Where International and Domestic Franchising Strategies Converge
by Ed Teixeira
Franchisors engaged in international licensing need to recognize that
with few exceptions the days of high upfront licensing fees are over.
A number of years ago some franchisors that franchised internationally had a
practice of trying to get the highest licensing fee as possible upfront. The
justification for this practice was based upon several factors:
- The initial licensing fee was seen by the franchisor as
primarily a profit generator rather than as reimbursement for
related present and future franchisor expenses, costs of
training, franchise system value and development costs.
- Franchisors were fearful of not receiving future royalty
payments and felt that a higher upfront license fee could serve
as hedge against this happening. Fear of costly litigation in a
foreign country was a related issue.
- Some franchisors preferred receiving a higher licensing fee
in lieu of providing ongoing services and support. In other
words, there was little interest in a traditional continuing
- During this time international franchising was in the
formative stages and some franchisors were apprehensive and
unsure about the risks and saw a high licensing fee as an
These appeared to be valid reasons at the time, even though the practice
differed compared to the relationship between an initial franchise fee and
ongoing royalties in domestic franchising.
In today’s world of international franchising much has changed. Given the growth
of franchising throughout the world and the amount of information available from
the Internet and other sources, licensee candidates are more franchise savvy.
Many recognize the difference between a reasonable license fee and one that is
considered excessive. In addition, a qualified international licensee recognizes
that capital needs to be available to open and grow the franchise operation.
Franchisors that choose to go international should realize that there needs
to be balance between the initial fee and income from ongoing royalties.
Although the licensing fee will be higher and the ongoing royalty percent lower
compared to a domestic franchise, the fact remains that franchisors should
structure their international program with the same expectation as their
Franchisors should recognize that the bulk of their revenues will flow from a
successful international operation. If there is doubt regarding this fact than
perhaps the franchisor has the wrong candidate or the wrong country.
© 2013 FranchiseKnowHow, LLC
Ed Teixeira is the President of FranchiseKnowHow, LLC. He
can be reached at firstname.lastname@example.org