for its beef hamburgers, in India, beef isn’t compatible with the predominantly Hindu local culture. So, with this awareness in mind, McDonald's built a sizable business around alternative products such as the Maharajah Mac, a chicken burger. "You have to understand the local nuances," explains Stafford. "And some of them can be really big. It can be the difference between success and failure; and some of them can be quite minor, such as how you write your operations manual, or telling the time." A common result of understanding cultural differences and local nuances can be that the brand name or logo needs to change. Says Stafford: "It happens more than you would think. There’s a very big brand baby food company out of America, called Gerber, but when it was released into France, the brand had to change as the French word gerber means ‘to puke’." 5. Not having a big enough capital base Having enough cash to back the move overseas is understandably a necessary element. Consultation with finance experts is a must to ensure sufficient financial depth to support the expansion. This is important also considering you might enter some markets as a franchise but use alternate structures in others. A sizeable number of franchisers in Australia would have a reasonable percentage of company-owned stores, whereas this may not be the case when they enter a foreign market.

Avoiding these pitfalls

1. Have the non-negotiables sorted This means ensuring you have strong cash flow and a solid market position, as well as appropriate senior management resources. 2. Understand and select the right business model This includes understanding the roles and responsibilities in the chain, right down to understanding, in each market, how the customer wants to buy. Stafford adds: "Also ensure that for each of those markets, there is sufficient profitability for each partner. It’s incumbent upon the franchiser to understand that there is sufficient profitability for the single unit franchise holder, for the master franchise holder and for the franchiser. You must make sure the business is viable." 3. Pick your countries based on success characteristics Look for countries that exhibit similar characteristics to those that make your domestic market attractive. 4. Apply the 80/20 rule Understand you need to retain 80 percent of your usual way of doing business, regardless of where you export the business. The idea prevails that if you must jettison more than 20 percent of the way you do business, then you have a different business. Stafford comments: "If I change the business too much it ceases to be a business I understand and it becomes a business I have to learn about, not one I know how to run." 5. Ensure the correct business governance models are in place

  • Ensure you have the capital base necessary for expansion.
  • Ensure all intellectual property is correctly protected.
  • Ensure you put into place a corporate structure that allows for the most efficient movement of money back to the franchiser; note that in tax havens it can be difficult to repatriate money from overseas.

And above all, get good advice-and look before you leap.

Helpful sources

AusIndustry: DC Strategy: Franchise Council of Australia: International Franchise Association: IP Australia: World Franchise Council:

Funding your franchise

Before looking to take your franchise overseas, assess how much working capital is required. Under-capitalisation when funding a franchise is an easy and potentially terminal mistake. Franchisees should aim to build strong financial foundations in their first site by establishing a solid customer base and growing profits in order to use the equity from the first site for the acquisition of additional franchise sites. In calculating the amount of working capital required, all costs of the operation need to be considered. It is prudent to review the cost outlay involved in setting up the first franchise site, what earnings can be taken, and also what additional costs need to be considered. These may include costs for new equipment, site rental or even additional staffing. From a bank’s perspective it’s critical to get an understanding of the amount of funding required to fund another site at the outset. Generally, multi-site franchisees pose less risk in loan applications as they’re able to provide pre-existing business performance indicators. However, this does not mean banks will be any less stringent in their approach to the loan application. Primarily, banks will look for operational strength, sufficient working capital projections, business capacity to meet loan repayments, and security for the loan. The financial groundwork isn’t over once the initial funding is secured either. When expansion to the second and third sites begins, there are some further financial considerations that will help keep all sites on the right track. -Rod Nuttall, national executive manager of Commonwealth Bank’s franchising division


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