‘FRANCHISING IN BRITAIN’ SERIES

L
NA
The Lloyds Bank Plc/IFRC Franchising in

FR
O

AN
I
AT
Britain series comprised 3 volumes:

CH
RN

IS
TE

E
IN
Vol.1
RE

E
TR
SE
1 Prospective Franchisees, (Hatcliffe,
AR

N
CE
CH
Mills, Purdy & Stanworth), 1995

2 Franchising in Figures, (Purdy,

Stanworth & Hatcliffe), 1996

THE INTERNATIONAL FRANCHISE 3 Secrets of Success, (Silvester,

RESEARCH CENTRE (IFRC) 1993-2007
University of Westminster, London, UK.
"The International Franchise Research
Centre (IFRC) is committed to
improving the understanding of
franchising. This is achieved by the
publication of impartial research and
by the encouragement of informed
debate."
Franchising operates in a dynamic environ-
ment, with new issues and challenges
emerging, including: globalisation, coping
with competition, disclosure, industry
regulation, managing relations with
franchisee associations, franchisee
recruitment & market saturation.
Stanworth, Purdy & Hatcliffe), 1996
Vol.2
1 Cloning Success, (Silvester,
Stanworth, Purdy & Hatcliffe), 1997
2 Franchising Your Business: Getting
Started, (Stanworth, Purdy &
Hatcliffe), 1998. A more recent version
- I franchised my business, so can you
(2002) - is also available.
3 Franchisee Success: Perceptions &
Barriers, (Nunn, Stanworth, Purdy,
Thomas & Hatcliffe), 1998
Vol.3

Against this backdrop, the IFRC was
established in 1993 by Professor John
Stanworth (Director of the Future of Work
Research Group at the University of
Westminster), supported by Brian Smith (ex-
BFA Chairman, franchisee, franchisor and
author), and Chair of its Steering Group.
FOUNDER MEMBERS
Founder members and sponsors included:
Barclays Bank, the British Franchise
Association (BFA), Dyno-Rod, Franchise
Development Services Ltd., Lloyds Bank
(now Lloyds Banking Group), Mail Boxes
Etc., Midland Bank (now HSBC), Prontaprint,
Rosemary Conley Diet & Fitness Clubs,
Royal Bank of Scotland, The Swinton Group,
and Wragge & Co.
1 Fifth Annual Strategy Seminar:
Breaking Out Of The Home Market,
(Stanworth & Purdy, Eds., papers by
McCosker, Scott, Hoy & Harris), 1998
2 Franchising: The Gender Dimension,
(Nunn, Purdy, Stanworth & Hatcliffe),
1998
Web versions
The above reports are now available online,
in Acrobat format, published January 2011,
via http://www.scribd.com/SME_Research
LIABILITY DISCLAIMER
The information and analysis in each report
is offered in good faith. However, neither the
publishers, the project sponsors, nor the
author/s, accept any liability for losses or
damages which could arise for those who
choose to act upon the information or
analysis contained herein.

International Franchise Research Centre Lloyds Bank Franchising In Britain - Web Versions 2011 p.1
OTHER PUBLICATIONS
The IFRC published extensively, including
journal articles, book chapters, conference
papers and a Special Studies Series (also
available via http://www.scribd.com/
SME_Research):
1 The Blenheim/University of
Westminster Franchise Survey: Spring
1993, 1993
2 Improving Small Business Survival
Rates via Franchising: The Role of the
Banks in Europe, 1993
3 Targeting Potential Franchisees:
Industry Sector Backgrounds and
Declared Areas of Interest, 1994
4 The Impact of Franchising on the
Development Prospects of Small &
Medium-sized Enterprises (SMEs) in
Europe, 1994
5 The Blenheim/University of
Westminster Franchise Survey: A
Comparison of UK and US Data, 1995
6 Developing a Diagnostic
Questionnaire as an Aid to Franchisee
Selection, 1995
7 Franchising as a Source of
Technology-transfer to Developing
Economies, 1995
8 Aspects of Franchisee Recruitment,
1996
9 Business Format Franchising:
Innovation & Creativity or Replication
& Conformity ?, 1996
10 London: A Capital City For Franchisee
Recruitment, 1997
11 The Effectiveness of Franchise
Exhibitions in the United Kingdom,
1997
12 Franchising: Breaking Into European
Union Markets, 1998
13 Succeeding As A Franchisor,
published jointly with Business Link
London Central), 1998
International Franchise Research Centre
14 Direct Selling: Its Location in a
Franchise Typology, 1999
15 Unravelling the Evidence on
Franchise System Survivability, 1999
16 Survey: Professional Services For
Franchising In The U.K., 2001
ACADEMIC LINKS
Close links were fostered with universities in
Rome and Pisa (Italy), Haute Alsace
(France) and Boston, Minneapolis and
Texas (USA), with a view to research
collaboration. Professor Pat Kaufmann of
Atlanta, Georgia, addressed our inaugural
annual strategy seminar, in 1994. Overseas
speakers in subsequent years included
Cheryl Babcock, Director of the Franchising
Institute, University of St. Thomas,
Minneapolis (1995), Professor Rajiv Dant,
University of Boston (1996), Professor
Francine Lafontaine, University of Michigan
(1997), Professor Claude Nègre, University
of Haute Alsace (1997), Colin McCosker,
University of Southern Queensland (1998),
Professor Frank Hoy, University of Texas at
El Paso (1998), Professor Jack Nevin,
University of Wisconsin-Madison (1999),
Professor Tom Wotruba, San Diego State
University (1999), Professor Bruce Walker,
University of Missouri, (2000), and,
Professor Wilke English, University of Mary
Hardin-Baylor (2000).
IFRC members were active supporters of the
International Society of Franchising, and
hosted the ISoF 2005 conference in London.
The IFRC ceased its research activities in
2007, when John Stanworth took retirement.
John Stanworth, Emeritus Professor,
University of Westminster
http://www.westminster.ac.uk/schools/
business
David Purdy, Visiting Fellow,
Kingston University
http://business.kingston.ac.uk/sbrc
January 2011
Lloyds Bank Franchising In Britain - Web Versions 2011 p.2
 CONTENTS

■ Seminar Programme ................................................................................................................. 3

■ Introduction
Professor John STANWORTH & David PURDY, University of Westminster ............................. 5

■ Franchising Into Australia & South-East Asia

Colin McCOSKER, University of Southern Queensland, Australia........................................... 13

■ Taking A Franchise To The USA

John SCOTT, Co-founder of Fastframe USA Inc...................................................................... 31

■ Franchising And Government Initiatives

Professor Frank HOY, University of Texas, El Paso, USA ....................................................... 47

■ Aspects of International Franchising

Gordon HARRIS, Wragge & Co., Birmingham, UK................................................................... 61

■ Speakers’ Biographical Details - located at the end of each paper, respectively

Lloyds Bank plc/IFRC Strategy Seminar: Breaking Out Of The Home Market (1998) 1
 Page deliberately blank

2 Lloyds Bank plc/IFRC Strategy Seminar: Breaking Out Of The Home Market (1998)
 IFRC Fifth Annual Strategy Seminar
Friday, 3rd July, 1998
Hosted by Lloyds Bank Plc
Main Boardroom, 71 Lombard Street, London

BREAKING OUT OF
THE HOME MARKET

9:30 - 10:15 RE GIS TR ATIO N & CO FFE E

10:15 - 10:30 Welcome addresses by a representative of Lloyds Bank Plc,
Bill BAILLIEU (Business Link London Central), and by Brian
SMITH (IFRC Chair, University of Westminster)
10:30 - 11:15 Colin McCOSKER (University of Southern Queensland,
Australia) will talk about Franchising Into Australia &
South-East Asia, including support from government bodies
Coff ee Bre ak
11:30 - 12:30 John SCOTT (Co-founder of Fastframe USA Inc.) will provide
an insight into the challenge of Successfully Breaking Out Of
The Home Market, based on his experience of
establishing a UK franchise system in the USA, with
150+ outlets in just over a decade
12:30 - 12:45 Rapporteur - Brian SMITH (Director of Rosemary Conley Diet
& Fitness Clubs and former BFA Chair/MD of
ServiceMaster UK) will summarise the morning session
BU FFE T LU NCH
13:45 - 14:45 Professor Frank HOY (University of Texas, El Paso, USA) will
discuss Franchising And Government Initiatives
14:45 - 15:15 Gordon HARRIS (Chair of BFA Affiliate Members, and Partner,
solicitors Wragge & Co., Birmingham, UK), will present
A Legal Perspective Of Franchising Overseas
Tea Br eak
15:30 - 16:00 Summary - John CHAPLIN, Chair, British Franchise
Association (BFA) and MD of Dyno-Rod Plc, UK, will act as
Rapporteur for the afternoon session
16:00 - 16:15 Roundup & close

Lloyds Bank plc/IFRC Strategy Seminar: Breaking Out Of The Home Market (1998) 3
 Page deliberately blank

4 Lloyds Bank plc/IFRC Strategy Seminar: Breaking Out Of The Home Market (1998)
 INTRODUCTION

Professor John STANWORTH & David PURDY

University of Westminster, London

WHY ‘BREAKING OUT and speedy means of obtaining

OF THE HOME MARKET’ ?
Whilst the British may reasonably claim to
have ‘invented’ franchising - with examples
to be found as early as the Middle Ages -
many other countries have taken the idea to
heart, especially over the past couple of
decades (Figures 1 and 2, overleaf,
Stanworth & Purdy, 1998). However, some
countries - the United States, most
noticeably - have cultivated franchise
horizons well beyond domestic boundaries
for the following reasons:
“... from a balance-of-payments
perspective, international franchising
is considered [in the U.S.] as a safe
foreign currency with a relatively small
financial investment abroad. It is
notable in that it neither replaces
[American] exports nor exports
[American] jobs, all these reasons
making this business arrangement
one of the most preferred and
government-supported forms of
international involvement.” (Eroglu,
1992)
Unsurprisingly, others have jumped onto the
global franchising bandwagon. For instance,
Australia and Singapore, as outlined in the
article below, from Australia’s Franchising
and Own Your Own Business Magazine.
One point in the article, however, especially

SINGAPORE WANTS
FRANCHISES
Franchising and Own Your
Own Business Magazine
June/July 1997 (Australia)
Singapore is ideally placed to
become an international franchise
hub - a centre from which master
franchises can be administered for
the Asian region, says Austrade's
Senior Trade Commissioner for the
island nation, Julie Bayliss.
"In addition to its strategic location
in South East Asia, its world class
telecommunications and
infrastructure facilities, Singapore
offers the Australian franchisor a
system of commercial and contract
law very similar to our own: English
is the common business language,
and a respect for and protection of
intellectual property rights is second
to none in Asia."
Austrade has been working with the
Australian Franchise Association
and Australian Exhibition Services
to generate Australian
representation in Global Franchising
'97 - the first fully-dedicated,
international franchise exhibition
to be held in Singapore. It will run
from September 25 to 27.
In May Singapore, for the second
consecutive year, was named the
world's most competitive country in
the 'Global Competitiveness Report'
of the Swiss-based, World Economic
Forum. Singapore was rated top in
three of the eight categories used to
determine competitiveness:
g o v er n m en t , f i n an c e a n d
technology. It was second in
infrastructure and labour, third in
openness, seventh in management
and ninth in institutions. The WEF
report compares 53 of the world's
leading economies. Singapore, in
this and many other surveys, has
been clearly identified to be a highly
business-friendly environment.
(Singapore rated 2.32 on the survey.
Australia, on the other hand, has
dropped down the list. While still
ranking behind Hong Kong and the
US, significantly we are also behind
countries such as Chile (0.92) and
Indonesia (0.82) with an index
rating of 0.78.)
The Singapore Government has
established programs to lift the
performance and competitiveness of
small and medium enterprises to
world class levels. Franchising has
been identified by the Government
as a prime mechanism to do this.
Lifestyle and service-related
franchises are in high demand. Food
franchises are by far the most
popular.

Lloyds Bank plc/IFRC Strategy Seminar: Breaking Out Of The Home Market (1998) 5
 Fig 1 - FRANCHISING WORLDWIDE 1995

NUMBER OF NUMBER OF
FRANCHISORS FRANCHISEES
Franchisees Population (m) GDP/head
United States....... 3,000 United States....... 250,000 266.5m $27,500
Canada................ 1,000 Japan................... 139,788 125.4m $21,300
Brazil.................... 932 Canada................ 65,000 28.8m $24,400
Japan................... 714 Brazil.................... 60,000 162.7m $6,100
Australia/NZ......... 600 France................. 30,000 58.3m $20,200
France................. 520 Britain................. 26,400 58.5m $19,500 (U.K.)
Germany.............. 500 Australia/NZ......... 26,000 21.8m $21,482
Britain................. 414 Mexico................. 18,724 95.8m $7,700
Italy...................... 400 Spain................... 18,500 39.2m $14,300
Mexico................. 375 Italy...................... 18,500 57.5m $18,700
Netherlands......... 341 Germany.............. 18,000 83.5m $17,900
Spain................... 280 Netherlands......... 11,975 15.6m $19,500
Austria................. 200 Hungary............... 10,000 10.0m $7,000
Hungary............... 200 Sweden................ 9,000 8.9m $20,100
Sweden................ 200 Norway................ 3,500 4.4m $24,500
Norway................ 185 Argentina............. 3,500 34.7m $8,100
South Africa......... 180 Belgium................ 3,083 10.2m $19,500
Switzerland.......... 170 Austria................. 3,000 8.0m $19,000
Belgium................ 150 Singapore............ 1,600 3.4m $22,900
Malaysia.............. 125 Denmark.............. 1,210 5.2m $21,700
Indonesia............. 105 Finland................. 900 5.1m $18,200
Argentina............. 100 Malaysia.............. 800 20.0m $9,800
Singapore............ 85 Yugoslavia........... 620 22.3m $2,994 †
Hong Kong........... 84 Colombia............. 300 36.8m $5,300
Portugal............... 70 Czech Republic... 100 10.3m $10,200
Finland................. 70 Philippines........... 61 74.5m $2,530
Denmark.............. 68 Chile.................... 25 14.3m $8,000
Philippines........... 56 Israel.................... 15 5.4m $15,500 ‡
Colombia............. 48 Bulgaria............... 7 8.6m $4,920
Yugoslavia........... 45
Chile.................... 45
Czech Republic... 35
Israel.................... 18
Bulgaria............... 0

The above franchise data was derived from a survey of the franchise The population and GDP values are
associations in 40 countries, which achieved a 90% response rate estimates (1996, and 1995, respectively)

Sources: 'Worldwide Franchising Statistics: A Study of Worldwide † Bosnia & Herzegovina,

Franchise Associations', by Leonard N. Swartz, Arthur Andersen (in Croatia, Macedonia, Serbia &
co-operation with the World Franchising Council), November 1995; Montenegro, Slovenia
CIA 'World Factbook' ,1996 ‡ Excluding Gaza Strip & West Bank

strikes home: respect for and protection of

intellectual property rights is second to
“Singapore offers the Australian none in Asia.”
franchiser a system of commercial
and contract law very similar to our So, having such a strong former association
own: English [our emphasis] is the with Singapore, one might expect to see a
common business language, and a reasonable contingent of U.K. franchise

6 Lloyds Bank plc/IFRC Strategy Seminar: Breaking Out Of The Home Market (1998)
Lloyds Bank plc/IFRC Strategy Seminar: Breaking Out Of The Home Market (1998)

Fig 2 - COUNTRY FRANCHISEE POPULATIONS: Number of Franchisees vs. Total Population

1,000.0m 1,000,000

Population (m)
266.5m
United States Franchisees
Japan
100.0m Canada 100,000
58.5m
Brazil
Australia/NZ
France Spain
Britain Germany
Mexico Italy Netherlands
10.0m Sweden 10,000
Hungary
Country Argentina
Austria Number
Population Norway Of
(Million) Belgium Singapore Franchisees
Denmark
1.0m Malaysia 1,000
Finland Yugoslavia

Colombia

.10m Czech Republic 100

Philippines

Chile
Log scales Israel
.01m 10
Bulgaria
7
 Fig 3 - COUNTRY/GROUP PARTICIPANTS AT ‘GLOBAL FRANCHISING 97’, SINGAPORE

systems at any franchise exhibition held
there. But in 1997 - at Global Franchising 97
- we were surprised to find that, with 191
participants/exhibitors, this was not the case.
Several countries had group stands (Figure
3), but only two exhibitors originating from
the U.K. appeared to be in evidence,
namely: Franchise Development Services,
and Yellow Door Therapy Spa.
Moreover, further investigation, based on
data published in the European Franchise
Federation’s European Franchise Survey
(1997), suggests that only a dozen or so
U.K. business format franchise systems
have broken out of the U.K./Eire markets.

