If so, what export method are you using and is it appropriate for your target country?

Introduction

There are five recognised methods in which you can export your system internationally and these are discussed below. Each target country will be different and you must take each country on a case by case basis. The method that you choose will have an impact on the success of your system in the target country and it is vital that you carefully consider the methods available to you (including the impact that any laws in your target country may have on that method).

Before exporting a franchise, you must fully research the overseas market that you wish to enter into and must take active steps towards protecting your intellectual property in that target country (including the registration of all trade marks).

Direct Franchising

This is where you grant a franchise to a third party to operate one franchise in a particular location. While direct franchising is a way of ensuring that the franchisor retains maximum control over the system and is a good way of “testing” the market, it can be difficult in terms of both time and money (should expansion throughout the target country be desirable). For example:

• Substantial tax difficulties may arise in respect of payment of royalties from the franchisee to you;
• It will be difficult for you to provide adequate support if you are situated in New Zealand – you may need to set up a local office to support the network in the target country;
• You may have little information about the target country and will need to find contacts and establish distribution networks yourself;
• There is a slower rate of growth when you establish agreements with owners of one outlet; and
• Difficulties may arise in terms of enforcing the provisions of the franchise agreement (if you do not have an active presence in the target country).

Joint Venture

This is where you form a joint venture operating entity with a partner in a target country. The joint venture is granted a licence to use the intellectual property and is provided with ongoing support. The advantage is that the partner in the target country has specific knowledge of the local market, as well as established contacts. It can also be advantageous where “locals” in the target country are given preferential tax treatment. The disadvantage however, is that the joint venture partners need to agree at the beginning of the joint venture as to how the joint venture will be run. For example, the joint venture parties will need to decide such matters as: how major decisions are to be made and which partner has control, what the partners individual responsibilities will be and how income is to be split.

Master Franchise (most common)

This is where you grant a master franchise in respect of an entire country to a third party who has knowledge of the local market. The master franchisee then has the right to offer sub-franchises to sub-franchisees and is responsible for developing the system in the target country. The advantage of this is that the amount of your investment (both time and money wise) is considerably less than other methods. The disadvantage with this method is that you do not have complete control over the master franchisee and its sub-franchisees. It is therefore vital that you chose the right person as the mater franchisee. The master franchise agreement can reduce the risk of the franchisor not having complete control by being quite specific as to the master franchisees obligations.

Area Development

This is where a third party is granted a territory in which it must establish a certain number of sub-franchises. Where the territory is small, the advantages/disadvantages will be similar to that of direct franchising. However, where the territory is quite large, the advantages/disadvantages will be similar to that of a master franchise.  

Conversion

This is where a third party, who has an existing business, agrees to take on your name and business systems in terms of its future operation. This allows quick expansion into a market and is useful where the third party has a large customer base.