e xp e rt a dvic e - davierconsultants.ca

ex per t advice
Michel Gagnon, President, Davier Consultants Inc.
INTERNATIONAL
FRANCHISING
A few years ago on
a trip to some North
African and Middle East
countries, we presented
a series of seminars
on franchising to local
business people.
With the support of the regional
Canadian Embassy Trade
Commissioners, we were witnesses to a
growing trend to start franchise systems
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from existing businesses and a strong
interest to acquire the master franchise
rights from North American franchisors
and in particular from Canada.
Franchising has really taken
a growing role in the world
economy
Over the last 10 years, as more and more
countries have made modifications to
their legislation to recognize issues
such as intellectual property protection,
trademark registrations, and other legal
aspects important to franchisors.
Many countries in Western Europe are
already quite heavily involved with
franchise systems of their own, such
as France, Germany, Italy, to name a
few, which have tens of thousands of
franchisees from thousands of different
franchise systems already in place.
Countries like China and India are
interested in attracting established
Canadian, American and European
franchisors in their country with eager
potential master franchisees interested
in developing known and serious brands
in their market. Already the two largest
countries in the world have thousands of
Canadian Franchising
systems either home grown or from
Europe and a few from Canada.
provide management competency and not
only have a large bank account.
This opens up the door for Canadian
systems, which are welcome in mostly
all countries in the world, to seriously
consider expanding outside of the
continent and into markets where the
consumer is eager for new products and
services delivered in a constant and
recognizable format.
There must be a sharing of some core
values and a shared long term vision.
This will only be achieved with face to
face meetings in both countries.
There are interesting opportunities
for Canadian growth in North African
markets, some of which have gone
through dramatic changes recently.
Eastern Europe markets are also
embracing franchising as their middleclass grows and demand for North
American products and services increase.
Typically, Canadian franchisors will
cover well their home markets: Ontario,
Western and Eastern Canada and
Quebec, and then will expand in the rest
of Canada. When that is accomplished,
they have covered a market potential of
32 million people spread over thousands
of kilometres. There are markets in the
world with that many people in a city! (A
slight exaggeration, of course!)
It is time for Canadian franchisors to
spread their wings on a global basis. Of
course, international expansion is not
for everyone. It should be reserved for
mature, structured, flexible and patient
franchisors.
franchisees.
Australia is a well-developed franchise
market and always looking to expand
outside its borders. Already there are a
few Australian concepts in Canada, with
Canadian master franchisees!
A country like South Africa, the largest
franchised African Country which
boasted over 430 franchisors and almost
24,000 franchisees in 2002, has been
expanding some of their brands in North
America and in Canada in particular.
Morocco is now a relatively large
franchised market with hundreds of
It should not an opportunity for a quick
cash grab of initial franchise fees and
then leave the local master franchisee
to himself or worst sell the rights to
the first organisation with money but
with no valid expansion plan in mind
or competency in building a franchise
system.
Choosing the right master
franchisee
Thia is in fact more complex than
recruiting our local franchisees as you
can appreciate. Business conditions,
consumer taste and behaviour will very
likely be different. Building conditions,
real estate, financing, the legal
environment and procurement must be
mastered locally. The master franchise
organisation must have proven success
in growing a business in that market and
We teach new Canadian franchisors
to think long term and consider that
the real objectives are the royalties on
growing sales from an increasing number
of franchisees and not to rely on initial
franchise fees as the main source or
revenues. International is the same or
should be viewed as the same objective.
How do we accomplish our
goals in Canada?
With proper franchisee selection, good
training programs, strong real estate
selection, creative marketing strategies,
adequate financing and ongoing support
in all aspects.
It is no different in another country but
we typically partner with a local and
knowledgeable master franchisee who
will work with the franchisor reaching
the same objectives!
Let’s discuss the financial
considerations
When a franchisor grants a franchise
here in Canada, the typical arrangement
is as follows:
There is an initial franchisee fee paid
at the time of signing the Franchise
Agreement. The average fee as we know
is $25,000 for a five to 10 year agreement
with renewal options. The initial fees is
meant to cover the costs related to recruit
and train the franchisee and absorb some
the initial set up costs of the franchise
system. Thereafter there is an ongoing
royalty on sales, averaged at 6 per cent
of sales. Of course there are many
permutations to both this initial franchise
fee and the royalty rate, but to simplify
this article, I am using the averages
as indicated in the usual franchise
publications. The royalty is the main
source of revenues for most franchisors
and the fairest as it is tied to growth for
both franchisees and franchisor.
If the system includes a master
arrangement in another province such as
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ex per t advice
Michel Gagnon, President, Davier Consultants Inc.
Quebec for example or an area franchise
arrangement is put in place, there is a
sharing of these initial fees and royalties
with the master or area franchisee which
will be based on the sharing of the duties
between franchisor and area franchisee.
With a master agreement for a country,
the logic is the same. The fair deal is
to arrive to a compromise in which all
parties can make money by growing the
franchise system. The initial franchise
fee will typically be higher since the
master has now the opportunity to recruit
many franchisees and collect franchise
fees and royalties. But the master
franchisee will have substantial costs in
setting up an organisation to recruit and
develop the brand in a new market. It
is common at this stage to agree to the
potential of new franchises in the market
over time in order to determine a sensible
initial fee for the rights to the country.
It is crucial that the master franchise
candidate and his senior management
team be properly trained at Head Office
and probably on site. It is common that
the agreement insists of the setup and
running of at least one corporate unit for
a certain time as well.
Usually there will be a sharing of the
ongoing initial franchise fees collected
by the master from his own franchisees.
The master should retain most of these
fees since he is doing most of the work
in finding, recruiting and training these
franchisees.
The same should be done for the ongoing
royalty stream. The franchisor usually
collects between one and two per cent
of sales, leaving the master to retain the
balance in order to provide for a strong
support team and organisation to grow
the system.
The key is to find the right people, make
sure that you have done jointly your
homework on what needs to be done to
have your brand successful in another
country and properly train and support
your partner and he must do the same for
his franchisees.
Opportunities are created
every day
Canadians should embrace change and
play a greater role in the international
Page 40
“It is time for Canadian franchisors to spread
their wings on a global basis.”
arena and franchising is one of them!
Michel Gagnon is the President
and Senior Consultant of Davier
Consultants Inc, a Management and
Franchise Consulting firm established
since 1994. Davier Consultants has
worked for a number of large and
small franchise systems in Canada
over the years and has been involved
internationally in prior years in Europe
and Africa. Michel is also serving
a four year term on the Board of
Directors of the Canadian Franchise
Association.
Contact:
Phone: +1 514 620 3770
Email: [email protected]
Web:
www.davierconsultants.ca