8 Lloyds Bank plc/IFRC Strategy Seminar: Breaking Out Of The Home Market (1998)
 Fig 4 - U.S. FRANCHISORS WITH INTERNATIONAL OPERATIONS,1
BY BUSINESS CATEGORY & NUMBER OF FOREIGN ESTABLISHMENTS, 1994

U.S. franchisors U.S. franchisors’

with international foreign
operations establishments
Number % Number %
Restaurants.......................................... 41 22.5 4221 31.3
Business aids/services ........................ 17 9.3 302 2.2
Retailing, non-food............................... 15 8.2 392 2.9
Educational products/services ............. 14 7.7 1837 13.6
Automotive products/services.............. 14 7.7 1775 13.1
Construction/home improvement......... 14 7.7 555 4.1
Cleaning services................................. 12 6.6 1932 14.3
Personal care services ........................ 11 6.0 680 5.0
Printing/signs ....................................... 8 4.4 582 4.3
Auto/truck rental................................... 6 3.3 401 3.0
Postal/shipping..................................... 5 2.8 125 0.9
Travel services..................................... 4 2.2 346 2.6
Recreation............................................ 3 1.7 56 0.4
Laundry/dry cleaning ........................... 3 1.7 50 0.4
Retail food, non-convenience .............. 2 1.1 9 0.1
Hotels/motels ....................................... 1 0.6 12 0.1
Rental equipment................................. 1 0.6 2 0.0
Other .................................................... 11 6.0 229 1.7

TOTAL ................................................. 182 100.0 13,506 100.0

1
Data reflects responses to a survey conducted by the periodical, Global Franchise. Note - Totals may not
add due to rounding. Source: Compiled by USITC staff from Global Franchise, ‘1994 International
Franchise Directory’ Second Quarter 1994, pp. 52-66 [in Industry & Trade Summary: Franchising,

This is in sharp contrast to the aspirations benefit to the U.K. However, we would refer
for overseas expansion, which are to the following extract from U.S.
reported on a regular basis. For instance: “… International Trade Commission’s 1995
48% [of franchisors] plan to be operating report on franchising:
units elsewhere in Europe by 2002 …” (The
NatWest/BFA Franchise Survey, 1998). “International expansion of U.S.
Forecasts of this magnitude have been franchisors has led to a substantial
published annually over a period of years trade surplus in franchising fees and
and suggest that, by now, there should be royalties. U.S. franchisors enjoy
literally hundreds of UK franchise systems international competitive advantages
exporting overseas, rather than just a mere as a result of the large domestic
handful. It could be argued that the market, considerable experience with
difference between rhetoric and reality here franchise management, and the
is simply a reflection of the gap between favorable perception of U.S. products
attitude and behaviour. and services around the world. The
European Union constitutes the
Potential Benefits ? largest single market for U.S.
franchisors ... Franchising trade data
It would of course be problematical to try and indicate that exports of [U.S.]
translate some speculated level of franchising services [worldwide]
expansion overseas into a precise economic amounted to approximately $408

Lloyds Bank plc/IFRC Strategy Seminar: Breaking Out Of The Home Market (1998) 9
 Fig 5 - U.S. TRADE IN FRANCHISING ROYALTIES & FEES, BY COUNTRY, 1989-93

1989 1990 1991 1992 1993

Exports/Imports in $million Exports Imports Exports Imports Exports Imports Exports Imports Exports Imports

Canada 21 (1) 34 (1) 40 (1 ) 42 (1) 51 (1)

Europe 107 2 89 (1) 118 1 148 1 155 3

Belgium.................................................. 3 0 4 0 11 0 9 0 7 0
France.................................................... 12 0 9 0 8 0 13 0 13 1
Germany................................................ 22 (1) 20 (1) 34 (1 ) 49 (1) 56 1
Italy ........................................................ 3 0 2 0 2 0 3 0 4 0
Netherlands ........................................... 5 0 4 0 2 0 2 0 4 0
Norway................................................... 1 0 1 0 2 0 3 0 1 0
Spain...................................................... 5 0 4 0 3 0 5 0 6 0
Sweden.................................................. 8 0 6 0 11 0 12 0 11 0
Switzerland ............................................ 5 1 3 0 3 0 3 0 3 0
United Kingdom ..................................... 32 1 19 (1) 27 (1 ) 36 (1) 31 1
Other...................................................... 10 0 17 0 15 (1) 14 (1) 18 0

Latin America & Other W. Hemisphere 11 0 13 0 29 0 39 0 58 (1)

South and Central America 9 0 9 0 24 0 33 0 51 (1)
Argentina ........................................ (1) 0 (1) 0 1 0 2 0 3 0
Brazil............................................... 1 0 1 0 2 0 3 0 5 0
1
Mexico ............................................ 4 0 4 0 13 0 16 0 27 ()
Venezuela....................................... 1 0 1 0 2 0 3 0 4 0
Other............................................... 4 0 4 0 6 0 8 0 12 0
Other Western Hemisphere 2 0 4 0 6 0 6 0 7 0
Bermuda......................................... (1) 0 (2) 0 (2 ) 0 (1) 0 1 0
Other............................................... 2 0 (2) 0 (2 ) 0 6 0 6 0

Other countries 66 0 88 (1) 118 (1 ) 136 (1) 134 (1)

Africa 2 0 3 0 3 0 4 0 4 0
South Africa .................................... 2 0 2 0 2 0 3 0 3 0
Other............................................... (1) 0 1 0 1 0 1 0 2 0
Middle East 2 0 4 0 6 0 6 0 10 (1)
Israel............................................... 1 0 2 0 2 0 2 0 4 0
1
Saudi Arabia ................................... 1 0 2 0 3 0 2 0 3 ()
Other............................................... 1 0 1 0 1 0 2 0 3 0
Asia and Pacific 62 0 81 (1) 109 (1 ) 126 (1) 120 (1)
1 1
Australia.......................................... 7 0 9 0 9 0 13 () 13 ()
Hong Kong...................................... 4 0 8 0 9 0 12 0 13 0
India................................................ (1) 0 1 0 (1 ) 0 (1) 0 (1) 0
Indonesia........................................ 1 0 1 0 2 0 3 0 4 0
Japan.............................................. 40 0 48 (1) 65 (1 ) 59 (1) 44 (1)
Korea.............................................. 2 0 3 0 6 0 5 0 7 0
Malaysia ......................................... 1 0 1 0 2 0 3 0 3 0
New Zealand .................................. 1 0 1 0 2 0 3 0 3 0
Philippines ...................................... 1 0 (1) 0 1 0 1 0 2 0
Singapore ....................................... 2 0 2 0 3 0 4 0 5 0
Taiwan............................................ 3 0 3 0 4 0 18 0 20 0
Other............................................... 1 0 3 0 4 0 5 0 6 0
International organizations & unallocated 4 (1) 18 2 12 2 10 2 11 1
Addenda
European Union (12) 87 1 74 (1) 94 1 120 1 127 3
1 1 1
Eastern Europe 0 0 () 0 1 () 1 () 2 0

ALL COUNTRIES 209 2 242 3 331 3 341 5 408 5

1
Less than $500,000. 2Suppressed to avoid disclosure of data of individual companies. Source: Bureau of
Economic Analysis, Survey of Current Business, Sept. 1994 [in Industry & Trade Summary: Franchising, U.S.I.T.C.

10 Lloyds Bank plc/IFRC Strategy Seminar: Breaking Out Of The Home Market (1998)
 million in 1993, while imports were
only $5 million. The resulting trade
surplus of $403 million is indicative of
the level of U.S. franchisors’
international competitiveness. The
favorable position of U.S. franchisors
reflects [modern] franchising’s origin in
the United States, the domestic
industry’s maturity relative to foreign
franchise industries, and the high level
of demand for “American-style”
products and services. As a result of
these factors, a very large number of
U.S. franchisors have extensive
experience in managing expansive
franchise systems and implementing
ambitious development programs...”
Further details are shown in Figures 4 and 5,
which quantify the benefits from the
American standpoint (in the mid-1990s).
Figure 4 indicates the number of U.S.
franchisors having foreign establishments,
broken down by industrial sector, and Figure
5 illustrates the flow of franchise royalties/
fees in and out of the U.S.
REFERENCES
British Franchise Association (1998)
The NatWest/BFA Franchise Survey
EROGLU, S. (1992)
The Internationalisation Process of Franchise
Systems: A Conceptual Model, International
Marketing Review, Vol. 6, No. 5
European Franchise Federation (1997)
European Franchise Survey
Singapore Exhibition Services Pte Ltd. (1997)
Global Franchising 97 Show Directory
STANWORTH, J. & PURDY, D. (1998)
Franchising - A Route Into Enterprise, University of
Westminster
U.S.I.T.C. (1995)
Industry & Trade Summary: Franchising, U.S.
International Trade Commission Publication 2921

Against this background, we therefore felt

that there was considerable merit in
stimulating further interest in the franchising
of U.K. systems overseas, and that we
would direct our 1998 annual strategy
seminar towards this issue. It should be
noted that the Department of Trade &
Industry has started promoting seminars with
a similar theme, which we feel is
encouraging. We hope that this will be
extended to embrace perhaps some other
form of modest support for related trade
missions or exhibitions overseas.

Acknowledgements

We are grateful to our speakers in agreeing

to share their experience and thoughts on
the seminar theme, and also for the supply
of word-processed material so that we could
publish these proceedings. We are
especially appreciative of Lloyds Bank plc for
sponsoring the seminar, and likewise of
Barbara Roche, the Small Firms Minister at
the Department of Trade & Industry, for her
support by way of a foreword.

Lloyds Bank plc/IFRC Strategy Seminar: Breaking Out Of The Home Market (1998) 11
 Page deliberately blank

