For many non-U.S. franchise concepts, entering the U.S. market is the pinnacle of international expansion. The IFA's Franchise Business Economic Outlook for 2017 estimates the economic output of franchise businesses in the nation at $711 billion, with 745,000 franchise establishments. Simply stated, this massive market cannot be ignored if you want to be a truly global franchisor.
Launching in the U.S. market may seem daunting to international franchisors.
No doubt, it's a major undertaking that should be planned carefully. However, the barriers to entry may not be as treacherous as they first appear. Recent successful U.S. market launches by international franchisors shed light on the possibilities. International franchisors eyeing the U.S. market should consider the following best practices:
Lesson i: CREATE A REALISTIC FINANCIAL PLAN FOR YOUR U.S. FRANCHISE MARKET ENTRY.
Capital requirements to set up a U.S. franchising program will vary depending on the franchise. However, typical costs range from $150,000 to over $500,000 before a franchisor can begin selling franchises (not including startup costs for company-owned pilot locations.) Also, it's not all legal fees. Recent international franchisor launch budgets indicate that legal fees accounted only for about 10 percent to 20 percent of total first year franchisor costs. Instead, personnel and marketing costs formed the bulk of the expense budget.
Bear in mind that this capital commitment should result in a return on investment within a reasonable timeframe. A simple five- or 10-year financial projection will help a franchisor clarify the risks and returns. How many franchises could you open in the U.S.? What would that represent in terms of new franchise fees and ongoing royalties? What would be the resulting valuation of your U.S. franchisor company in three, five or 10 years? Some young, high-growth U.S. franchisors reached lucrative valuations of $10 million within five years.
Lesson 2: PROOF-OF-CONCEPT IS A CRITICAL FIRST STEP TO VALIDATE YOUR FRANCHISE IN THE U.S.
Without existing units in the U.S. market, it can be difficult for a foreign franchise to sell and support U.S. franchises in the early stages. In addition, U.S. states requiring franchise registrations may reject a franchise without viable U.S. operations. Bottom line: an international franchisor that is serious about entering the U.S. should set up a pilot unit to demonstrate proof of concept.
A recent example is the...