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Franchise structures

International franchise expansion strategies are discussed in this video. Watch Jenny Buchan explain more.
There are a range of possible business structures through which to expand a franchise. This module explores the features of each option and it clarifies why one option is chosen ahead of another.
The franchisor may choose to move to the target country. This might work well if, for example, they appoint a master franchisee for their original jurisdiction, and focus all of their efforts in learning about how to do business in the new place. An example is a courier business that started in New Zealand, a very small market that the franchisor understood well. The franchisor then moved to Australia and expanded the business in this much bigger market.
Where the geographic distances are small, or the jurisdictions are very similar. The franchisor might franchise direct from its home to the target country. This might work well for a franchisor in Detroit franchising into Toronto, only a few hours drive. Once the franchisor is confident the new jurisdiction is receptive, it would be likely to appoint master franchisees. It might choose to establish branch office in the target country. For more detailed discussion on this, listen to the comments by tax law professor, John Taylor, in the expert video at the end of this module.
Appointing master franchisees is the most common strategy. The master might be appointed for a region, a country, or a smaller area like a state or a province. In some countries, it’s more common to appoint area developers. This might work well where there are powerful business families who control access to multiple shopping centre premises. Another possibility is to appoint a local business as a joint venture partner and franchise with them. Remember also that the same range of franchise models can exist within one country, if the franchisor will be stretched too thinly if it attempts to develop all markets within the country itself. For example, Canada and Australia have population concentrations separated by vast areas that are very thinly populations.
For these countries, a franchisor may choose to appoint an area developer or a master franchisee in each metropolitan area. The right choice for any franchisor is going to depend on culture, geography, the laws of each country, the degree of control the franchisor wants to retain, and the amount of risk the franchisor is willing to take. You’ll find some interesting research in the reading list at the end of this module.
There is a range of possible business structures through which to expand a franchise. This section explores the features of each option – and clarifies why one option could be preferred to another in a specific situation.
The options include:
  1. Move to the target country (relocation).
  2. Direct franchising.
  3. Establish branch office in the target country.
  4. Appoint a master franchisee.
  5. Appoint an area developer.
  6. Establish a master franchise/area development via a joint venture.
The right choice for any franchisor is going to depend on culture, geography, the laws of both countries, the type and degree of control the franchisor wants to retain and the amount of risk each party is willing to take.
As was outlined in the video there are a range of options available to a franchisor when choosing to expand overseas. Here we discuss each of these options in more detail. In the attachment ‘Business Expansion Models’, the specific details of the relationship between the parties and the flows of money are depicted.
  • Relocation: The franchisor could go to live in the target country and appoint unit franchisees.
  • Direct Franchising: The franchising of units directly from the franchisor’s home country.
  • Branch Office: The franchisor could establish a branch office in the target country and appoint unit franchisees.
  • Master Franchising: The master franchisee is granted the rights to operate the franchise system in a particular area. It “steps into the shoes” of the franchisor and grants the franchise agreements. In return for these rights the master franchisee pays a franchise fee and ongoing royalties to the franchisor.
  • Area Developer: An area developer franchisee purchases the rights to develop and own an exclusive area development territory, and then sells portions of this territory to new sub-franchisees. Area developers may establish their own units. In some cases a master franchisee may appoint an area developer to assist with recruitment of unit franchisees.
  • Joint Venture: Franchisor enters into a joint venture with a local company. Together they operate a master franchise or an area developer and create unit franchises. A joint venture is an agreement between the two businesses to provide resources or assistance for a finite period of time. They retain independence in relation to their own existing businesses beyond the scope of the venture.
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International Franchise Law: the World is Yours

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