12 Lloyds Bank plc/IFRC Strategy Seminar: Breaking Out Of The Home Market (1998)
 FRANCHISING INTO AUSTRALIA AND SOUTH EAST ASIA
Colin F. McCOSKER
University of Southern Queensland, Australia
ABSTRACT
International expansion by US franchisors
has triggered increased growth in franchising
in many nations. Now franchisors from such
nations are themselves moving into other
regions. This paper reports on research into
opportunities and challenges faced by
franchisors seeking expansion into Australia
and South East Asia. Franchising has seen
dramatic growth in recent years in
Singapore, Malaysia and Indonesia. In
Australia, franchising also is growing well
and a brief overview is provided of these
nations, their business environments and the
prospects for foreign franchisors.
Franchising is now firmly established in each
of the nations, although it is not yet a major
influence within South East Asia. In
Singapore and Malaysia, there is significant
government support to assist its
development. At this stage the majority of
franchises are foreign based, mainly from
USA, although the number of locally based
franchises is rapidly increasing. Growing
populations and growing affluence are
creating increasing demands for the
products and services offered by franchises.
Foreign franchisors often have the added
advantage of the novelty of things Western,
especially among the younger generation.
The greatest hindrance to the growth of
franchising in South East Asia is the
widespread lack of understanding of this
business technique. In Australia, this is a
comparatively minor problem since
franchising has been actively growing for
much longer. However, finding suitable
franchisees is always a vital ingredient in
success and checking out their credentials in
distant locations can be difficult. Australian
banks have specialised in providing
appropriate finance but in the region, only
Malaysia has begun to implement a similar
approach. Nevertheless, obtaining finance
does not appear to be a major problem for
Lloyds Bank plc/IFRC Strategy Seminar: Breaking Out Of The Home Market (1998)
many franchisees and often government
assistance is available for suitable
applicants.
There are numerous investors who are
interested in sound, proven foreign
franchises. As a result, local residents have
initiated the establishment of most master
franchises and joint ventures. Yet many
franchisors were looking overseas before
being approached and there is a strong
worldwide trend towards ongoing
international expansion. Investigations
confirm the strong potential for franchising
into Australia and South East Asia, provided
that the necessary research, operational
preparation and commitment are put into the
move.
1. INTRODUCTION
International expansion by US franchisors
has been the catalyst for the development of
an entrepreneurial franchising sector in
many nations. It is almost 30 years since the
fast-food giants KFC, Pizza Hut and
McDonalds set up their first outlets in
Australia. Until then, only a few locally based
franchises were operating at that stage and
one, L J Hooker Real Estate, remains one of
the largest chains today. However, the
example of these invaders triggered a far-
reaching change in the way many
Australians conducted their businesses.
Today, franchises permeate virtually all
industries and while 87% of them are locally
based, new foreign franchises continue to
appear. The last comprehensive survey
(ABS 1994) located 555 franchisors with
30,600 outlets and turnover of A$42.6 billion.
A new survey currently underway is
expected to find that growth has raised the
sector to 700-800 franchisors with over
40,000 outlets.
Expansion by US franchisors has had a
similar effect on the nations of South East
Asia since the 1980s. In the three nations
13
most actively franchising, ie. Singapore,
Malaysia and Indonesia, numerous US
franchises are clearly active but local
franchises are also present and growing,
particularly in Singapore and Malaysia. The
recent economic crisis has created problems
for foreign franchises, especially those using
imported products or ingredients, but the
situation appears to be gradually improving.
Indonesia is by far the hardest hit by the
problem. Nevertheless, foreign franchisors
continue to seek master franchises or joint
venture partners for the region and sound
opportunities remain for suitable business
concepts.
US franchisors have taken the lead in
international expansion and successful
experienced operators normally can find
local investors willing to take up the
opportunities offered. Yet it is not difficult to
observe that many individuals would prefer
to do business with firms from nations seen
as less dominating economically.
Furthermore, those nations with a history of
British colonialism and a legacy of similar
legal and financial institutions appear more
comfortable dealing with others having a
similar background. How this background
affects British franchises seeking to expand
into Australia and South East Asia will be
discussed in this paper, together with other
significant factors that provide opportunities
and the potential impediments affecting
success. The information provided has been
gathered from a variety of sources, including
government publications, research papers
and national franchise associations, together
with personal fact-finding visits in the nations
discussed. Interviews were conducted with
executives of national
a s s oc i a t i o ns , f r a n c h is o r s ,
franchisees, government officials,
consultants, lawyers, accountants & bankers
– all actively involved with franchising and its
expansion internationally.
Franchising internationally has become a
widespread trend, with increasing activity by
franchisors from nations where franchising is
still a recent phenomenon. As a result,
competition is increasing for the attention of
the most capable potential franchisees.
Success is likely to become more difficult in
some regions for those franchisors who
delay their decision to join the move.
14 Lloyds Bank plc/IFRC Strategy Seminar: Breaking Out Of The Home Market (1998)
2. MARKET PROFILES
Australia, Singapore, Malaysia and
Indonesia each have an established
franchising sector, all continuing to develop,
but Australia alone has the years and
participants which mean that franchising has
now become widespread and mature in its
operation. Each nation has a unique
business environment that should be
understood as well as possible before any
foreign franchisor moves into the relevant
market. These four nations are the most
favoured targets in the region for foreign
firms seeking to franchise into the region.
Each will be discussed separately before an
attempt will be made to compare and
summarise the situation.
2.1 Franchising into Australia
2.1.1 The Nation
Australia is a vast nation (7.7m.sq. km) with
a comparatively small population of 18.5
million growing at 1.0% pa. What foreign
franchisors are not always conscious of
when appointing franchises and calculating
possible outlets is that over 10 million are
concentrated close to the eastern coastline,
the majority residing in eight cities. The
manner in which firms expand is affected by
the existence of many small towns, often
separated by considerable distances. The
per capita GDP is US$23,600 with low
inflation (2.6%) and unemployment
continuing around 8.5% (1996). The strength
of its economy is evidenced by the fact that
the GDP has been growing at 3.6% per
annum (1996) and that as yet it has not been
franchise greatly affected by the Asian economic crisis
m as t e r
Due to ongoing immigration since World War
II, Australia has become a multicultural
society with around 30% of residents born in
other nations. While the greatest proportion
of immigrants is from Britain and Ireland,
there are many from other parts of Europe
and from Asia, the latter predominant in
recent years - mostly from Hong Kong and
Vietnam. As a result, many aspects of the
lifestyle of Australians have been influenced,
eg. tastes in food have become very
international, international travel has become
common, firms are more ready to consider
international expansion than in earlier
history.
2.1.2 The Business Environment
State and Federal governments have
established small business development
programs. These have been introduced
mainly in the last decade, with ministers
designated as responsible for small
business. The policies of successive
governments have been to assist small
businesses to overcome the disadvantages
of size in order to compete with larger
businesses, rather than to favour the
smaller. Ongoing efforts have included
reducing the time and costs of their
compliance with government legislation and
improving their access to finance.
Franchising has increasingly come under
government scrutiny, especially since 1991
when a Federal Government Franchising
Task Force was appointed to look into ways
to improve its efficiency and reduce any
impediments.
The legal and financial systems clearly
reflect the influence of British settlement.
However international trade has moved its
focus from Europe and USA to Asia in recent
times. Australians have become increasingly
aware of being part of the Asian region
geographically and this is being reflected
economically, although retaining earlier links.
Successive Australian governments have
supported trade liberalisation and have been
actively reducing tariffs in many industries.
The Australian workforce is well educated
since 75% go onto higher grades at school
and 52% to tertiary courses. The population
generally accepts new technology, reflected
in the fact that businesses have been in the
forefront of world acceptance of fax, email
and internet usage. While total employment
has steadily grown, the level of
unemployment has remained high. Industrial
relations reforms have unsettled some of the
workforce and contributed both to increased
efficiency and unemployment. An unusually
long drought lasting five years in some areas
has reduced agricultural production, with
onflowing effects on other businesses and
the economy, but conditions are now
improving. Despite some difficulties, the
underlying strength of the economy has
meant a stable business environment overall
for those with sound systems and willing to
adjust to changing conditions.
Lloyds Bank plc/IFRC Strategy Seminar: Breaking Out Of The Home Market (1998)
2.1.3 Prospects for Franchising
Franchising is solidly established in the
Australian business sector. In the 1970s
local entrepreneurs sought to emulate the
success of the US-based multinational
franchises but had very few experts to guide
them. Inevitably a number which began with
great expectations soon failed spectacularly
and franchising gathered a poor reputation
which it still holds in the eyes of a few. As
expertise developed, the 1980s saw rapid
growth in numbers and a gradual growth in
acceptance by the general public and by
governments. This trend has continued into
the 1990s – a 1994 survey by the Australian
Bureau of Statistics found an average
growth of 14% over the previous three years.
However the mid 1990s also saw a
resurgence of agitation for specific
legislation to control franchising, together
with adverse publicity from a series of court
cases instigated by franchisees. The Federal
Government decided that a self-regulatory
code of conduct that had been introduced in
1993 should be revised and made
mandatory for all franchises. This is
expected to be introduced in the latter part of
1998. It will specify standards of disclosure
and conduct including use of alternative
dispute resolution but its detailed
requirements are yet to be finalised.
However, no registration is to be required,
rather those franchises proven to have
contravened the code will be penalised
under trade practices legislation. How this
will work in practice is yet to be seen.
Foreign franchisors are expected to come
under its provisions in regard to the issue of
franchises in Australia, although there may
be some variations in regard to master
franchises for the whole nation. There are no
restrictions on the entry of foreign franchises
nor on repatriation of fees or profits, except
as apply to any foreign based business.
All major Australian banks, ie. National,
Commonwealth, Westpac and ANZ, have
sections targeting franchise systems, as well
as Citibank and a number of smaller banks.
With up to 15 years experience with
franchising, they have developed expertise
that has assisted the setting of ethical and
procedural standards, as well as providing
finance for the expansion of sound
franchises. Reductions in the staff of large
15
firms and government departments have
brought franchises a considerable number of
enquiries from interested investors, often
with managerial experience and needing
little or no finance due to their redundancy
payouts, although not all are ideal as
franchisees.
Continuing high unemployment has
increased the interest in franchises,
especially those with low entry costs, from
the long-term unemployed as a means of
creating their own jobs. Like the unemployed
with substantial payouts, these are a mixed
group. Not all are suitable, more likely due to
limited experience or abilities. However, with
careful screening, the unemployed too can
be a fruitful source of franchisees.
The service industries have been a growing
part of franchising. Services to double-
income households and businesses seeking
to outsource tasks previously performed by
staff, are increasingly in demand and lend
themselves to franchise chains. The tourist
industry is an increasingly important part of
Australian business and especially so as an
export income earner. The various needs of
tourism provide attractive opportunities for a
number of franchised service providers, all
the more well established foreign franchises
since overseas tourists readily accept
international brands.
Franchising sector growth seems to have
slowed a little overall during the period of
uncertainty leading into the introduction of
the mandatory Franchising Code of Conduct.
Yet new franchisors continue to appear and
most established franchisors continue to
seek additional franchises. Currently, a large
proportion of franchises are small, having
fewer than 20 outlets. Unless they grow, or
merge with others, they are unlikely to
survive in the long term. There are also
instances of well known franchises merging
to create stronger chains. Some foreign
franchises have bought out local franchises
as a basis for expansion into Australia, or
alternatively a local firm has obtained the
master franchise of a well-known foreign firm
and merged itself into the franchise.
Australians also are interested in overseas
opportunities, and the number of locally
based franchises operating internationally is
approaching 100.
16 Lloyds Bank plc/IFRC Strategy Seminar: Breaking Out Of The Home Market (1998)
Franchising has some critics in Australia, but
overall it has been well accepted.
Government is positive about its beneficial
aspects for the economy but is being careful
to ensure its growth is built on a fair and
ethical relationship between franchisors and
franchisees. It is supported by a growth in
expertise among the banks, a good
availability of legal knowledge and a slowly
developing understanding within the
accounting profession.
The Franchise Council of Australia (FCA),
formed in 1983, was previously known as
the Franchise Association of Australia and
New Zealand until the formation of a
separate Franchise Association of New
Zealand in 1995 as franchising rapidly
expanded there. The FCA has over 320
members, including franchisees and those
servicing them. It serves as a meeting place
for exchange of ideas through an annual
conference, monthly state chapter
breakfasts, publications and a developing
educational program, as well as providing a
voice with the government in matters relating
to franchising. It can be a useful contact for
foreign franchises seeking to establish
themselves in Australia.
2.2 Franchising into Singapore
2.2.1 The Nation
Singapore has a small land area (646 sq.
km) consisting mainly of an island linked by
a causeway and bridge to Peninsular
Malaysia, together with 63 small islands. Its
population of 3 million is totally urban and
growing by 1.8% pa. The strength of the
economy is seen in the ongoing growth in
GDP (7.0%) and its GDP per capita of US
$30,900 (1996). As well, 7.1 million visitors
spent time in Singapore in 1995, adding
greatly to consumption. Inflation was 1.4%
with unemployment at 2.6% in 1996.
It is a multicultural society, with 77%
Chinese, 14% Malay and 7% Indian.
Knowledge of English is widespread, being
the language of commerce and government.
The official languages are English, Chinese
(Mandarin), Malay and Tamil. There is a
well-educated and trained workforce. The
Chinese Singaporeans are reputed to be not
as entrepreneurial as those in business in
Hong Kong and more comfortable working in
a salaried position. Nevertheless there are
many local investors keen to take up
business opportunities when they see them.
The Singapore government has various
schemes to encourage entrepreneurship,
especially where international ventures are
concerned, as the economy is export
oriented.
In 1993 the government began a drive to get
businesses to expand internationally, looking
to the nearby growing economies for
investment opportunities. As labour costs
have become high in Singapore, the
encouragement is to use the lower-cost
labour elsewhere in the region. Double tax
deductions and a venture capital fund are
among the incentives offered. Collaboration
between local and foreign firms to take up
opportunities in other countries is also being
emphasised.
2.2.2 The Business Environment
The legal and financial environment in
Singapore is very similar to that in Britain
and most nations previously colonised it. As
the third most important financial centre in
Asia and the fourth largest foreign exchange
market in the world, Singapore is a strategic
target market for many foreign firms eager to
expand in South East Asia. Many
international accounting and legal firms, as
well as the major banks have set up offices
there, as an added advantage for foreign
franchisors.
The economy of Singapore is based on a
free enterprise system. No restrictions are
placed on foreign ownership, use of foreign
experts, or repatriation of profits. A strong
emphasis on export-oriented industrialisation
is evident, with a number of investment
incentives offered to encourage foreign
investors into selected industries and to
promote exporting. The government has
fostered the concept of Singapore as a
centre for service industries. The Economic
Development Board (EDB) promotes
industrial and commercial development and
the Trade Development Board (TDB)
promotes international trade. The TDB has
offices in many nations and is a source of
assistance for firms interested in expanding
into Singapore.
Income tax ranges from 2.5% to 30% (on
Lloyds Bank plc/IFRC Strategy Seminar: Breaking Out Of The Home Market (1998)
incomes above S$400,000), while company
tax is 27%. A Goods and Services Tax of 3%
has been introduced. Imports are mostly
either duty-free or at tariffs up to 5%. The
main exceptions are for social reasons, eg.
liquor, tobacco, petroleum products, motor
vehicles. The costs of purchasing,
registering and operating motor vehicles are
very high. Rental costs also are extremely
high, although new cheaper accommodation
is being developed in outlying areas and
internal transport is easy and cheap.
Foreign firms, and franchisors in particular,
can take comfort in the fact that trademarks
and patent protection laws exist and are
effective. With the level of low employment,
staff loyalty tends to be low and difficulties in
recruiting capable staff are reported. Female
participation in the workforce is high (51%),
increasing the preference for eating out and
using convenience services. Singapore is
rated as a low risk country, but it should be
noted it is also a very competitive market, so
quality and efficiency are vital for new
entrants to be successful.
2.2.3 Prospects for Franchising
With government assistance and
encouragement, franchising has grown well
in Singapore. In Asia, its franchising sector is
second only to Japan. Over 200 franchises
are reported to be operating, about one half
being locally based. Of these, 53 were
created with assistance from the Economic
Grouping Service Centre (EGSC), part of the
Singapore Productivity and Standards Board
(PSB). The government sees franchising as
a means to enhance productivity and
efficiency. The EGSC assists the
development of networks through franchises
or co-operatives within industries. Financed
by the EDB, the EGSC operates a financial
incentive package, Management of
Economic Group Assistance (MEGA), which
includes grants for study missions,
consultancy, training and employment of an
economic group manager. As yet, local
financial institutions have not sought to
develop special financial packages to
service the needs of franchisors and
franchisees.
Local franchises are assisted to expand
internationally through the TDB’s
International Franchise Enterprise
17
Programme (IFEP) which subsidises
feasibility studies, consultancies, legal
advice and marketing. IFEP will assist
indigenous franchises in overseas
expansion, together with local companies
seeking master franchise rights for the
region for a foreign franchise and others
seeking outright purchase of an international
franchise. Assistance extends to the
development and overseas marketing of
these franchises. Trade missions to locate
overseas franchisors have been arranged to
a wide range of locations, including Hong
Kong, Paris, China and South Africa, with
others being considered. Over 30 Singapore
franchises have been assisted in
international expansion.
Singaporean investors are clearly interested
in investigating possible opportunities in
franchising, as seen in the well-attended
franchise exhibitions, although many as yet
do not have a detailed understanding of its
practice. Some are wary about converting
their business to a franchised outlet, fearing
that the franchisor may take over their
business. Others are not ready for the
external discipline inherent in franchises.
Sub-franchising is not common in Singapore,
except in the outer areas, reflecting the
concentration of population. There is
concern among some master franchisees
about what they consider to be lopsided
contracts with their franchisors. Also,
because of the small population of
Singapore, master franchisees commonly
want rights to a larger region, often the entire
South East Asia.
When setting up in Singapore, skilful
marketing is essential for foreign franchises
in order to establish the brand name vital to
success. As well, products and services may
need some tailoring to local preferences to
get maximum response. Food franchises are
popular but very competitive and some well-
known U.S. entrants have failed. Those
offering food varieties and premises that are
very different have better possibilities, and
franchises that emphasise unique national
aspects could be popular. Others that
concentrate on healthy foods would appeal,
as health-consciousness is high and very
few in the food industry have this approach.
The foreign fast food and restaurant
franchises presently operating are
dominated by US firms. Food is a very
18 Lloyds Bank plc/IFRC Strategy Seminar: Breaking Out Of The Home Market (1998)
popular past-time with Singaporeans and a
1992 study indicated that 34% of spending
was on food items, so the market is large
and varied.
Franchisors do not have to contend with
laws specifically aimed at franchising, merely
the usual business regulations which apply.
However, ensuring that the franchise
agreement is understood fully before being
finalised is important in avoiding disputes
later. Even though Singapore has an
effective legal system, as in other areas of
Asia the personal relationship with the local
master franchisee or joint venture partner is
most important for a successful long-term
relationship.
The Singaporean business community is
showing a growing interest in franchising
and its franchising sector is developing well
with government encouragement and
assistance. The government sees Singapore
as a potential centre for franchising in the
region, encouraging both local and foreign
franchises to use it as their base. The
Singapore International Franchise
Association (SIFA), formed in 1993,
presently has a membership of 54. It is
active in promoting the development of
franchising and liaises with government
agencies in this regard. Global Franchising
’97, a highly successful exhibition and
conference in Singapore in 1997, drew
exhibitors and attendees from all over Asia
and beyond and is planned to continue as an
annual event.
Rising affluence and increasing consumption
make Singapore a potentially lucrative
location to establish franchises. It also
means that there are investors with the
capital to take up and develop master
franchises for the region. There are
opportunities of additional trade missions
encourage study tours by potential investors
from Singapore, visiting franchise exhibitions
in other countries and franchises interested
in overseas expansion. Likewise, groups of
interested franchisors can travel to
Singapore to participate in the Singapore
exhibition or to investigate the market.
Franchisors considering expansion into
Singapore need to visit personally to
examine the market, assessing whether they
have products or services that are attractive
to local residents and can perform profitably.
An element of uniqueness is always
important to the success of a franchise, all
the more in Singapore which has been
assessed by the World Economic Forum as
the most competitive nation in the world
(quoted in TDB 1997).
2.3 Franchising into Malaysia
2.3.1 The Nation
Malaysia consists of eleven states in
Peninsular Malaysia, together with the states
of Sarawak and Sabah on the island of
Kalimantan (formerly Borneo), with a total
area of 329,758 sq. km. The population of
21.2 million (1996) is mainly located in
Peninsular Malaysia as is the capital Kuala
Lumpur, and is growing at 2.5% pa. The
economy has been consistently growing
strongly (8.8% increase in GDP in 1996) in
line with the Prime Minister’s “Vision 2020”
where Malaysia will become a developed
nation by the year 2020. GDP per capita is
US$4,700. Incomes and consumption are
growing in the buoyant economy that has
exceeded expectations. Inflation remains low
at 3.5% and unemployment at 2.6% (1996)
with shortages of staff among the lowest
paid and middle management. Bank interest
rates are 13% pa. but a number of schemes
operate to provide low-cost finance for small
businesses and franchises.
The population of Malaysia is a mixture of
ethnic Malays (Bumiputra) representing
58%, Chinese 31% and 9% Indians.
Government is dominated by Malays and
since most Malays are Muslims, Islamic
traditions play an important part in everyday
life. The official language is Bahasa
Malaysia, with English, Mandarin,
Cantonese, Tamil and others in use. English
is widely used among business and
government personnel.
2.3.2 The Business Environment
The earlier British presence is reflected in
the legal, accounting and banking systems
and therefore offers firms with a similar
background a more comfortable environment
than many other Asian markets. International
professional firms have offices or affiliates in
Kuala Lumpur. Taxation is reasonably low
with income tax for non-residents ranging
from 15% to 35% and company tax at 30%.
Lloyds Bank plc/IFRC Strategy Seminar: Breaking Out Of The Home Market (1998)
A Sales and Services Tax ranges between
5% to 10%. Malaysia is strongly export-
oriented and has sought to liberalise trade
through wide-ranging tariff reductions,
although high tariffs remain in parts of the
manufacturing sector and for the agricultural
sector.
In Kuala Lumpur Western influence is
strong, especially among those under 40
years of age. Two-thirds of Malaysian
business is conducted in the Klang Valley
region that includes Kuala Lumpur. In the
last decade there has been a growing
willingness among middle-income people to
try new products. The increasing number of
working women means higher household
incomes and a growing demand for quality
goods has resulted.
For foreigners, joint ventures have some
advantages in overcoming problems and if
their business partner is a bumiputra, they
can attract government support with low
interest loans and other assistance. The
government has targeted the development of
small and medium enterprises as a priority,
including linking the small with large firms –
an approach that includes franchising. They
also are seeking to develop the services
sector and encouraging the export of
services. Full tax exemption has been
granted for income remitted from abroad.
2.3.3 Prospects for Franchising
Franchising is growing steadily in Malaysia
with 202 franchises known to be operating.
While half are foreign franchises, the
proportion of locally-based franchises is
increasing. Assistance is readily available
from government funding where there is
bumiputra involvement whether as franchisor
or franchisee, and those programs include
bumiputras seeking to take up a master
franchise from a sound foreign franchise. As
yet, there is no legislation specifically aimed
at franchising, only laws relating to business
generally, but future legislation has been
promised. There is protection for
trademarks, patents, etc, although it can
take considerable time to finalise
registration.
Loans are available with low interest and
interest-free terms for many small
businesses, including franchises, and the
19
Credit Guarantee Corporation backs loan
applications to the banks and finance
companies where there is insufficient
collateral. Finance does not appear to be a
great problem as funds are reported to be
available. In fact, there are many investors
seeking new opportunities, with reports of
franchise advertisements attracting as many
as 200 responses. However, because of the
distance between a foreign franchisor and
franchisees and the resultant communication
and support problems, many would prefer
either a joint venture or a less traditional
financial arrangement, eg. instead of a high
up-front fee, part payment required at
commencement followed by progressive
payments as the franchise develops. A long-
term approach is needed by all involved and
franchisors need to be flexible in designing
arrangements for expansion into Malaysia.
The Franchise Development Division (FDD)
was set up in 1992 in the Prime Minister’s
Department, and in 1995 it became part of a
new Ministry of Entrepreneur Development.
This Division aims at encouraging and
assisting bumiputra into franchises, through
a number of strategies which should assist
the development of sound local franchises
and through matching local investors to
suitable foreign franchises. A database of
potential franchisees is maintained who have
been checked and interviewed to provide
contacts for franchisors who make the final
selections. Training for franchisors and
franchisees also is provided and generally
the division seeks the healthy growth and
understanding of franchising.
The Malaysian Franchise Association (MFA)
formed in 1994 has developed to have a
permanent office in Kuala Lumpur and over
400 members – over 50 being full members
and the rest associate members or affiliate
organisations. They hold regular meetings,
with topics and speakers intended to
improve franchisor performance. Annual
franchise conferences and exhibitions have
been held successfully in Kuala Lumpur
since 1995. The MFA co-operates with other
national franchise associations in assisting
the entry of foreign franchisors and has
ongoing contact with the Malaysian
Government on matters relating to
franchising.
Malaysia, like Singapore, has many
20 Lloyds Bank plc/IFRC Strategy Seminar: Breaking Out Of The Home Market (1998)
advantages as a regional base for
franchising into Indonesia, Thailand and
other neighbouring countries. The Malaysian
government seeks to encourage such
arrangements with foreign franchises and
there are many linkages that can assist
international expansion, as well as
government incentives. Franchisors who are
considering a possible move into Malaysia
need to be sensitive to cultural factors, firstly
in relation to the market being sought, but
also in regard to expatriate staff and families
where they are needed in Malaysia for any
length of time. It is especially vital to check
thoroughly the credentials and capabilities of
any potential master franchisee or joint
venture partner before signing any
agreement to ensure there will be personal
compatibility. As throughout Asia, the older
generation often finds it difficult to fully
appreciate the openness that forms the
basis of the relationship between franchisor
and franchisees – an aspect that needs to
be emphasised in prior negotiations.
Pilot outlets are important in ensuring the
imported franchise is proven in the
Malaysian market before expanding widely.
If the master franchisee is operating the pilot
outlet, then considerable assistance needs
to be available during refinement of the
operational procedures. One early essential
often overlooked is the necessity to put effort
and funds into building up the franchise’s
image, as it will be known to few even
though it may be long-established in its
home market. Foreign franchisors also tend
to provide too little in ongoing support with
resulting shortfalls in performance and
strains in the franchisor-franchisee
relationship. Retail sites can be difficult to
locate and good sites usually are expensive,
so a high gross profit margin is needed if the
franchise is to operate in such areas.
However new shopping malls being
constructed offer useful opportunities at
lower rentals.
Finally, despite some difficulties, there
continue to be plenty of opportunities for
sound franchises to expand into Malaysia.
However any decision to seek expansion
into the nation should be preceded by a
series of personal visits by the franchisor.
Personal experience of the market is
essential if development is to be based on a
sound understanding of the business
environment in which the franchise is to be
established. Use of capable advisers, both
domestic and in Malaysia, can help greatly
but the franchisor is wise to supplement
them with personal enquiries.
2.4 Franchising into Indonesia
2.4.1 The Nation
Indonesia consists of 13,000 islands (1.9
million sq. km) of which about half are
inhabited. The five islands of Java, Sumatra,
Kalimantan, Sulawesi and Irian Jaya account
for over 90% of the land area. Total
population exceeds 210 million, growing at
1.5% pa., and over half live on the island of
Java. The GDP per capita is only US$1100.
GDP was growing at 7.0% (1997) until the
recent economic crisis which is not yet
resolved. Inflation in 1997 officially was 7.5%
but the basis for calculation is debated and
most consider it to be much higher.
Unemployment is high; the total including
underemployed is estimated at 40% of the
workforce. Interest rates were around 20%
at the start of 1995 but have more than
doubled in the current crisis and hopefully
will be restored to a more manageable level
when conditions stabilise.
Although the majority of Indonesians are of
Malay origins and Muslims, ethnic Chinese
are disproportionately active in the business
sector. Bahasa Indonesia is the official
language and commercially, English and
Chinese dialects also are used. There are a
small wealthy elite and an increasing middle-
class but incomes and consumption are
growing overall. Only a small proportion of
the population has sufficient income to
purchase the products or services offered by
foreign franchises. Recent changes in
economic policy have seen a freeing up of
many restricted areas, with greater
opportunities for foreign ownership and
decreases in tariffs. However political
controls have remained tight until 1998,
maintaining the political stability due to the
long presidency of Suharto. Now there has
been a change of leadership, pressures for
extensive economic and political reforms will
see further changes intended to improve
conditions for many in business. Only time
will tell whether benefits will come soon or
only in the long term.
Lloyds Bank plc/IFRC Strategy Seminar: Breaking Out Of The Home Market (1998)
2.4.2 The Business Environment
Business in Indonesia has many differences
when compared with many Western nations.
The commercial legal system is based on
the Dutch code, and it is being updated
slowly. It can be difficult for foreign firms to
enforce their legal rights. For this reason it is
all the more important to ensure a sound
personal relationship is developed with
Indonesian business associates. Reliable
local contacts can also help in sorting
through arrangements with other businesses
and government that would otherwise prove
frustratingly difficult. Jakarta with a
population of over 10 million is the capital
and the main centre for business. The
business environment varies greatly
throughout Indonesia, as do the people.
Taxation is relatively low but administrative
inefficiencies and unofficial charges can add
considerably to operating costs. Value
added tax has been increasingly used,
including in new areas in the services sector.
Tax concessions are granted for investment
in particular industries, in less developed
areas and for reinvestment of profits.
2.4.3 Prospects for Franchising
The growth of franchising in Indonesia has
been steady rather than spectacular,
although there is considerable interest
among the business community. Seminars
on franchising, when lasting no more than a
day, attract good enrolments. However,
franchising is not yet well understood by
most. A total of 264 franchises are reported
to be operating in Indonesia with over 2,000
outlets. Mostly they are foreign-based and in
the food industry with only 35 local
franchises so far. A number of local
franchises have closed and there is an
urgent need for sound professional advice to
improve the structure of others commenced
without a good grasp of the details of the
business method. Despite this, Indonesians
do not seem keen to use consultants and the
few available have limited experience.
Overall, a preference for foreign franchises
is noticeable at this stage, with their
professional organisation and image. Some
franchising courses are available from the
privately-operated Institute for Management
Education and Development (LPPM) which
has translated some publications on
franchising and carried out limited research.
21
 Table 1: Comparison of Export Markets for Franchises

