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How to approach the largest franchise industry in the world

How to approach the largest franchise industry in the world

Everything is bigger in the U.S.A. – don’t be daunted.

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The U.S. franchising marketplace is one of the most – if not the most – successful in the world. It is also one of the oldest and mature. This sector’s maturity also means there is some complexity to navigate when seeking to bring your franchise business to the United States.

This complexity and market scale should not deter your ambition to bring your franchise system to the U.S. Yes, it can be complex and there can be stiff competition but, given the wide acceptance of franchising and the massive size of both the B2B and B2C market sectors, it is well worth the effort.

Research is critical. Seeking local advice essential. Deciding on which state and city to launch in is very important. Method of entry is also mission-critical. Do you want to own it 100 per cent? Do you want to partner with a U.S. entity?

Cultural fit research

Too many times over the years have I have seen simplistic assessments of the cultural fit of a franchise for the U.S. market. Just because you might come from an English- speaking country that has many U.S. franchise systems, or you may think they eat similar foods or utilize the same services, does not guarantee success.

Spending time to understand what, if any, cultural barriers there are for your franchise in the U.S. is important. Joining the International Franchise Association is a great way to begin expanding your U.S. franchise connections and to help find credible suppliers to deal with. I can’t recommend that strongly enough.

Corporate and tax complexities

As per Michael Iannuzzi, CPA, CFE, and co-practice leader of Citrin Cooperman’s franchise practice: “From a tax perspective one of the key items of focus is to determine how you will operate in the U.S.A. What is the ideal corporate structure for the franchisor to be operating under?

“For example, a U.S.A. franchisee pays a royalty to a foreign entity. Those franchisees could be required to withhold taxes on those royalty payments and the franchisee now must understand the tax complexities and remit the withheld tax money to the Internal Revenue Service.

“Geographically, the U.S. is an enormous country. This size translates to a richly diverse regionality of culture and ethnicities”

“This is not a customary practice and it places an extra unfamiliar burden on your franchisees. There are ways to structure the U.S. franchisor that avoids franchisees having to withhold their royalty payments.

“Another key point to consider is what states do you plan on operating in and where will you be filing your initial FDD? The FTC has certain financial statement audit requirements that allow a ‘phase-in of audited financial statements’. However, if you enter a registration state, such as New York, these phase-in benefits do not apply and their rules require full audits with your initial FDD filing.”

Geography and regionality

2020 was the catalyst for a huge long-lasting shift in how and where we live and work. Many ‘traditional’ franchise sectors such as fast food and hospitality have had to change their operations overnight, and challenges such as closures, unfortunately, aren’t going anywhere for the first part of 2021 at least.

The office franchise space has also quickly responded and is now tuned in to cater to the changing working practices that are here to stay.

While the industry will undoubtedly undergo a number of changes in 2021, the outlook for franchised office space looks positive, offering an attractive proposition for existing franchisees to diversify their portfolio and reduce risk, as well as for budding entrepreneurs who wish to start their own business under an established brand.

Climate

Let’s also talk about the varying climates of the U.S. and its potential impact on how your franchisees can operate. The effects of the seasons vary widely across the States. If you’re a service-based franchise whose franchisees work outside, then this a serious consideration to factor into your launch plans.

The North East region has very cold winters and you must assess if your franchisees can operate during winter and what options they will have to generate income. The hurricane season in the South can also have serious business interruption consequences for your franchisees that must be planned for.

To partner or not to partner?

Now that is a question! Going it alone will usually mean you will need much more of your own resources. Piloting is a good way to start. As per Michael Iannuzzi: “One of the more popular methods over the last few years entailed partnering with a private equity group. This would require you to sell a piece of your company and use the money from the sale to accelerate growth.

“Some franchisors like to sell master franchises in the U.S. The master would own the state of California, file their own FDD and sell franchises and service the franchisees, and in return they would pay a fee back to the foreign company.”

Trends are also key. The use of brokers and development partners is very common. Ensuring you select the right way will take some researching. Thankfully, there are very high-quality operators in this sector. But do your homework and check their client testimonials. Better still, ask to speak to clients where it might not have worked out.

Finally, look at franchise unit sales trends. There has been a big shift to multi-unit franchises. The way you sell and support multi-unit franchisees can be very different to what you do domestically.

Systems and technology

This is one that starts at home. Some franchisors have found it difficult to use the same technology and systems in a new country as they use for their home domestic market. Not every system developed domestically was designed to go international.

Systems and technology may need to be reviewed when entering the U.S. It’s better to have common systems and software across countries to make communication easier, data and financial management easier, and monitoring and benchmarking of performance more impactful.

Don’t be daunted

The U.S. franchise market is an exciting place to take your franchise system. It can look scary and daunting as it is so large a marketplace, and knowing how and where to start can seem overwhelming.

It is also true that the U.S. is going through a period of great upheaval. They have many challenges ahead of them. I also know many franchise businesses have continued to do well. Entry to the U.S. franchise market will take time. Begin your planning now and as the U.S. begins to turn its economy around, the timing of your entry could be ideal.

THE AUTHOR

Michael O’Driscoll CFE has been in the franchising sector for 30 years. He has been a CEO, COO and board director of several franchise systems. He is former director of the Franchise Council of Australia and holds an MBA in International Franchise Strategy.

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