Service providers’ role to support sustainable franchise industry

Maltese service providers have a very important role in safeguarding the future health of the local franchising industry.

The legal professionals’ role is particularly important as franchising is a contractual arrangement between two parties, but so is that of financial advisors, accountants, tax advisors, bankers, management consultants, and marketing brokers.

A franchise research and strategy project work conducted by the International Franchising Centre and funded by the Commonwealth Secretariat, was managed by Malta Enterprise with the participation of the Malta Chamber of Commerce, Enterprise and Industry over the past 14 months.

The exercise examined existing franchising structures and devised a strategy which mobilises Maltese SMEs out of the country into other markets through the use of business format franchising.

The initial assumption was that the bulk of franchising activities may be taking place within the local franchisee sector. These would be companies or individuals who acquired master franchise rights from foreign brands for Malta, with the right to either directly grow the network into North Africa or sub-franchise those rights using local sub-franchisees. Hence, the need was felt for possible support of the Maltese franchisee to generate more business and grow their network out of Malta.

It was very quickly realised that there are also a noticeable number of indigenous Maltese companies seeking to use business format franchising to grow their own network either at home or abroad. The challenge of a Maltese company in using franchising as a growth vehicle is that a local brand holder will reach critical mass rapidly due to the small size of the island, so it will not have the full opportunity to trial the mechanics of franchising at home before getting on the road of international expansion.

The franchisor has a dual challenge: to grow internationally and to grow through franchising – if their concepts and systems meet the six major criteria of franchise expansion:

The concept has the ‘staying power’ and should not be fad or fashion; systems have to be fully developed and proven to be successful and resilient; the operation has to be profitable for both parties and have sufficient track record to ensure its sustainability; the method of operating the business must be such that others can be trained in its day-to-day operation; the business must be replicable; and the franchisor’s corporate culture must allow the management team to effectively support the franchise network.

A support programme must be put in place for the company to accurately assess whether or not a business system is realistically ready to be franchised. If not, a gap analysis should be conducted to determine what is necessary for a brand holder to work towards a fully developed system and meet the pre-requisites.

So who is going to assess or prepare for whether a brand can or should be franchised, the impact on the brand holder’s business, a coherent international development strategy and international franchise model, the requisites of franchise documentation and agreements, and financial planning?

An ethical franchisor should offer a comprehensive tailor-made proposition and documentation to a franchisee.

The Maltese franchisor would seek independent advice from professionals, particularly a corporate lawyer, as franchising is primarily a contractual arrangement between two parties. Other professionals are also to be involved: It must not be forgotten that a franchise is all about a holistic business model.

A solid development plan will have to rely on every single one of the above key players. No single service provider can successfully offer the full suite of advice to a franchisor or franchisee. The role of an ethical lawyer is to put the commercial terms and conditions into a robust franchise development and ancillary agreement, ensure the concept and system travels well in other jurisdictions and conduct a legal audit on behalf of their clients and review the franchisee’s legal agreements given to them by their franchisors.

The lawyers should not get into offering commercial advice without considering the full supportive commercial and financial planning and modelling which must be undertaken before devising those commercial terms. Taxation plans should be discussed with tax advisors and accountants, to ensure repatriation of royalties are done in a tax efficient manner and that the company set up enhances future benefits from hard labour. A banker should review franchisee and franchise offers and relevant documentation to ensure they are comprehensively prepared to minimise any risk of financial failures.

It is hoped that ethical Maltese service providers will raise their awareness of international franchising practices and affairs through appropriate institutional contact such as Malta Enterprise, Malta Chamber, the British Franchise Association or the International Franchise Federation.

• Farah Rose was recently in Malta to lead a two-day workshop at Malta Enterprise for professionals on international franchise development.

Ms Rose is director of international development at The International Franchising Centre of the UK.