Data Australia Singapore Malaysia Indonesia

Area of Nation Sq km 7.7m 646 329,758 1.9m
Population No. 18.5m 3.0m 21.2m 210m
Population Growth pa 1.0% 1.8% 2.5% 1.5%
GDP per capita US$ 23,600 30,900 4,700 1,100
GDP growth pa 3.6% 7.0% 8.8% 7.0% (?)
Inflation pa 2.6% 1.4% 3.5% 7.5% (?)
Unemployment % 8.5% 2.6% 2.6% ?
Franchisors No. 700 est. 200+ 202 264
Outlets of Franchises No. 40,000 est. 1600+ 2500 est. 2,000+

Sources: SIFA, MFA, AFI, DFAT, World Handbook 1997

Legislation relating to franchising was nations. Unfortunately, too many local

passed in 1997 and some of its provisions
have caused expressions of concern, but it
has not yet been enacted. The government
generally appears supportive of franchising.
Some interest has been shown in its use in
regard to privatisation of state-owned
enterprises, in improving the performance of
small firms through partnerships with larger
companies and generally as a means of
creating businesses likely to succeed.
However various government departments
affect the setting up of foreign franchises
and there appears to be little co-ordination
between them, which can cause some
delays and other problems. A Trading
Enterprise License is necessary, together
with appropriate industry licences before
commencement. Difficulties faced in
Indonesia include obtaining reliable market
information, problems of communication,
adaptation of the product or service,
checking the credentials of potential
franchisees, and finance for franchisees as
the banks mostly are not knowledgeable on
the technique. Although relevant regulations
exist, enforcement of trademarks, patents,
etc can be difficult for foreign firms.
The Asosiasi Franchise Indonesia (AFI), or
Indonesian Franchise Association, has not
established a wide membership as yet.
Despite Indonesia’s immense population,
franchising is advancing more quickly in
some of its smaller neighbouring countries.
Some master franchisees based in
Singapore or Kuala Lumpur have the rights
to Indonesia and other South East Asian
master franchisees are not sub-franchising
which also is slowing their development.
Preference for joint ventures, rather than
master franchises, is evident among some
investors, since they more actively involve
the franchisor in the long-term development
of the franchise. A few large foreign retailers
have franchised into Indonesia as a means
of overcoming laws that earlier prevented
them setting up subsidiaries.
Franchising in Indonesia is growing and
there is great potential in the long term as
the business sector and government gain an
understanding of its practice. The market for
the products and services offered presently
is limited to residents with better incomes in
the larger population areas. Jakarta is the
obvious place to start. However, extensive
investigation and preparation are necessary,
all the more until franchising is more widely
understood, the legal situation is clearer and
more professional support is available
locally.
3. MARKET OVERVIEW
Throughout the four nations discussed,
franchising has established a firm foothold in
their business sectors, as can be seen from
Table 1. Although not yet a major influence
in South East Asia, it is becoming an
increasingly important contributor to the
national economies. At this stage the
majority of franchises operating there are
foreign-based – mainly from USA, but a few

22 Lloyds Bank plc/IFRC Strategy Seminar: Breaking Out Of The Home Market (1998)
are from other countries, including Australia
– and most in the food industry. However,
the situation is rapidly changing in Singapore
and Malaysia. Valuable opportunities exist
for franchisors to establish themselves as
industry leaders throughout South East Asia
before similar franchises from elsewhere
move in. Australia too is open to
experienced franchisors willing to put in the
necessary effort and especially those which
target markets which have few franchisors
as yet or where there are no clear market
leaders.
3.1 Opportunities
In South East Asia, the population is growing
in numbers and affluence, with a resulting
growth in their consumption. This applies
especially to the more expensive products
and services that are often the basis of a
franchise. There is also considerable interest
in things Western, notably among the
younger generation, reducing any cultural
gaps that would have hindered acceptance
of foreign concepts in the past. Tourism to
Asia means that many Westerners with
similar tastes are visiting these areas,
together with business representatives
seeking trade opportunities. Foreign visitors
and workers often look for familiar food and
business services. Until the recent economic
crisis, tourist numbers into Western nations
from Asia were consistently increasing and
no doubt will continue to do so when it
passes. As a result, many are familiar with
the names of franchises that are popular
elsewhere. Australians too are well-travelled
and subject to the same silent influences.
Altogether, these factors should assist
earlier acceptance of well-established
foreign franchises than could be expected
otherwise.
In Singapore and Malaysia government
programs have successfully assisted the
launch of a considerable number of
franchises, both local and foreign. Indonesia
appears favourably disposed to franchising
but so far has not specifically targeted it in
any business development programs. The
usual commercial legislation applies to the
franchising sector, including protection for
intellectual property. Unfortunately,
foreigners may find the laws difficult to
enforce at times and it remains to be seen
as to the effect of new franchising legislation
Lloyds Bank plc/IFRC Strategy Seminar: Breaking Out Of The Home Market (1998)
there. The building of a sound personal
relationship with overseas franchises is the
best protection against difficulties that could
lead to costly and damaging legal
disputations. This is especially true in Asia,
and foreign franchisors not only do well to
choose carefully when appointing
franchisees but also need to give their
relationship the attention it deserves.
3.2 Challenges
The greatest hindrance to the sale of
franchises and their effective growth in
South East Asia is the lack of understanding
of franchising in the local business
communities, the government and the
general public. The word “franchise” is
difficult to translate and usually the English
word has been taken over into the local
language, or a transliteration of it, so it
needs explanation. The preparation, the
ongoing support, the mutual responsibilities,
etc needed to set up a sound franchise have
not been understood by many local
franchisors and master franchisees. The
franchising sector is in its infancy throughout
Asia, Japan being the exception. In
appointing franchisees in such an
environment, whether a master franchisee, a
joint venture arrangement, or individual
franchisees, it is vital that the local investor
understands the full ramifications of the
arrangement. When great distances
separate the parties and communication
problems easily arise, it needs specific
attention in prior negotiations.
Finding a suitable person to develop the
franchise is the key to success. While
individual franchisees could be appointed in
Malaysia and elsewhere, the difficulty of
supporting them (unless a local subsidiary is
set up) mean that franchisors from foreign
nations usually choose to appoint either a
master franchisee or form a joint venture, in
which they involve a local entity. Both
approaches draw on local knowledge and
contacts, while enabling ongoing support for
franchisees appointed. Checking out the
credentials of applicants can be difficult and
needs assistance from local professionals or
contacts. In actual fact, few master
franchisees in South East Asia are presently
sub-franchising, choosing rather to open all
outlets themselves. Master franchisees are
often successful local businesses with
23
sufficient capital to do this, although there
seems to be a lack of willingness to trust
others with the valuable business format,
especially among older business owners.
Younger entrepreneurs with business
education from a Western nation have
become suitable master franchisees in a few
foreign franchises and may be a fruitful
group to target, having an understanding of
both the local culture and that of the
franchisor.
Availability of finance for franchisees varies
between locations as the individual market
reports indicate. Lack of understanding of
franchising by the banks and other financial
institutions is a potential limitation. However,
family sources and informal networks often
provide finance in Asian societies. As far as
master franchises and joint venture partners
are concerned, interested parties often are
established companies looking for additional
business opportunities and not lacking in
access to funds. Financial needs are not
necessarily a problem if the franchise
opportunity is presented well enough to
attract quality applicants.
A frequent complaint voiced about foreign
franchisors is that although they assisted
well until the first opening, afterwards they
are seldom seen. On the other hand, a
common complaint from franchisors is that
the Asian master franchisees quickly change
the business format and do not maintain
operational manual standards.
The answer to both complaints appears to
involve more active franchisor commitment
to ongoing support for overseas outlets,
which in turn requires a fee structure or other
arrangement to fund the expense. Presently
some franchisors have a franchise
agreement that only provides sufficient fees
to allow absentee support and possibly an
annual visit. Joint ventures may be a better
way for many franchisors wishing to enter
Asia; possibly selling off their share once the
franchise is well established in the nation. In
South East Asia, government personnel and
consultants often express preference for a
joint venture arrangement.
3.3 Recruitment of Franchisees
Over the last decade, rising affluence has
created numerous nationals in each of
24 Lloyds Bank plc/IFRC Strategy Seminar: Breaking Out Of The Home Market (1998)
Singapore, Malaysia and Indonesia seeking
business opportunities. The increasing
popularity of franchising has attracted many
to make enquiries either direct to foreign
franchisors or through the local office of
national trade missions. National franchise
associations have been established and
franchise exhibitions have annual events.
Franchisors interested in expanding into
these regions should find assistance through
contacting the local franchise association
(see Appendix A) and make enquiries
concerning government programmes.
Likewise, participation in trade missions to
the target markets or in regional franchise
exhibitions can provide valuable exposure
and contacts.
However it is essential that franchisors seek
to understand the foreign market targeted,
whether Australia or South East Asia or
wherever, especially as it relates to their
particular industry. Reading of relevant
literature and contact with others already
established in the particular market will help,
but personal visits are an absolute necessity
to assess the opportunities and competition.
Cultural sensitivity is a basic requirement for
success in finding the best business partner
and achieving maximum turnover, even
when the culture seems similar. Adjustments
to the product, service and business system
may be necessary. Suitable sites can be
difficult to find and expensive in some
markets so variations to strategies may have
to be considered. The personal involvement
in planning and setting up cannot be avoided
without risking the overseas project. Pilot
outlets to fine-tune operations to local
conditions are needed, no matter how
experienced the franchisor may be in the
home market.
There is little reason why the master
franchisee’s territory should be limited to
their own nation, especially where the
population is comparatively small. Singapore
with its small but affluent population provides
only limited scope for a master franchisee. A
franchise granted in Singapore could include
at least Malaysia, and vice versa. Not only
do franchisees want the rights to large
populations, but government franchise
assistance schemes in Malaysia and
Singapore aim at exporting franchises. The
right to other regions can best be granted as
later options, conditional on certain
performance goals being achieved, so
protecting against being locked into an
agreement with a poor performer.
Master franchisees and joint venture
partners usually are trained mainly in the
foreign franchisor’s home country. They in
turn train their sub-franchisees and company
staff, although in some cases the sub-
franchisees are still sent to the franchisor’s
regional or head office. Absorption of the
corporate culture of the particular franchise
is important in assisting identification with
the franchise. However while adaptations to
local culture normally are necessary for
maximum acceptance, the possibility
appears to have been overlooked by some
US and other foreign franchises which are
struggling.
Numerous foreign franchisors are actively
seeking opportunities in Australia and
especially in South East Asia, but most often
master franchises have been granted in
response to an unsolicited contact by an
investor from the particular nation (Arthur
Andersen 1996, McCosker 1992). When this
happens, the franchisor is unlikely to be
sufficiently aware of market needs and
practices, even though international
expansion may have been intended at a
future time. A number of franchise
consultants offer assistance in international
expansion which hopefully provides some
opportunity for guidance when franchisors
are unexpectedly faced with such a decision,
but their credentials need to be examined
closely.
4. CONCLUSIONS
Investigations have established strong
potential for exporting franchises into
Australia and each of the nations considered
in South East Asia ie. Singapore, Malaysia
and Indonesia. All have populations that are
increasing in numbers and affluence.
Acceptance of franchising is growing
throughout Asia. There are valuable
opportunities in these markets for
franchisors that have operated successfully
in their domestic markets, provided they are
willing to put in the preparation and long-
term commitment necessary for expansion
internationally. Justis and Judd (1989)
suggest that the growth in franchising
internationally is due to the following trends:
Lloyds Bank plc/IFRC Strategy Seminar: Breaking Out Of The Home Market (1998)
“(1) increased disposable income,
(2) rising education levels,
(3) universal cultural trends,
(4) increasing number of women in the
working force,
(5) shorter work weeks,
(6) younger generations willing to try
new products,
(7) demographic concentrations of
people in urban areas, and
(8) smaller families with two or more
incomes.”
All appear to be important factors to varying
extents in the markets discussed. The
changing world has brought opportunities
that favour the introduction of foreign
franchises into markets such as these.
Impediments were noted, but few appear
insurmountable. Lack of widespread
understanding of franchising in South East
Asia has to be taken into account by the
franchisor seeking to export, but most other
problems can be minimised by adequate
research, operational preparation and
commitment to ensuring the foreign
franchisees succeed. Export strategies
suitable for all franchises are not possible,
but considerations to be included in
development of appropriate strategies for
individual franchises have been presented.
An Export Checklist (Appendix B) may assist
in developing an individual strategy..
Franchisors will only establish themselves
internationally with extensive preparation
together with sound advice from those who
have experience in this field of business.
Information gathered personally in Australia,
Singapore, Malaysia and Indonesia will be
invaluable.
Singapore and Malaysia are considered as
one market by many foreign franchisors.
Singapore offers a very conducive
environment for foreign franchisors and the
franchising sector appears somewhat more
mature there than in the other regions
discussed. It also enjoys the support of a
range of government programmes. However
the small population and high rental costs
provide some limitations on its attractiveness
as a base. Malaysia also has a supportive
government attitude and while possibly not
yet advanced in franchising as Singapore, it
has a far larger population and lower rental
25
and staff costs.
Although the number of locally based
franchises continues to grow throughout the
region, opportunities abound for appropriate
foreign franchises willing to put in directed
efforts to take them up. US franchisors are
dominating their industry sectors in South
East Asia at this stage and others are
anxious to join them. However many gaps
remain and those who establish themselves
early as leaders in their industries will be
difficult to dislodge. Furthermore, Singapore
and Malaysia offer possibilities as stepping
stones to reach the rest of Asia both by
using the experience built up in more
supportive business conditions and existing
trading contacts between the nations of Asia.
Australia has its own strongly performing
leaders in many industries but the market is
large enough to accept experienced foreign
franchises that can provide well proven
products and services.
26 Lloyds Bank plc/IFRC Strategy Seminar: Breaking Out Of The Home Market (1998)
REFERENCES
Arthur Andersen, 1996, International Franchising by
US Franchisors, IFA Educational Foundation,
Washington DC.
Australian Bureau of Statistics, 1994, Franchising
Sector Survey Results – 1994, Dept of Industry
Science and Technology, Canberra.
Dept of Foreign Affairs and Trade, 1996, Country
Economic Brief – Singapore, DFAT, Canberra
Dept of Foreign Affairs and Trade, 1997, Country
Economic Brief – Malaysia, DFAT, Canberra.
Dept of Foreign Affairs and Trade, 1996, Country
Economic Brief – Indonesia, DFAT, Canberra.
Justis, R and Judd, R, 1989, Franchising, South-
Western, Cincinnati.
McCosker, C, 1992, Motivations and Methods of
Australian Firms Franchising Internationally, Dept
of Business Industry and Regional Development,
Brisbane.
McCosker, C, 1996, Developing Export Strategies for
the Queensland Franchising Sector, Dept of
Tourism Small Business and Industry, Brisbane.
Melly, C, 1995, Franchising, Industry and Trade
Summary no.2921, US International Trade
Commission, Washington DC.
Singapore Trade Development Board and Arthur
Andersen, 1997, Franchising in Asia-Pacific, TDB,
Singapore.
WEBSITES APPENDIX A

