Franchising is a proven route to the successful international expansion of businesses such as schools, pharmacies and care providers. In the hotel and retail sectors global brands such as Hilton and H&M use franchising strategically to grow in emerging markets.
However, it is not the exclusive preserve of such mega brands. It is also an international expansion method that can be used successfully by NHS Trusts and private healthcare providers with an appetite for growth. Within the UK domestic market, potential for growth is very limited and entering the more lively foreign markets is something that many NHS trusts and private healthcare companies are now having to consider. You can generate another income stream through a franchise business model.
The well travelled way of doing business
Franchising is an established way of expanding a business internationally. Annually it accounts for turnover of USD$300 billion in Europe, USD$850 billion in America and USD$130 billion in Australia. Together with management agreements, it is the preferred form of international expansion for many successful service brands. To put it simply, international franchising works!
This is why brands such as Boots, Home Instead Senior Care, Planet Pharmacy and Celesio have looked at franchising as a tool to expand business internationally into markets as wide ranging as the Middle East, China, India, South East Asia, Russia, Eastern Europe and Africa.
Benefits for all concerned
Franchising works because it offers real benefits, not only to the brand owner but also to its franchisees. It offers a number of clear advantages to NHS Trusts looking at internationalisation. It removes the need for the NHS Trust to invest capital and other substantial resources in the venture. The advantages are clear and obvious. In order to open a new hospital abroad, a budget in excess of US$200 million would easily be needed. A franchise strategy, on the other hand will see the local partner make the bulk of the investment whilst benefiting from the knowhow, good name and quality assurance program of the NHS Trust that they are partnering with. Franchising enables NHS Trusts to access the required capital and grow the business internationally without significant expenditure or external funding.
Franchising also allows the NHS Trust to attract high quality local investors. These investors are highly sophisticated and have a great incentive to make the project a success in their local market. They also have a strong understanding of the local market. So franchising not only enables you to grow your business internationally by taking advantage of the capital and resources of local investors, but also enables the local investor to have access to the blueprint of a strong proven concept with a known reputation.
Few local investors have the resource and time to research their own specialist know how to put together an innovative and successful new concept for the local market that would generate attractive levels of income without the trial and error that goes into building a successful new healthcare business.
Preparing the launch
However, in order to take advantage of the potential that franchising offers, the NHS Trust needs to plan its approach carefully. One of the first signs of success seems to be an influx of offers from foreign real estate developers interested in taking a franchise for Russia or China or the Middle East. Whilst this may be very flattering, it is important to be discerning. A franchise which has been well planned, structured and executed can have a substantial positive impact on a business but one that has been done as a response to an opportunistic approach from a foreign developer can be catastrophic. The reality is that on those relatively rare occasions where international franchises fail, this is usually due to cooperation with poor quality local partners that do not adhere to the necessary quality standards.
NHS Trusts must also take expert advice on how to structure the franchise in order to optimise its return, protect the brand and other intellectual property rights and comply with the legal requirements in the target markets. An inappropriately structured deal can mean that the most promising commercial arrangements fail. Before jumping into an arrangement with a local licensee the healthcare company needs to ensure that its brand is fully protected by way of trademark registrations in the target market and that those marks are held in the most taxefficient, intellectual property friendly manner. That requires some expert professional advice before negotiations start. Trademark pirates are a way of life in some markets. Additionally, there are countries where the registration of a trademark can take between two and four years. This can result in promising negotiations aborting because the trademark situation is unclear until registration has been achieved. Early planning is therefore key.
The basic structure for international hospitality franchises is straightforward. The franchisor grants the local owner the right to operate a hotel at a given location for a set number of years. A hotel franchise agreement will usually be for between 10 and 20 years. Generally, the local partner will either operate the property itself or engage a local management company to do so. Which approach is adopted depends very much on the partner and their operating experience. If they already own and operate hotels, they do not need to engage a third party manager. If, however, they are new to hospitality, the franchisor should insist that arrangements for quality management are put into place.
In addition to the plain vanilla unit franchise for a single property, more sophisticated structures are also available and should be considered. For example, joint venture franchises are possible and some franchisors will take a limited equity stake in the franchisee with respect to strategic markets. Management Agreements can be another attractive structure where the NHS Trust is able to make some senior management available to run the local operations. Typically, the franchisee/local investor would pay the salaries of such senior managers as well as a success related incentive fee for the management services. Incentive fees are a proven method of permitting participation by UK entities in the profit of its foreign partners without the risk and complication that goes with an equity investment.
How about joint ventures ?
Some NHS Trusts are being offered joint ventures with local partners. Typically, this involves taking an equity stake in the local business and a profit and loss participation. The obvious attraction would be a profit share. But, these structures are high risk and should only be attempted by experienced global organisations with access to funding and a large budget for legal and consultancy fees. Joint Ventures can result in the total loss of the cash investment and significant management time being diverted from the UK operations without any financial reward. The risk that the NHS Trust is subsequently criticised for sending staff and consultants abroad whilst there are waiting lists in the UK would seem obvious.
Empirically most joint ventures fail and more recently many companies in the global sphere have converted their problem joint ventures to franchise and management type arrangements