Franchisenet National Franchise Associations

http://www.franchise.net.au
Franchise Council of Australia
Franchise Council of Australia GPO Box 1498N
http://www.fca.com.au Melbourne Vic 3001
Australia
Malaysian Franchise Association Tel: 61 3 9650-1667
http://www.mfa.org.my Fax: 61 3 9650-1713
Email: jimmcracken@bigpond.com.au
Singapore International Franchise Association
http://www.sifa.org.sg Indonesian Franchise Association
A19, Darmawangsa X
World Handbook 1997 KebayoranBaru
http://www.odci.gov/cia/publications/factbook/ Jakarta 12150
country-frame.html Indonesia
Tel: 62 21 739-5577
Fax: 62 21 723-4761

Malaysian Franchise Association

79, Kompleks Damai
Jalan Dato’ Haji Eusoff
50400 Kuala Lumpur
Malaysia
Tel: 60 3 445-4700
Fax: 60 3 445-4711
Email: ceomfa@tm.net.my

Singapore International Franchise Association

50 Kallang Ave #09-00
Noel Corporation Building
Singapore 339505
Email: info@sifa.org.sg

Lloyds Bank plc/IFRC Strategy Seminar: Breaking Out Of The Home Market (1998) 27
APPENDIX B
Export Checklist
To assist franchisors seeking to expand
internationally a 10-point Export Checklist
has been drawn up, based on enquiries
made and the experience of earlier
exporters. Important aspects of preparation
which deserve a franchisor’s attention to
maximise the opportunity for successful
expansion overseas include:
1 A self-examination
The franchisor needs to soberly consider the
present state of the franchise. Will exporting
adversely affect domestic operations? Are
there sufficient capable staff to handle
overseas operations? Are finances available
to enable investigations, recruitment, set-up
and ongoing support until export income
reaches break-even point? What are the
motivations for exporting? (Are they mostly
emotional or egotistical, or a considered
strategy?)
2 The overseas target market
The franchisor needs to decide which
overseas market should be targeted first.
Most choose a nearby nation as the least
risky location to begin operating
internationally. The second market will
invariably be more difficult but then can be
faced with some experience. Preliminary
investigation of possible target markets is
needed before a decision is made, eg.
enquiries with franchisors already operating
in these markets, enquiries with consultants
and/or other professionals with experience in
franchising internationally, reading business
guides on each market.
3 Visits to the proposed target market
Personal visits by the franchisor are an
essential part of a sound decision whether or
not to go ahead. Even after the best advice,
increased understanding of what exporting
would involve will result. The visit should be
planned carefully, with appointments
arranged with capable information sources,
eg. the national franchisor association, the
relevant government office, commercial
associations such as an international
Chamber of Commerce These can provide
28 Lloyds Bank plc/IFRC Strategy Seminar: Breaking Out Of The Home Market (1998)
invaluable local knowledge of customs,
tastes, competition, relevant regulations, etc
to add to personal observations. More than
one visit is a necessity.
4 Feasibility studies
Once a market has been decided upon, two
feasibility studies are needed - one for the
franchisor’s export venture and one for the
master franchisee (if this arrangement
chosen.) The franchisor will need a detailed
business plan based on investigation of the
market (re product, price, promotion,
distribution, etc), financial aspects, legal
requirements and issues, and staff needs.
The assistance of domestic and overseas
professionals will be required, as neither can
fully understand both nations.
5 Legal arrangements
Protection of intellectual property is vital in
any franchise and should be commenced as
early as possible to avoid potential problems
from nationals in the target nation. The
controlled usage of trade marks, service
marks, trade names, patents, copyrights, etc
may be endangered otherwise. The
franchise agreement will need attention from
experienced franchise lawyers in both
nations, as will any regulatory requirements
in the host nation.
6 Operational arrangements
Once the decision to go ahead is certain, the
Operations Manual will need to be adjusted
for local conditions, possibly translated into
another language (even if English is widely
understood). A training program will need to
be constructed for the master franchisee, an
ongoing support program detailed and a
marketing strategy appropriate to the
overseas market.
7 Recruitment
Finding a suitable master franchisee or joint
venture partner is crucial to establishing a
franchise overseas. Having sufficient funds
and speaking English fluently are not
enough in themselves to ensure an applicant
will be an efficient business operator and
one with whom a long-term business venture
can be successfully conducted. However,
some who have received their business
education in Western universities have the
advantage of understanding Western
business methods as well as local
knowledge. Credentials of applicants need to
be checked out thoroughly, using whatever
local contacts established and any
commercial means available. A mistake can
be extremely costly and time-consuming,
and ensure a second effort will be very
difficult because of damage to the franchise
name.
8 Pilot outlets
Because the business environment of every
nation differs, often in ways not readily
visible, the operation of pilot outlets is
prudent to ensure the foreign franchise is
viable in the new market. These may be set
up by the master franchisee and fine-tuned
with assistance from the franchisor, before
further outlets are opened or any sub-
franchisees appointed.
9 Planned expansion
Expansion goals need to be specified in the
franchise agreement if plans are achieved.
They must be realistic and mutually agreed
upon, if a serious attempt is to be made.
Options to the rights to other regions can be
offered, subject to attainment of the original
goals.
10 Ongoing Support
Vital to long-term success is the provision of
adequate ongoing support by the franchisor.
Without a well-planned support program and
appropriate controls, the master franchisee
will either fail or cease fee payments, and
most likely commence a competing franchise
using the skills learnt from the franchisor.
Regular communications and visits help
maintain a good relationship and cultivate a
sense of identification with the franchisor.
All ten aspects of preparation for
international expansion can do much to
minimise the risks and maximise the results
for both franchisor and franchisees in the
targeted nation.
Lloyds Bank plc/IFRC Strategy Seminar: Breaking Out Of The Home Market (1998)
AUTHOR’S BACKGROUND
COLIN McCOSKER
Faculty of Business
University of Southern Queensland
TOOWOOMBA QLD 4350 AUSTRALIA
Telephone: ■■■■■■■
Fax: ■■■■■■■
Email: ■■■■■■■
Colin McCosker is a Senior Lecturer in the
Department of Marketing, specialising in
Franchising and Small Business
Management. His research has focused on
the worldwide trend towards Franchising as
a means of creating small businesses. As a
result, he has shared his findings through
numerous articles, book chapters,
monographs and conference papers. He is
widely quoted on franchising in Australia and
internationally, acting also as a referee for
several journals and conferences.
Mr McCosker grew up in Newcastle, NSW
and held accounting and administrative
positions there, in Melbourne and in
Brisbane. His tertiary studies were carried
out at the University of Queensland and the
University of New England.
His research projects have looked into the
profile and performance of franchisees,
international expansion, franchise fees,
franchise management education in USA
and UK, franchise legislation in USA
compared with self-regulation, government
programmes assisting franchising and an
ongoing survey of business confidence and
satisfaction in the Australian franchising
sector. Study tours and conference
participation in USA, Canada, New Zealand,
Europe, South Africa and Asia have added
information on franchising worldwide and
opportunities for local and foreign franchises.
A comprehensive database on Australian
franchises have been developed & used as
a basis for various surveys of franchising
practice.
Lectures on Franchising in Australia and
internationally have been presented in USA,
Canada, New Zealand, Slovenia, Singapore
and Malaysia, as well as in Australia. He
29
served many years on the Executive of the
Small Enterprise Association of Australia
and New Zealand and was awarded
Honorary Membership of the Franchise
Council of Australia in 1989 for ‘his
contribution to the knowledge, education and
development of franchising’. As well, he is
active in the Society of Franchising (USA)
and the International Council for Small
Business. He has served on numerous
government and other committees relating to
small business and franchising, including the
Australian Government’s Franchising Task
Force (1991). He received the 1992 USQ
Award for Excellence in Scholarship and the
1996 SEAANZ Award for Excellence for his
contribution to small enterprise.

Mr McCosker’s major current interest is

investigating the worldwide growth of
international franchising and he teaches
Franchising and Small Business
Management at the University of Southern
Queensland.

30 Lloyds Bank plc/IFRC Strategy Seminar: Breaking Out Of The Home Market (1998)
 TAKING A FRANCHISE TO THE U.S.A.

John SCOTT
Co-founder of Fastframe USA Inc.

Taking a Franchise
to the USA

John L. Scott
Co- Founder, FASTFRAME USA Inc.
2

Lloyds Bank plc/IFRC Strategy Seminar: Breaking Out Of The Home Market (1998) 31
 Taking a Franchise to the USA
¾Introduction
¾Background
¾The decision to enter the USA market
¾Timing Issues
¾Preparation & Due Diligence
¾The USA franchise industry
¾International Franchising Techniques
¾Q & A
3

Background

¾Fastframe in the UK
– History & Market
¾The reason for franchising
– Company Owned v Franchise
¾Growth of UK operation
– Market penetration
¾Overseas opportunities & preparation
4

32 Lloyds Bank plc/IFRC Strategy Seminar: Breaking Out Of The Home Market (1998)
 The Decision to Enter the USA

¾How USA opportunity arose

¾The original pilot

The First Store opened in the USA in

May 1986 in Thousand Oaks
California, pop 100,000 6

Lloyds Bank plc/IFRC Strategy Seminar: Breaking Out Of The Home Market (1998) 33
 The Decision to Enter the USA

• How USA opportunity arose

• The original pilot
• Raising the capital
• Negotiating a Master License
• Setting up the USA corporation

34 Lloyds Bank plc/IFRC Strategy Seminar: Breaking Out Of The Home Market (1998)
 Timing Issues

¾Choosing the time:

– Strategic development
– Opportunism & coincidence!
– The catalyst
– Getting there

Thousand Oaks

10

Lloyds Bank plc/IFRC Strategy Seminar: Breaking Out Of The Home Market (1998) 35
 Preparation & Due Diligence

¾Legal Considerations
¾Financial Considerations
¾Setting up a company/entity to develop
– Joint venture
– Master franchise
– Area franchising
– Area developer
– Direct franchising
11
– Company operations

Franchising in the USA

¾The franchise pilot

¾Real estate
– Finding locations
– Broker system
– Negotiating deals
– Territories

12

36 Lloyds Bank plc/IFRC Strategy Seminar: Breaking Out Of The Home Market (1998)
 Territories

• Regions
• States
• County Boundaries
• Zip Codes

13

Franchising in the USA

• The franchise pilot

• Real estate
– Finding locations
– Broker system
– Negotiating deals
– Territories
– Planning & Build outs
– Fixed and variable cost approaches
14

Lloyds Bank plc/IFRC Strategy Seminar: Breaking Out Of The Home Market (1998) 37
 Franchising in the USA

¾The UFOC
UNIFORM FRANCHISE OFFERING CIRCULAR
¾The Fastframe experience
¾What to do and not to do
¾Finding a legal advisor
¾The registration process
¾Dangers
15

Franchising in the USA

➤ Franchise Fees* ➤ $5 to $100,000
➤ Royalties ➤ .5% to 30%*
➤ Supply of Goods ➤ Variable
➤ Supply of Equipment ➤ % markup
➤ Supplier Rebates ➤ .5% to 5%
➤ Corporate Supplies ➤ % markup
➤ Training Fees ➤ $1 to $5000
➤ Transfer Fees ➤ % of sale 5% to 15%

38 Lloyds Bank plc/IFRC Strategy Seminar: Breaking Out Of The Home Market (1998)
 Franchise Fees

¾The Fee $17,500

¾Opening Package $12,500
¾Launch Fee $10,000
Total $40,000

17

System Sales 87-97

$m
35

30

25

20

15

10

0
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

18

Lloyds Bank plc/IFRC Strategy Seminar: Breaking Out Of The Home Market (1998) 39
 Store Openings
180
160
140
120
100
80
60
40
20
0
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

19

Profit & Loss

$000s
1000
800
600
400
200
0
-200 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
-400
-600
-800
-1000
-1200
20

40 Lloyds Bank plc/IFRC Strategy Seminar: Breaking Out Of The Home Market (1998)
 The Franchisor’s Obligations

¾In the USA, the Franchise Industry is regulated

by the Federal Government and at local level by
the Department of Corporations.

21

Franchisor’ s Obligations

¾This means an annual disclosure document must

be specifically registered in 15 states of the 50
US. states.
¾A generic Uniform Franchise Offering Circular,
accepted by all states was introduced in 1995.
However, there are still some minor differences
in the requirements of some of the registration
states.
22

Lloyds Bank plc/IFRC Strategy Seminar: Breaking Out Of The Home Market (1998) 41
 The Franchisor’s Obligations

¾Continued
– Failure to comply with many of the laws could
result in the franchisee rescinding the contract and
forcing the Franchisor to return the Franchisee’s
investment and compensate him for losses.

23

The Franchisor’s Obligations

¾ As franchisors, our experience has convinced us that

the USA has over regulated franchising. We strongly
suggest that self regulation, such as the UK System, is
a far better way. Every franchise association has a code
of ethics which, if followed, should protect franchisee
and franchisor alike!

24

42 Lloyds Bank plc/IFRC Strategy Seminar: Breaking Out Of The Home Market (1998)
 The Franchise Industry

¾USA Attitudes to franchising:

– Scope of Franchise Packages
– Franchisors - Disclosure-Relationships
– The Franchisee
– The Banking/Financial Sector
– Landlords
– Suppliers

25

Risk & Reward

¾New Country
¾Don’t be taken in by language similarities
¾Legal considerations
¾Fiscal considerations
¾Much more disclosure
¾Substantial capital required

26

Lloyds Bank plc/IFRC Strategy Seminar: Breaking Out Of The Home Market (1998) 43
 Risk & Reward

¾Massive consumer market

¾Very receptive to new ideas
¾High disposable income
¾Growth of housing markets
¾Boom and bust
¾Love the British!
¾5 to 6 times market potential
27

QUESTIONS
&
ANSWERS
28

44 Lloyds Bank plc/IFRC Strategy Seminar: Breaking Out Of The Home Market (1998)
 AUTHOR’S BACKGROUND launched franchised parcel system - TNT
Despatch Post. TNT Overnite was grossing
£2 million per week on departure.
John L. SCOTT
1974 to 1980 - Prontaprint Ltd., Darlington
■■■■■■, Northumberland,
U.K. - Marketing Director/Deputy
UK, ■■■■■■■ Managing Director
Joined with 3 stores opened left at 100 open.
Newcastle Office Acquired 5% equity stake. Personally sold
Tel: ■■■■■■■ over 60 franchises. Developed marketing
Fax: ■■■■■■■ programs and national conferences. Opened
email ■■■■■■■ first International stores in South Africa.

1969 to 1973 - Burmah Castrol London

1996 to date - Scott International,
Hexham, UK - Partner
Investor/director in User2 Franchising Ltd
and assisted in raising £1.1million venture
capital to fund operations. Developed new
International Franchise Division for Ann
Summers. Consulted with 4 new franchise
start ups. Undertook advisory role assisting
2 UK firms to enter USA market.
U.K. - Sales Promotion & Advertising
Manager
Provided sales promotion programmes to
over 1000 petrol stations nationwide.
Controlled advertising budgets and regional
supervisors. Advertising agency direct
contact.

1995 to 1996 - United States Agency for

International Development Washington,
DC & Russia - International Franchise
Specialist/Country Director
Headed $1,000,000 franchise project in
Russia. Developed two major lecture
courses on business development &
franchising. Visited 10 cities and gave 32
lectures to over 2500 businesses. As a result
of success of above, asked to stay & form
Russian Franchise Association. Now in
operation.

1987 to 1995 - Fastframe USA Inc.

Newbury Park, California - Founder &
CEO
Started company from a single pilot in 1987.
Grew business to over 150 stores in 20
states. 150 franchises and $29 Million sales.
Opened in Brazil, Australia & Japan.

1983 to 1987 - Fastframe UK Ltd.,

Newcastle Upon Tyne - Managing
Director
Founded franchise company and developed
all systems from scratch. Sold first 40 stores
before exchanging equity for USA rights.

1980 to 1983 - TNT Express Ltd.,

Atherstone UK - Group Marketing
Manager - General Manager
Launched 6 new transport concepts
including TNT Overnight. Piloted and

Lloyds Bank plc/IFRC Strategy Seminar: Breaking Out Of The Home Market (1998) 45
 Page deliberately blank

46 Lloyds Bank plc/IFRC Strategy Seminar: Breaking Out Of The Home Market (1998)
 FRANCHISING AND GOVERNMENT INITIATIVES
THE U.S. EXPERIENCE AND INTERNATIONAL IMPLICATIONS
Frank HOY
University of Texas at El Paso, USA
LOVE AND HATE
Governments love franchising - they exempt
franchisors from anti-trust laws.
Governments hate franchising - they
demand that franchisors disclose proprietary
information. Governments love franchising -
they organizing franchise trade shows and
missions. Governments hate franchising -
they charge franchisors with engaging in
"pyramid schemes" designed to defraud
unsophisticated franchisees. Governments
love franchising - they subsidize the
international marketing expenses of
franchisors. Governments hate franchising -
they target franchises for minimum wage
increases.
Perhaps it is inherent in democratic societies
to have a permanently ambivalent and
contradictory relationship between business
and government. Abuses occur in free
enterprise systems. Yet opportunity and
quality of life are dependent on the creation
and growth of prosperous ventures. As
representatives of a nation's populace,
government officials are caught in a constant
tension of protecting citizens while
encouraging a healthy economy. The
tension is especially manifested in
franchising due to unique characteristics of
the industry.
In the pages that follow, I offer an American
perspective of this love/hate relationship. A
brief history of the legislative and regulatory
evolution of franchising in the United States
is followed by an analysis of why all three
branches of government -- executive,
judicial, and legislative - are interested in the
industry. We then turn to the ways
government demonstrates support for
franchising, followed by the attempts to
regulate and control franchising. Finally, I
suggest implications from the U.S.
experience for other free enterprise
societies.
Lloyds Bank plc/IFRC Strategy Seminar: Breaking Out Of The Home Market (1998)
WAR AND PEACE
The elements of what we now call
franchising no doubt predate the history of
commerce. In medieval Europe, local
Catholic clergy were granted the right to
collect tithes from their parishioners on
condition of forwarding a portion to Rome.
Similarly, feudal nobles in England began
enfranchising (literally empowering or
granting rights to someone who had none)
serfs in exchange for Royal Tithes (i.e.,
royalties). The thirteen colonies that
eventually formed the United States
originated as commercial franchises that
were granted in exchange for taxes and
fees.
Implicit in the paragraph above is struggle.
Struggle to obtain rights, struggle over fees,
struggle for greater freedom of action,
struggle between those wielding political
power and those engaging in commerce.
Yet, even though the first examples of
franchising in America fought for their
independence, the relationship between
franchising and government in the United
States has been characterized more by
peace than by war.
We date franchising in the U.S. from 1851,
when Issac Singer provided territorial rights
for selling sewing machines to independent
representatives in exchange for fees. The
turn of the century marked the beginning of
automobile and petroleum franchising. Ben
Franklin stores pioneered retail franchising in
1920, and Arthur Murray Dance Studios
were an early service franchise enterprise in
1938.
Serious government interest in franchising
began in the 1950s during a period of rapid
economic growth following World War II.
Poorly financed, poorly managed and
fraudulent franchise operations led to public
complaints, business failures and class-
action lawsuits. A series of court cases
47
 TABLE 1 - THE FRANCHISE RULE DISCLOSURE REQUIREMENTS

1. Identifying information about the franchisor

2. Business experience of the franchisor’s directors and key executives
3. The franchisor’s business experience
4. Litigation history of the franchisor and its directors and key executives
5. Bankruptcy history of the franchisor and its directors and key executives
6. Description of the franchise
7. Money required to be paid by the franchisee to obtain or commence the
franchise operation
8. Continuing expenses to the franchisee in operating the franchise business
that are payable in whole or in part to the franchisor
9. A list of persons, including the franchisor and any of its affiliates, with whom
the franchisee is required or advised to do business
10. Realty, personalty, services, and so on that the franchisee is required to
purchase, lease, or rent and a list of any person with whom such
transactions must be made
11. Description of consideration paid (such as royalties, commissions, etc.) by
third parties to the franchisor or any of its affiliates as a result of franchisee
purchases from such third parties
12. Description of any franchisor assistance in financing the purchase of a
franchise.
13. Restrictions placed on a franchisee’s conduct of its business
14. Required personal participation by the franchisee
15. Termination, cancellation, and renewal of the franchise
16. Statistical information about the number of franchises and their rate of
termination
17. Franchisor’s right to select or approve a site for the franchise
18. Training programs for the franchisee
19. Celebrity involvement with the franchise
20. Financial information about the franchisor

reinforced franchise practices associated FTC started conducting fraud investigations

with trademark protection and purchase
requirements. In the 1960s, the Federal
Trade Commission (FTC) responded with
opinions that franchisors wielded excessive
economic power over franchisees.
The 1970s saw the beginning of state
legislation to regulate franchise practices,
requiring registration and disclosure. The
in 1975. Also that year, what is now the
North American Securities Administrators'
Association issue guidelines for a Uniform
Franchise Offering Circular, subsequently
accepted by the FTC to encourage a uniform
format for disclosure documents. In 1979,
the FTC introduced the "Disclosure
Requirements and Prohibitions Concerning
Franchising and Business Opportunities

48 Lloyds Bank plc/IFRC Strategy Seminar: Breaking Out Of The Home Market (1998)
 TABLE 2 - UNFAIR OR DECEPTIVE PRACTICES

1. To fail to furnish prospective franchisees, within the time frame

established by the Rule, with a disclosure document containing
information on twenty different subjects relating to the franchisor, the
franchise business, and the terms of the franchise agreement
2. To make any representations about the actual or potential sales,
income, or profits of existing or prospective franchisees except in the
manner set forth in the rule
3. To fail to furnish prospective franchisees, within the time frame
established by the rule, with copies of the franchisor’s standard form
of franchise agreement and copies of the final agreements to be
signed by the parties
4. To fail to return to prospective franchisees any funds or deposits
(such as down payments) identified as refundable in the disclosure
document

Ventures." There have been some
modifications to what has become known as
"The Franchise Rule" over the years. It now
requires franchisors to disclose information
on twenty subjects (see Table 1) and to
document earnings claims. Additionally, the
FTC specifies unfair or deceptive acts by
franchisors (Table 2).
In the past decade, there have been a
number of failed attempts to pass national
legislation regulating franchises. Bills have
addressed such issues as,
The executive branch of the United States
government, through the Federal Trade
Commission and the Justice Department,
monitors the franchise industry, periodically
firing shots at selected targets. In the
legislative branch, it has been more a war of
words: spoken on the floor of Congress and
in committee hearings, but with no
Congressional victories to date. The judicial
branch has been somewhat friendlier with
decisions generally favoring franchise
agreements. Thus, peaceful conditions
prevail with occasional battles occurring.

■ disclosure and consumer protection; THE ELEPHANT IN THE LIVING ROOM

■ standards of conduct for balance and Why are governments interested in

fairness in franchise relationships; and
■ collection, analysis and publication of
statistical information on franchising.
At one Congressional hearing, international
franchising was discouraged on the
argument that no government policy had
been formulated to ensure the rights and
investments of both domestic and foreign
franchisees. Private sector responses to the
legislative initiatives have included the
formation of franchisee organizations and
the opening of membership in the
International Franchise Association (IFA) to
franchisees.
franchising? Like an elephant seated in your
living room, the industry is difficult to ignore.
There are a variety of reasons for this. First
consider the economic impact. Sales
through franchised outlets now account for
more than a third of all retail volume in the
U.S. and are projected to reach 40% early in
the next century. Nearly every product
category is represented in franchising. The
industry is a huge employer. Countless
young people obtain their first jobs in
franchising, and more and more college
graduates are choosing careers as franchise
owners and managers. One authority
estimates that by the year 2010, one fourth
of the American workforce will have been
employed at some point in their lives by

Lloyds Bank plc/IFRC Strategy Seminar: Breaking Out Of The Home Market (1998) 49
McDonald's. Obviously, franchises are a
significant source of tax revenue for all levels
of government. The industry is also one of
the nation's great success stories in
international trade.
A second reason for government interest is
the vast number of constituents that have
some stake in the industry's condition.
Franchisors and franchisees as voters and
political activists seek to shape government
policies on such issues as minimum wage,
anti-trust, trade barriers, etc. The customers
of franchises and consumers in general have
an interest in prices they are charged, the
variety of products offered, after sale service
and many other factors. Competitors
complain of unfair advantages available to
franchise organizations through buying
power, negotiating strength, brand image
and so forth. Suppliers, creditors,
professional advisors, landlords, and many
others depend on franchises for major
portions of their revenues.
A third reason relates to conflict, existing or
potential, between franchisors and
franchisees. As has previously been alluded
to, government agencies have frequently
demonstrated concern about imbalances of
power and abusive behavior. Where
franchise-specific legislation has not existed,
remedies have been sought through other
criminal and civil laws.
There are, therefore, numerous justifications,
both pro and con, for government initiatives
associated with franchise organizations and
practices. We turn now to those which are
supportive of franchising.
DANCE WITH THE GAL WHAT BRUNG YUH
The free enterprise system is not perfect, but
the collapse of the Soviet Union and the
emergence of new market economies have
shown that capitalism is more effective and
efficient than the alternatives tried to date for
sustaining nations and improving quality of
life. Thus, governments have a vested
interest in supporting successful private
enterprise initiatives. Franchising has been
one of those success stories. When we find
a tried-and-true practice in Texas, we have
the saying that you should "dance with the
gal what brung yuh!" In other words, stick
with the practice that made you a success;
50 Lloyds Bank plc/IFRC Strategy Seminar: Breaking Out Of The Home Market (1998)
don't dump it for some novelty that suddenly
catches your eye. As a proven means of
creating jobs, introducing competitively
priced products, providing service to
customers, and other ways, franchising has
earned the right to expect government
support for a continued healthy existence.
One of the earliest demonstrations of
support for franchising by government was
the marriage of the U.S. military and Coca-
Cola during and after World War II. During
the war, Coca-Cola made a strategic
corporate decision to supply its beverage to
American troops wherever they might be
stationed around the globe. The Army and
Navy provided logistical support. This was
seen as a morale booster to men and
women in uniform far from home. It also
introduced Coca-Cola to the world. The U.S.
maintained a military presence in many
countries following the war and continued to
be an overseas distribution network for
Coke. The company quickly capitalized on
its market penetration by franchising to local
bottlers wherever feasible.
Much of the government assistance
available to franchises in the United States is
not unique to the industry. It is the same
type of assistance that government agencies
make available to other small or minority-
owned businesses or to corporations. For
example, franchisees and prospective
franchisees can apply for loans guaranteed
by the Small Business Administration (SBA),
for equity capital from SBA-sponsored Small
Business Investment Companies, or for
loans from SBA-sponsored Small Business
Lending Companies, just as can any small
business that meets SBA criteria. Similarly,
qualifying franchisors can seek assistance
from the Department of Commerce
regarding foreign market information and
have even received subsidies for advertising
expenses when engaging in international
trade.
Perhaps the most favorable treatment of
franchise organizations has been provided
by the court system. To date, courts have
normally upheld franchise agreements
except in cases of obvious fraud or other
illegality. Courts have protected trademarks,
trade secrets, patents, and other elements
critical to franchisors. A recent issue of
Franchising magazine devoted to an
explosion of merger and acquisition activity
among franchises indicated that federal
courts in the U.S. were unlikely to intervene
or interpret these combinations as violations
of anti-trust laws.
INLAWS AND OUTLAWS
In addition to generic assistance programs
that are available to help franchisors and
franchisees, there are also generic laws and
regulations regarding commerce that
encompass franchising. Various states have
passed franchise-related legislation, and the
Federal Trade Commission has issued
regulations targeting franchises, but
Congress has yet to pass any franchise-
specific laws.
Although, as mentioned above, bills
addressing franchising are introduced at
every session, it appears that the U.S.
Congress is content to allow franchising
issues to be handled within the existing legal
framework. There are two categories of
franchise problems that are covered as any
other business practices in U.S. law:
inducement and relationship. Inducement
problems are those of misrepresentation by
one party toward another. These involve
criminal behavior and defendants are
charged under common law or statutory
fraud. Relationship problems are
characterized by performance failure.
Plaintiffs take action in civil courts under
contract law.
State legislatures, on the other hand, have
shown more initiative. Beginning in the
1970s, California and New Jersey led the
way for other states by passing laws
regulating the information franchisors were
required to disclose to prospective
franchisees and the practices associated
with selling franchises. The theory
underlying legislative actions is that
regulation is appropriate for transactions in
which one party is likely to have far superior
information about the transaction, or far
superior ability to impose its power or will on
the other party. Such imbalances are
implicit in franchisor-franchisee relationships.
State franchise laws currently apply to
approximately one-third of franchise systems
in the U.S. Many are inconsistent with one
another or with FTC requirements.
Lloyds Bank plc/IFRC Strategy Seminar: Breaking Out Of The Home Market (1998)
Why do government officials believe that
franchisors are operating outside the law
and, therefore, need to be regulated? An
example of the rationale occurred in 1990
when the Committee on Small Business in
the U.S. House of Representatives reported
the results of a three-year investigation of
franchising. The investigation found
widespread unfair, abusive and fraudulent
practices, typically involving business
owners contractually sacrificing basic legal
rights when they became franchisees. The
report concluded that a weak regulatory
climate and the absence of federal laws or
guidelines encouraged abusive practices.
On what issues do government officials seek
to initiate action? There appear to be
several recurring problems in franchisor-
franchisee relations and in the relationships
of franchise organizations with consumers or
the public in general. Some of these
problems are included in Table 3 (The order
in which the problems are listed does not
imply importance or priority.).
In addition to the examples listed in Table 3,
franchisors sometimes have pressures to act
contrary to the interests of franchisees or
consumers because of corporate demands.
This might occur for a publicly-traded
company because of the perceived need by
management to meet short-term earnings
projections. Another occasion could follow a
leveraged buy-out and the actions necessary
to service the accompanying debt.
Government does and will play a role in
monitoring and regulating franchise
organizations. Fraud and abuse will occur in
the absence of government intervention.
There are two schools of thought, however,
as to the assertiveness of government
agencies. One is that franchising practices
can be adequately controlled within the
guidelines of existing laws and regulations
that apply generally to the marketplace. The
other is that the unique characteristics of
franchising demand legislation specific to the
industry, implying that franchises are
somehow engaged in harmful activities that
are outside the scope of current laws.
51
 TABLE 3 - GOVERNMENT CONCERNS ABOUT FRANCHISING

1. Misleading or exaggerated earnings claims by franchisors.

2. Opportunistic behavior by which the franchisor becomes a
competitive threat to franchisees.
3 The absence of legal remedies when franchisors engage in harmful,
but not illegal, business practices.
4. The lack of specialized professionals who can make franchisees or
prospective franchisees aware of risk factors.
5. Intimidation by franchisors of franchisees who attempt to form
franchisee associations, or seek alternative sources for products, or
make other efforts to create a more level playing field.
6. Restrictions on franchisees who desire to liquidate their holdings in
favor of alternative investment opportunities.
7. One-sided contracts devised by franchisors.
8. Conflicts of interest, such as when a franchisor forces franchisees to
be captive outlets for other suppliers owned by the franchisor.
9. Forcing franchisees to purchase products or supplies at higher than
market costs.
10. Restrictions on the ability of franchisees to transfer ownership.
11. Encroachment, i.e. locating a new outlet or point of distribution in
sufficient proximity to a franchisee to cause a material diversion of
sales.
12. The imposition of new restrictions as a requirement of contract
renewal.
13. Imposing noncompete clauses on franchisees.
14. Churning: terminating a successful franchise operation in order to
resell it and gain additional franchise fees.

THINGS TO COME new regulations. Alternatively, they do wish

The Wish
There is no future in forecasting. Any
prediction I might offer regarding franchising
will likely be wrong. But I can suggest what
franchisors and franchisees wish the future
will hold in the way of government initiatives.
Wishes, as I present them here, are those
events we hope will happen without our
taking action. Franchisors wish for minimal
government activism in the private sector.
They wish for no federal legislation and no
for continued support for exporting, such as
subsidies for advertising and other marketing
expenses. This has become known in the
United States as "corporate welfare."
Franchisors want no new state government
initiatives and would like to see rollbacks of
state laws. They want continued protection
for trademarks and from anti-trust laws.
Finally, they wish the Republican Party
would maintain control of the U.S. Congress
because franchise-specific bills have only
been introduced by Democratic
representatives.

52 Lloyds Bank plc/IFRC Strategy Seminar: Breaking Out Of The Home Market (1998)
Franchisees also, for the most part, prefer
fewer government initiatives. New and
prospective franchisees wish that franchisors
would be required to disclose more
information, although long-time, successful,
multi-unit franchise owners appear to accept
the position of franchisors that such
disclosures could be misleading or could
benefit competitors. Franchisees wish to
have more rights in their contracts and more
protection from retaliation when they
disagree with their franchisors or attempt to
organize. They would like to see new efforts
by government to foster venture capital for
both start-ups and growth.
In short, those in franchising wish for what
most of us wish for from government: more
money to help us; fewer obstacles to our
making profits.
The Nightmare
Nightmares are what we fear will happen in
our future if we cannot or do not prevent
them. The franchisors' worst nightmare is
an activist government. They fear a return of
the Democrats to legislative power. They
fear mandatory requirements to disclose
proprietary information. They fear they will
have to absorb onerous costs attributed to
the reports they will have to fill out for
multiple government agencies. They fear
separate and contradictory laws passed
regulating their activities in each of the fifty
states. They fear a loss of the uniqueness of
franchising by having franchisees declared
by government to be in fact employees of
the corporate entity due to their restricted
freedom of action.
Franchisees also have nightmares about
government intervention. They, perhaps
even more than franchisors fear the prospect
of added paperwork burdens and the
associated costs. Their fear of the negative
implications of government initiatives
exceeds their desire for legislation or
regulation that may offer them greater
protection in the franchisor/franchisee
relationship.
The Hallucination
In lieu of or in ignorance of sufficient and
factual information, we sometimes create
fantasy worlds for ourselves. It is one thing
Lloyds Bank plc/IFRC Strategy Seminar: Breaking Out Of The Home Market (1998)
to espouse a vision for the world as we
would like it to be. It is quite another to
imagine a false and misleading environment
and act as though it is real. The classic
example is the dictum of Henry Ford that he
would sell customers cars in any color they
wanted ... as long as it was black. He was
hallucinating to think that the world would
accept this lack of choice.
In the absence of hard and accurate data,
franchisors and franchisees alike
overestimate the share franchising
possesses of retail sales in the United
States. I have heard industry leaders throw
out figures as high as 60%. There is
widespread belief that the failure rate of
franchises is less than 10%. No solid
research supports this contention. The best
studies I have examined conclude the
success rate of franchises to be much closer
to that of independent ventures.
Some franchise owners hallucinate that they
will be exempted from minimum wage laws,
from local zoning ordinances, from charges
of false or misleading advertising, and other
laws and regulations imposed on
independent businesses. They act as
though the franchise agreement and the
operating manual provided by the franchisor
protect their behavior. Franchisors in turn
sometimes assume that they will not be held
accountable for the actions of their franchise
units.
Hallucination can be painless and may even
lead to some creative ideas. Acting as
though the fantasy is real, however, can
result in strategic and tactical blunders. By
overestimating their impact on the economy,
franchisors can also overestimate their
ability to influence legislators. Conversely,
they may bring unwarranted attention to the
industry from those who believe franchising
to be harmful to or destructive of
competition. Unsubstantiated statements of
success rates may stimulate regulatory
initiatives by those who complain that
franchisors are intentionally misleading
prospective franchisees.
Hallucinating the future is a dangerous
practice and can have ill effects on a
company and on the industry.
53
The Vision
The concept of vision involves expressing an
achievable future as you want it to be and
then devising a strategy for making it
happen. As expressed above, the future is
impossible to predict with precision. Yet we
can make reasonable projections of trends,
and we can assess the amount of discretion
we have to shape the results we seek.
Obviously, we have more discretion over our
own firms than over an entire industry. For
example, PepsiCo, one of the largest players
in business-format restaurants, recently
divested itself of KFC, Pizza Hut and Taco
Bell. PepsiCo is a long-time franchisor and
a profitable competitor, but concluded that it
was not in the interest of shareholders to
continue in fast-food, and reshaped the
corporation accordingly.
It is interesting to look back at earlier
forecasts and examine their accuracy.
Franchisors and franchisees alike can
evaluate whether they adjusted their
strategies appropriately to changing events
in order to achieve the vision they articulated
for their firms. One well-known organization
for trend-spotting in the U.S. is the Naisbitt
Group. The Naisbitt Group was
commissioned by the International Franchise
Association to identify existing and emerging
trends in franchising for a 25 year projection.
The report was issued in 1985, so we can
now take a mid-term peek at its precision.
The Naisbitt Group predicted a continuation
of the following trends:
1. Franchising at the forefront of the shift
from a manufacturing-based to an
information and service-based
economy.
2. Emphasis on convenience and quality,
particularly targeting the increasing
number of women in the workforce.
3. Movement from department and other
general merchandise stores toward
specialized retailing of products and
services.
4. Increasing participation of women and
minorities in franchise ownership.
54 Lloyds Bank plc/IFRC Strategy Seminar: Breaking Out Of The Home Market (1998)
5. Global expansion by American
franchisors.
6. Changing demographics altering the
composition of the labor pool for
franchises.
7. More state regulation.
8. More franchising education.
9. Greater customer knowledge leading to
niche marketing.
Let us suppose we had used these trends to
devise a vision for our organization. All the
trends have, with some variation, continued
to date. To ensure our long-term survival
and success, we would have visualized an
information or service-based operation
appealing through convenience and quality
to working adults. Although the Naisbitt
Group appeared to have overlooked the
WalMart phenomenon and the expansion of
other general merchandise retail chains, the
growth of that sector has, if anything,
encouraged more specialization by
franchises, which cannot compete in buying
and distribution power across multiple
product categories. Franchisors have
discovered that locally-owned franchises can
be valuable sources of market information to
help the entire network respond more
effectively to customer needs in selected
niches.
Ownership by women and minorities has
been problematic. Studies show that these
groups do not enjoy the same access to
capital as white males. Additionally, there is
some evidence that minority franchisees
often receive territories with less profit
potential and other undesirable features.
Affirmative action initiatives have been called
into question in the U.S. in recent years, as
demonstrated in all three branches of
government. The franchise that visualized
increased minority ownership and
management, however, may well have
positioned itself better for the future due to
the changing demographics of the American
population and how that has translated into
the customer base.
The vision of global expansion has had
interesting consequences. Many
multinational franchise organizations now
find their international sales and profits
exceed those in the United States. Further,
there is more growth potential and less
competition in many other countries. The
prediction missed, however, penetration of
the U.S. market by foreign-based franchisors
and the backlash in some countries toward
what is perceived as American cultural
imperialism.
The Naisbitt Group was partially correct
about changes in the demographics of the
labor pool. Franchises that anticipated the
"baby bust" years in the U.S., the lower birth
rate years of the late 1960s through most of
the 1970s, planned for attracting other
segments of the population as employees,
typically retirees or homemakers returning to
the workforce. The forecast missed the
downsizing of large corporations, the stock
market boom and robust economy leading to
full employment (4.3% as of this writing), and
the impact of immigration. Another recent
factor has been welfare reform, forcing many
chronically unemployed to lose benefits and
find employment. Franchises compete with
other employers for workers who may speak
limited English, have low levels of education,
or who may lack a sound work ethic or work
experience.
The increase in state regulation has not
grown at the rate predicted. Other than the
state of Iowa, which passed what the IFA
considers to be the most stringent disclosure
and other operating requirements to date,
there has been no significant increase in
state government initiatives this decade.
The vision toward which franchise
organizations have worked has been the
lobbying effort of the IFA to minimize,
prevent or eliminate franchise-specific
legislation. Initially an effort almost exclusive
to franchisors, most franchisees who joined
the IFA after it expanded its membership
have concurred with this lobbying policy.
The legislative agenda, therefore, has been
neither wish nor hallucination. Franchise
organizations have found that their joint
stand has influenced public policy and
lawmakers.
The IFA has played a small role in
encouraging franchise education. We at the
University of Texas at El Paso belong to the
IFA-affiliated Society of Franchising and
serve on boards of the IFA Educational
Lloyds Bank plc/IFRC Strategy Seminar: Breaking Out Of The Home Market (1998)
Foundation. The appendix to this paper
contains brief descriptions of UTEP's
Franchise Center and the Foundation. The
Foundation sponsors a fledgling Certified
Franchise Executive program. It is hoped
that the CFE designation will become as
sought after as the older designations of
other professions. One reason for the
creation of the CFE is the IFA's desire to
upgrade the image and practice of the
industry and avert attempts at legislative
remedies to abuse of franchisees,
shareholders, and consumers. Franchise
education has not caught on to any
significant extent at American universities.
The franchise executive with vision sifts
through relevant information, forecasts
achievable future scenarios, and adjusts
accordingly as low probability or unforeseen
events force changes or provide
opportunities. The expression of vision is
critical to convey to the entire network why
the organization exists and will continue to
exist.
SO, WHAT'S YOUR POINT?
What, if anything, does the foregoing have to
do with the U.K., the European Union, or any
country other than the United States? At this
point in time, the U.S. is the world's leader in
number of franchisors, franchisees, and
franchise sales volume. U.S.-based
franchisors have globalized to a greater
extent than those of other countries. Thus,
American government entities, at federal,
state and local levels, have had more
experience in grappling with franchise issues
than have other governments. This has
multiple implications. First, major areas of
concern that governments may have about
franchising have been identified. Second,
possible courses of action by government,
both in support of and to regulate franchising
have been proposed, enacted, discussed or
experimented within my country. Third, the
U.S. has been a laboratory for actions by
franchisors and franchisees to stimulate or
prevent government initiatives. Fourth, it
has also been a laboratory for observing
responses to government initiatives.
Having said all that, I do not mean to infer
that the U.S. is the source of all answers. In
fact, the U.S. may have much to learn by
approaches taken in other nations. A few
55
examples follow:
1. The European Union adopted a block
exemption protecting franchise
agreements from restraint of trade laws
applicable to other types of businesses.
The exemption permits territorial
restrictions, protection of intellectual
property rights, and allows other forms
of control by franchisors over
franchisees.
2. Mexico has authorized foreign
franchisors greater ownership rights
than have been permitted to other
business forms seeking to operate in
that country.
3. Canada and Australia have generally
followed the U.S. model, relying more
on provincial and state than national
regulation.
4. Several Southeast Asian countries rely
on the free market to regulate
commercial activity and have avoided
franchise legislation. Interestingly, this
has led to complaints by franchisors
that their products, services and
identities are being pirated.
into associations as never before. There are
general associations, trade-specific
associations, and organizations for
franchisees of individual franchisors. These
associations have agendas, sometimes
related to government policy, for the mutual
benefit of their respective memberships.
The growth in numbers of multi-unit
franchisees has contributed to this
phenomenon. Multi-unit franchisees are less
afraid of retaliation by franchisors. The
actions and impact of these associations will
bear watching by those of you outside the
U.S.
Finally, franchising has a rather remarkable
record of success in the U.S. This success
has been achieved with few franchise-
specific government-sponsored support
initiatives. A relatively free market system,
with sufficient control over abusive practices,
which only do the industry's reputation
damage, combined with property rights
protections, appear to make for a fertile
franchising environment.

There are four implications for Europe from

the United States experience that seem to
me especially worth noting. First, legislative
bodies and government regulators perceive
their value to society in action rather than
inaction. Legislators attach their names and
reputations to bills, and new laws tend to
expand government involvement in
commerce. Such expansion may be
supportive, but is as or more likely to be
controlling. Regulators rarely attempt to
reduce their oversight of the entity they are
assigned to regulate. Based on the
American experience, Europe can anticipate
continuing efforts to introduce laws and
regulations with respect to franchising.

Second, the International Franchise

Association has proved to be a powerful and
influential lobbying organization in the U.S.
If franchisors and franchisees expect to have
a voice in government initiatives toward their
industry, there may be lessons to be learned
from IFA practices.

Third, franchisees are organizing themselves

56 Lloyds Bank plc/IFRC Strategy Seminar: Breaking Out Of The Home Market (1998)
SELECTED BIBLIOGRAPHY
The Age of Acquisition. 1998. Franchising, January/
February.
Chan, P.S., and Justis, R.T. 1992. Franchising in the
EC: 1992 and beyond. Journal of Small Business
Management, January.
Committee on Small Business, House of
Representatives. 1990. Franchising in the U.S.
economy: Prospects and problems. August.
Washington, D.C.: U.S. Government Printing
Office.
Committee on Small Business, House of
Representatives. 1991. Franchising in hard times.
Hearing, March 20. Washington, D.C.: U.S.
Government Printing Office.
Committee on Small Business, House of
Representatives. 1992. New developments in
franchising. Hearings, June 17 and July 21.
Washington, D.C.: U.S. Government Printing
Office.
Honig-Haftel, S., and Jones, W.P. 1996. Franchisee
associations: A description of their partnering role
and importance within the US franchise industry.
Franchising Research: An International Journal, 1
(2): 40-44.
Sherman, A.J. (ed.). 1993. The Franchising
Handbook. New York: Amacom.
Shivell, K., and Banning, K. 1993. Running a
Successful Franchise. New York: McGraw-Hill.
Stanworth, J., Purdy, D., and Price, S. 1997.
Franchise growth and failure in the U.S. and the
U.K.: A troubled dreamworld revisited.
Proceedings of the Society of Franchising,
Orlando, FL, March.
Stern, P., and Stanworth, J. 1994. Improving small
business survival rates via franchising - The role of
the banks in Europe. International Small Business
Journal 12 (2): 15-25.
Study of franchised unit turnover. 1996. Sponsored
and Published by the Franchise Educational
Foundation. Washington, D.C.: International
Franchise Association, August 1.
Tomzack, M.E. 1994. Tips and Traps When Buying a
Franchise. New York: McGraw-Hill.
Vincent, W.S., and Kaufmann, P.J. 1996. Mandatory
earnings disclosure: Some comments and
caveats. Franchising Research: An International
Journal, 1 (3): 21-37.

Konigsberg, G. 1993. Nationwide protection for

franchisees: A matter of fairness. Business Law
News 15 (1): 13-14, 50-53.

LaFalce, J.J. 1993. Legislation to promote fair

franchising. Speech to U.S. House of
Representatives, March 11.

Mayfield, W.M. 1997. Franchising: Issues for the

future. Franchising Research: An International
Journal, 2 (1): 4-5.

The Naisbitt Group. 1985. The future of franchising:

Looking 25 years ahead to the year 2010.
Washington, D.C.: International Franchise
Association.

Purvin, R.L., Jr. 1994. The Franchise Fraud. New

York: John Wiley & Sons.

Sherman, A.J. 1991. Franchising & Licensing. New

York: Amacom.

Lloyds Bank plc/IFRC Strategy Seminar: Breaking Out Of The Home Market (1998) 57
APPENDIX A APPENDIX B

FRANCHISING TRENDS THE FRANCHISE CENTER

1. Franchising at the forefront of the shift
from a manufacturing-based to an
information and service-based
economy.
2. Emphasis on convenience and quality,
particularly targeting the increasing
number of women in the workforce.
MISSION STATEMENT
The Franchise Center has been established
to increase the level of entrepreneurship
internationally by expanding and developing
future business owners.
The Franchise Management Certificate
Program

3. Movement from department and other The Franchise Management Certificate

general merchandise stores toward Program offers quality assistance to
specialized retailing of products and individuals seeking guidance in franchising,
services. including: students, veterans, and current
business owners. Because of the University
4. Increasing participation of women and of Texas at El Paso's unique location along
minorities in franchise ownership. the U.S./Mexico border and the largest
Hispanic-majority student population of any
5. Global expansion by American university, the Franchise Center's program
franchisors. targets graduate students, regional culturally
diverse residents, and international business
6. Changing demographics altering the entrepreneurs.
composition of the labor pool for
franchises. Capitalizing on UTEP's geography and its
long term working relationships in Mexico,
7. More state regulation. the Franchise Management Certificate
Program focuses on International/Border
8. More franchising education. Economic issues. Given the recent passage
of NAFTA, the United States can expect
9. Greater customer knowledge leading to explosive growth of franchise opportunities
niche marketing. in Latin America. With 19 convenios and
numerous long-standing partnerships in
Mexico, UTEP and its faculty are poised to
facilitate these franchise opportunities to
optimize very advantage for United States
businesses.

Topics addressed in the Franchise

Management Certificate Program include:

● Franchising: Is it for you? Becoming a

franchisee;
● What works? The secrets of success;
● Getting the right start: The importance of
a business and a business plan;
● Keeping it legal: Franchising and the
law;
● Where's the money: How to keep track
of it;
● How to get the most bang for your buck:
Guerrilla Marketing;
● Risk management, financial and
otherwise;

58 Lloyds Bank plc/IFRC Strategy Seminar: Breaking Out Of The Home Market (1998)
● To err is human: Personnel and labor
law;
● Management, training, and
communications;
● The art of micro-demographics: site
selection and the lease purchase; and,
● Hot topics.
The potential benefits of the Franchise
Management Certificate Program include:
● Fostering a new generation of business
people internationally
● Establishing a support network for
potential business owners, including
pooled expertise from established
franchises and local business leaders;
and,
● Developing a business/franchise
resource center and business plan
computer lab to in include printed and
multi-media materials covering a wide
array of topics pertaining to franchising.
THE INSTITUTE OF CERTIFIED FRANCHISE
EXECUTIVES MISSION
The Institute of Certified Franchise
Executives certification is designed to meet
the need of individuals seeking to broaden
their knowledge of franchising and to
enhance their professional standing. The
program will enable participants to develop
their expertise, demonstrate their dedication
to franchising, and work at their optimum
level of efficiency.
The program is also designed to meet
franchising companies' need for motivated,
thoroughly grounded, broad-based
executives and managers at all skill levels.
For franchising, the ICFE establishes a high
standard of competence. It defines
franchising's commitment to professionalism
and helps franchising attract and retain the
finest and most-promising individuals.
The ICFE is an integral part of and the next
step in moving all of franchising to a higher
level of accomplishment.
Lloyds Bank plc/IFRC Strategy Seminar: Breaking Out Of The Home Market (1998)
AUTHOR’S BACKGROUND
Dr. Frank HOY
College of Business Administration
University of Texas at El Paso
El Paso, TX 79968-0545
USA
■■■■■■■ (Phone)
■■■■■■■ (Fax)
■■■■■■■ (E-mail)
Frank Hoy is dean of the College of
Business Administration and holds the Chair
for the Study of Trade in the Americas at the
University of Texas at El Paso. He began
his academic career at the University of
Georgia, where he served as state director
of the Georgia Small Business Development
Center. Subsequently, he joined Georgia
State University as the Zwerner Professor of
Family-Owned Businesses.
Dr. Hoy specializes in family business,
franchising, and entrepreneurship as a
strategy for economic development. He
chaired a Congressional Commission, the
Central European Small Business Enterprise
Development Commission, advising the
governments of the Czech Republic,
Hungary and Poland on establishing small
business assistance programs. He is a
member of governing boards for both the
Family Firm Institute Education and
Research Foundation and the International
Franchise Association Educational
Foundation.
Dr. Hoy has served as an officer in several
academic associations, including the
Academy of Management, the International
Council for Small Business (ICSB), and the
United States Association for Small
Business and Entrepreneurship (USASBE).
He is past editor of Entrepreneurship:
Theory & Practice and special issues editor
for the Journal of Business Venturing. He
has been elected a USASBE Fellow and a
Wilford White Fellow of the ICSB. He is a
recipient of the Leavey Award for Excellence
in Private Enterprise Education from the
Freedoms Foundation.
59
1991 to Present - University of Texas at El
Paso, El Paso, Texas - Dean, College of
Business Administration, Texas
Commerce Bank Professor of Business
Administration, 1994-1997, Chair for the
Study of Trade in the Americas, 1997-
present
Administrative duties include responsibility
for an AACSB accredited College of
Business consisting of four departments
offering - undergraduate degrees and three
graduate degrees, and a Computer
Applications Learning Center. Established
the C e n te r s for E n t r e pr en eu r i a l
Development, Advancement, Research, and
Support in 1992. Established the Family
Business Forum, 1993. Established the
Franchise Center, 1994. Director, Small
Business Institute Program, 1994-97.
Established the Business Advisory Council,
1994. Established the Center for the Study
of Western Hemispheric Trade, 1995.
Accreditation of College reaffirmed by
American Assembly of Collegiate Schools of
Business, 1996. Member, Steering
Committee for the NAFTA Intermodal
Transportation Institute, 1997-present.
Courses taught: Management Strategy and
Policy (Graduate); Small Business
Management (Under-graduate); New
Venture Creation (Undergraduate); Corp-
orate Entrepreneurship (Graduate); Family
Business Management (Undergraduate)
1988 to 1991 - Georgia State University,
Atlanta, Georgia - Carl R. Zwerner
Professor of Family-Owned Businesses,
Department of Management
Courses taught:
Seminar in Organization Design and
Implementation (Ph.D.); Strategic Planning
and Policy Formulation (Executive MBA);
Policy (Graduate); Entrepreneurship and
Enterprise (Graduate); Entrepreneurship and
New Venture Management (Undergraduate);
Management Concepts, Theory, and
Practice (Undergraduate)
1984 to 1988 - University of Georgia,
Athens, Georgia - Director, Small
Business Development Center of Georgia
Administrative duties included responsibility
for a statewide extension program affiliated
with the University System of Georgia
offering counseling, education, and research
services to small businesses. One of the
first SBDCs in the nation to be certified by
60 Lloyds Bank plc/IFRC Strategy Seminar: Breaking Out Of The Home Market (1998)
the Association of Small Business
Development Centers, 1987.
1983 to 1988 - University of Georgia,
Athens, Georgia - Associate Professor of
Management, College of Business
Administration
Teaching responsibilities included co-
ordinating the Entrepreneurship curriculum
and teaching Small Business Management
and Entrepreneurship at the graduate level.
1981 to 1984 - University of Georgia,
Athens, Georgia - Director, Division of
Research and Experiential Education,
Small Business Development Center
Obtained extramural funding for and founded
the Center for Business and Economic
Studies. Statewide Co-ordinator of Small
Business Institute Programs at fifteen
colleges and universities in Georgia.
1978 to 1983 - University of Georgia,
Athens, Georgia - Assistant Professor of
Management, College of Business
Administration
Teaching responsibilities included Business
Policy and Small Business Management
courses at undergraduate and graduate
levels.
1978 to 1981 - University of Georgia,
Athens, Georgia - Director, Division of
Residential Instruction, Small Business
Development Center
Initiated and supervised College of Business
Administration's Co-operative Education
Program. Obtained five-year grant from
Department (then Office) of Education to
establish co-op program. Wrote grant
proposals to obtain support for faculty
conducting research on small business.
1975 to 1978 - Texas A&M University,
College Station, Texas - Lecturer
Primarily taught the Organizing Process.
Also taught Introduction to Business.
1973 to 1975 - Tarleton State University,
Stephenville, Texas
Instructor. Primarily taught marketing
courses, but also management, finance, and
business law.
 ASPECTS OF INTERNATIONAL FRANCHISING
FATTY FRIES LIMITED - CASE STUDY
Gordon HARRIS
Wragge & Co., Birmingham, UK
THE FRANCHISOR
Fatty Fries Limited specialises in very high
fat-content fast foods and operates a well-
established network of franchises throughout
England and Northern Ireland.
Fatty Fries Limited has decided that it wants
to expand its operation overseas and, after
carrying out market research, has decided to
try and break into the USA. It has also
identified a target market in South East Asia.
Fatty Fries Limited call me to ask me to draw
up a franchise agreement, for use
internationally, along the lines of their current
franchise agreement. I suggest that things
may not be so simple and that there are a
number of other things they need to
consider. I invite them to a meeting to
discuss.
At the meeting Fatty Fries Limited want to
concentrate on their expansion plans for the
USA. It is their idea that, based on the
success of their Northern Ireland operation,
they simply grant franchises to interested
individuals/companies in the USA. They are
intending to send their marketing director to
the States to sell franchises and they think
they will concentrate, initially, on California
where they have identified a niche market.
However, they also inform me that they have
been approached by two Californians, Jock
and Jo, who have expressed an interest in
taking a master franchise for the USA.
These individuals have previous experience
in the fast food industry in the USA and at
one time ran a successful business, since
bought out, in this area. Fatty Fries Limited
are not sure whether this is the way to go
and want advice on this.
Fatty Fries Limited are also interested in
some general advice on international
franchising which may be relevant to
expansion overseas generally and, in
Lloyds Bank plc/IFRC Strategy Seminar: Breaking Out Of The Home Market (1998)
particularly, expansion into South East Asia.
STRUCTURE OF AN OVERSEAS NETWORK
Direct franchising?
Although Fatty Fries Limited have franchised
successfully in Northern Ireland I explain that
because NI is geographically close and, in
terms of the market, fairly similar to England,
it has been easy to provide adequate
support and consultation for the franchisees
there without needing to relocate any part of
its business there, nor to establish a branch
office. Monitoring the performance of those
franchisees based in Northern Ireland has
also not been a problem. However, when
looking to expand, for example, into the USA
they need to consider the fact that being a
direct franchisor with no presence there is
unfeasible given the need to provide support
and assistance and the need to monitor
performance.
Also they should consider that as the market
in the States and is potentially quite different
from that in England and NI it may be
advantageous to work together with Jock
and Jo, or at least with a party that does
have experience of the market.
Subsidiary operation in the USA?
Advantage:
■ no need to share control with a third party
Disadvantage:
■ still requires a physical presence in the
country in question
■ need to fulfil all registration, accounting,
disclosure and other requirements which
may be necessary according to
companies legislation in the country in
question
61
■ cannot benefit from knowledge and
experience of a third party
Joint Venture?
Advantages:
■ makes use of the knowledge and
experience of a third party
■ gives 'presence' in the country in question
without Fatty Fries Limited having to
physically establish an operation there
■ splits the risks BUT equally Fatty Fries
Limited will be liable in accordance with
its stake in the joint venture company
Disadvantages:
■ difficulties which are inherent in all joint
venture operations of agreeing on a
decision making process; including
provisions dealing with dispute resolution
and settling shareholding ratios and
rights
■ without having tested the market and the
abilities of the potential joint venture
partner this could be an option which is
dangerous as it involves considerable
time and cost to establish and could be
difficult to get out of if things do not go to
plan
Other issues:
■ if a joint venture arrangement is entered
into then a separate master franchise
agreement is going to be needed to
protect Fatty Fries Limited
Master Franchise Agreement?
Advantages:
■ the master franchisee is the 'presence' in
the USA and has the responsibilities of
the franchisor and the obligations to
develop and monitor the franchise
network
■ the master franchisee has direct liability
62 Lloyds Bank plc/IFRC Strategy Seminar: Breaking Out Of The Home Market (1998)
to the franchisees for fulfilling the
franchisor's obligations
Disadvantages:
■ Fatty Fries Limited loses control over
individual franchisees in the territory
which impairs their ability to control the
manner in which their franchise system is
being established
■ still involves reliance on the skills,
experience and ethical qualities of the
master franchisee - although master
franchise agreement will allow for
termination of it in the event that
franchisor's obligations are not fulfilled,
termination creates serious difficulties
due to the impact on the sub-franchisees
and could well result in the breakdown of
the system in that country in which case it
potentially very difficult indeed for Fatty
Fries Limited to reintroduce its franchise
system
■ is there enough money to split fees
between Fatty Fries Limited and the
master franchisee?
Area Development Agreement?
Consider the option of granting an Area
Development Agreement (ADA) which would
require the licensee (for example Jock and
Jo) to open a certain number of outlets
themselves (eg not sub-franchised or sub-
licensed) within the defined territory.
Advantages:
■ direct control over the development of the
franchise network due to direct
contractual relationship with the licensee
(because Fatty Fries Limited will want to
enter into a separate franchise
agreement in respect of each unit)
■ licensee has to achieve certain targets -
eg as to number of outlets opened within
a given timescale - as well as this being a
positive obligation on the part of the
licensee it also means that the risks of
'market tolerance' are taken on by the
licensee
■ no splitting of fees
■ can be used as a pre-cursor to granting
master franchise rights within the territory
if the franchise operation proves viable
Disadvantages:
■ requires Fatty Fries Limited to provide
close support, training, consultation and
monitoring - although this does not
necessarily mean that a physical
presence is required - and this will
undoubtedly lead to increased costs
■ the direct contractual relation between
Fatty Fries Limited and the licensee
means that Fatty Fries Limited is also
exposed to the liability issues of direct
franchising
Opinion:
The grant of ADAs should be considered
more often where a franchisor wishes to
expand overseas, especially where these
are used as a means of testing out the
market without requirement for a physical
presence nor with all the financial risks
associated with direct franchising, taking
advantage of the skills and experience of a
'local' person'/company and having direct
control of the establishment of a network. It
does require the franchisor to be more
closely involved in training, support and
monitoring but this is not necessarily a bad
thing and if the ADA is used as a pre-cursor
to granting a master franchise to the
licensee (perhaps after the targets have
been met) then may prove considerably
advantageous as way of laying the
groundwork and establishing the ethics of
the franchise operation before this is
diversified through a master franchise
structure.
Other?
Fatty Fries Limited is interested in expanding
into South East Asia. According to the
ASEAN focus group many local business
people in South East Asia do not understand
the concept of franchising. They also point
out that many franchisees, including a
master franchisee, would expect to be
Lloyds Bank plc/IFRC Strategy Seminar: Breaking Out Of The Home Market (1998)
chased for payment and therefore a higher
level of follow up and flexibility in structuring
the payment of fees is required. These are
all considerations to be taken into account
when deciding on the most appropriate
structure.
In some countries it may even be true to say
that permitting the use of trade marks in
connection with a franchise system could be
dangerous because of the risks that such
marks may be subject to unauthorised use
by third parties, or even by a master
franchisee that has terminated
arrangements. In this case it may be prudent
for Fatty Fries to consider adopting new
trade marks for use in connection with the
system in these countries.
As a result of the above, consideration may
be given to granting a simple licence
agreement for a particular country, or part of
it, where the franchisor's obligation is to
provide initial training and set-up assistance
(with no on-going obligations of support etc)
and in return for the licence a set monthly
fee would be payable by the licensee (or
even escalating fees for the number of
outlets opened) as opposed to a royalty
based on sales.
Opinion:
There are of course a number of problems
with adopting simple licence arrangements
but such licenses should not be discounted
where they may make a venture
economically viable which otherwise would
probably not be, and which may offer a
creative solution to some of the typical
problems which arise as a result of cultural
differences in ways of doing business.
Other Issues to be considered in advising
on structure:
■ taxation considerations
■ foreign investment regulations - for
example, many of the ASEAN countries
have regulations which require local
persons to hold shares and to participate
in new business enterprises which would
prevent Fatty Fries Limited from setting
up a wholly owned subsidiary. In some
countries the regulations are such that all
of the equity would need to be owned by
63
 locals.
TERRITORY
Fatty Fries Limited have said they want to
expand in the USA but that they have
identified a particular niche in California.
Advise that as the USA is so vast, and each
state has its own laws, a single master
franchise for the whole country would be
unmanageable. There is no reason why a
master franchise or ADA cannot be granted
which defines the territory by state, rather
than the whole country and in fact,
depending on the market potential and size
of any given area, the territory for a master
franchise or ADA may even be smaller than
that.
LOCAL LAW
Let us assume that Fatty Fries Limited, after
consideration, has decided to go down the
route of granting a master franchise to Jock
and Joe (who have set up a new company,
J&J Inc for that purpose) for the state of
California.
They instruct me to draw up a master
franchise agreement and tell me that they
want to get it all signed up straight away.
I would then have to disappoint them and
advise them that there are a number of other
considerations which they need to take
account of, arising from laws and regulations
in the USA as a whole and, specifically, in
California. Setting up a franchise in a foreign
country is not the same as setting one up in
England - one important difference between
the two jurisdictions is the mandatory
disclosure requirements which franchisors
are obliged to prepare.
Disclosure requirements
The Federal Trade Commission of the USA
requires every franchisor to prepare an
extensive disclosure document for each of
its prospective franchisees. In California the
name of this document is a Uniform
Franchise Offering Circular and it requires
the franchisor to provide information about
many things, including a history of the
company and its franchising activities, as
well as details of key management
64 Lloyds Bank plc/IFRC Strategy Seminar: Breaking Out Of The Home Market (1998)
personnel; financial statements; details of
any litigation with which may have been
brought against the company and so forth.
In the case of the Uniform Franchise
Offering Circular these disclosure
requirements are complex and it would
almost certainly be necessary to seek the
advice of a local attorney with relevant
experience on the form, content and wording
of such a document to ensure compliance
with this law which, in the event of non-
compliance, may render the company liable
to civil and in some cases even criminal
sanction.
It should be remembered that not only will
Fatty Fries Limited have to comply with
these disclosure requirements in respect of
offering a master franchise, but J&J Inc will
also have to comply when offering individual
franchises and for this reason an obligation
will need to be included to this effect in the
Master Franchise Agreement.
The USA is not unique in imposing
mandatory disclosure requirements so when
Fatty Fries Limited is looking to expand into
other countries there is a need to seek
advice from local lawyers on whether such
requirements exist and, if so, what exactly
needs to be done to ensure compliance.
Other relevant laws
Fifteen states of the USA, California
included, have enacted laws which require a
franchisor to register with the relevant state
administrator prior to the offer and sale of
franchises. There are also a number of
'business opportunity laws' which may
regulate the offerings of newer franchise
companies whose trademarks are not yet
federally registered.
In light of the above it will be seen that it is
essential that once the master franchise
agreement is drawn up, it is vetted by a local
lawyer to ensure:
■ the agreement complies with relevant
laws and regulations in the territory to
which it applies
■ the agreement does not omit information
which may, as a result of local law, have
to be included nor clauses which should
 be included to protect Fatty Fries Limited
(such as obligation on J&J Inc to comply
with disclosure requirements)
■ advice is given on other aspects of local
law which may affect the implementation
of the franchise system - these may
include:
- competition laws
- customs and import regulations (if
relevant)
- exchange control provisions
- taxation treatment of payments
- employment and labor law
LOCAL ETHICAL ENVIRONMENT
Consider whether any franchise associations
or ethical codes of conduct for franchisors
exist in the country which is the target for
expansion. Membership/compliance may not
be mandatory but desirable (for reasons, not
least, including marketing and profile of the
business) and the franchisor may want to
include obligations in the master franchise
agreement for the master franchisee to
become a member/adhere to such codes - a
marketing point more than anything.
GOVERNING LAW
Amongst lawyers in this country there are
different opinions (surprise, surprise) on
whether master franchise agreements
should be governed by English law or by the
local law of the country or state in which the
master franchise is to operate. It is my
opinion that, apart from certain limited
exceptions, the contract should be governed
by and interpreted in accordance with local
law.
The franchisor will want the ability to sue for
infringements, on the part of the master
franchisee (or the area development
licensee), and that master franchisee is
going to be resident in the country in which
the franchise is operated. Logistically,
therefore, it is often going to be easier to
bring judgement in the country in which the
infringement has occurred and in which the
Lloyds Bank plc/IFRC Strategy Seminar: Breaking Out Of The Home Market (1998)
franchisee is resident.
Quite apart from that, a judgement obtained
by an English court against a foreign master
franchisee will need to be enforced in the
country in which the assets of that master
franchisee are located. In many cases, and
certainly in the USA, judgements of foreign
courts cannot be enforced in the local
jurisdiction as such and instead judgement
must first be sought in (or transferred to) the
jurisdiction where enforcement is to take
place. In that case, why not bring the action
in that jurisdiction in the first place?
In addition, there are a number of
jurisdictions which do not recognise the fact
that a contract is stated to be governed by
English law and will, in the event that the
master franchisee wishes to bring an action
against the franchisor for example, apply
their own law anyway. This is the case in the
United Arab Emirates, which is obviously a
common choice of market for expansion
overseas.
SUMMARY
■ Fatty Fries Limited will need to decide
which structure is most suited to them
moving into the American market and any
other market place they have in mind. A
consideration of the nature of the market
and the culture of the target country, as
well as its local laws (in particularly in
respect of foreign investment and
taxation provisions) will have a bearing
on this decision.
■ Fatty Fries Limited must have regard to
local laws and requirements in the target
country (no matter what law applies to
the contract itself) and in this respect
should accept that advice of a local
lawyer is essential.
■ What, if any, are the franchise
associations or ethical codes which apply
in the target country and does Fatty Fries
Limited want itself of any master
franchisee/area development licensee to
become a member of any such
association and to comply with any such
ethical code?
■ Consideration should be given to the
governing law of the contract - unless
65
 there are convincing reasons to the AUTHOR’S BACKGROUND
contrary (eg the franchise is to operate in
the People's Republic of China!) then the
law of the country/state in which the Gordon HARRIS
franchise is to be operated should apply. Wragge & Co.,
55, Colmore Row,
Birmingham. B3 2AS
U.K.

Tel: 0121 233 1000

Fax: 0121 214 1099

Gordon joined Wragge & Co in 1982, and

became a partner in 1990. He has over 12
years experience in franchising, acting for
many household franchising names. He is
Wragge & Co's nominated representative for
the British Franchise Association and is
currently the BFA's Affiliate Representative.
He is the author of Franchising: A
Commercial and Legal Guide.

Gordon is also an associate of both the

Chartered Institute of Patent Agents and the
Institute of Trade Mark Agents, and a
member of the Intellectual Property Lawyers
Association, the International Association for
the Protection of Industrial Property (AIPPI),
the Anti-Counterfeiting Group, the
International Trade Mark Association, and
the Licensing Executives Society. He is a
mediator accredited by the World Intellectual
Property Organisation, and the Centre for
Dispute Resolution.

FINAL VERSION
Vol_3_1.PUB 22-Jul-98

Re-set 5-Jan-2011
With redactions of personal
details as indicated

66 Lloyds Bank plc/IFRC Strategy Seminar: Breaking Out Of The Home Market (1998)