Bank Alfalah | SME Toolkit

Global Expansion

Provided by My Own Business, Content Partner for the SME Toolkit

OBJECTIVE:

International trade is increasingly important to many growing businesses. It is equally attractive to both B2B and B2C firms. This session will shed light on what you need to know when expanding internationally.

  • International trade as a growth opportunity
  • A tool for hollow corporations
  • International franchising
  • Advantages and disadvantages of international trade
  • Common mistakes made in international trade
  • Helpful Tools
    • Get advice from experts
    • Online resources
    • U.S. Government resources
    • Non-government resources
  • Top Ten Do’s and Don’ts

The importance of global expansion as a growth opportunity has been stated most clearly by Dr. Lucius Riccio, a professor at Columbia Business School:

“It is a time of global transformation and change made possible by logistics innovation. A time when the smallest companies can compete with the largest ones – – – sometimes with the advantage of being more nimble and quicker to seize opportunities.”

In most countries of the world, international trade represents an important share of the gross domestic product. In considering alternatives to grow your company, it will be worth investigating this accelerating trend which is the outcome of increasing industrialization, transportation and communication tools. You can follow the footsteps of large corporations that are already looking more beyond their country borders for growth. In many cases such as General Electric, Coca-Cola and Proctor and Gamble, offshore earnings are beginning to outstrip domestic profits

International trade is increasingly important to many smaller growing businesses as well. It is equally attractive to either business-to-consumer (B2C) or business-to-business (B2B) firms. Your opportunities can lie either as a buyer or a seller.

  • You may want to add cashmere sweaters to your line. As a buyer, you will need to become an importer in order to compete in the marketplace.
  • As a seller, you may want to establish markets in other growing economies. (And as a buyer you may want to outsource manufacturing to a firm in Asia.)
  • As a business-to-business manufacturing operation, you could utilize online conferencing and IT skills to expand your sources of supply as well as your customer base.

The purpose of this session is to enable you to review the highlights of international trade and provide you with helpful resources. Your global expansion will involve complexities including documentation, shipping, financial, legal, communications, governmental regulations, licensing and property rights. So you will also need to expand your knowledge beyond the scope covered here.International trade is especially appropriate for the rapidly growing number of “hollow corporations.” A hollow corporation is a business without a factory and with a minimum number of employees in which manufacturing is performed by outside suppliers. A hollow corporation might depend on outside suppliers for virtually all of its products, such as an American toy company importing product from China. Or, it might depend on outside suppliers for selected components in its overall product line, such as The Boeing Company.Franchisors have been expanding globally for decades. As they saturate their domestic markets, they depend more on global expansion. Many franchisors avoided dealing with individual franchisees and instead have signed up area licensees or even country licensees.

Complying with taste and other preferences is important. South American countries have a taste for sweets and hence are a good expansion territory for Dunkin Donuts©. In other parts of the world, recipes as well as products have been tweaked to satisfy local tastes.

Advantages to consider:

  • Enhance your domestic competitiveness
  • Increase sales and profits
  • Gain your global market share
  • Reduce dependence on existing markets
  • Exploit international trade technology
  • Extend sales potential of existing products
  • Stabilize seasonal market fluctuations
  • Enhance potential for expansion of your business
  • Sell excess production capacity
  • Maintain cost competitiveness in your domestic market
  • Expansion brought about by international trade could accelerate the advantages of taking your company public

Disadvantages to keep in mind:

  • You may need to wait for long-term gains
  • Hire staff to launch international trading
  • Modify your product or packaging
  • Develop new promotional material
  • Incur added administrative costs
  • Dedicate personnel for traveling
  • Wait long for payments
  • Apply for additional financing
  • Deal with special licenses and regulations
  • You will need to set up specialized conferencing and communications tools

  • Failure to obtain export counseling and to develop a master international marketing plan before starting an export business.
    Utilize government and association resources for export counseling. Hire a lawyer to help you structure your export operations for the long run: Lawyers are concerned with issues of compliance on both ends of the transaction, therefore, they are instrumental in helping you to make sure that your recordkeeping system is planned correctly, that your legal documents are structured correctly, and to advise you on a broad range of compliance issues before the sale, during the sale, and after the sale.
  • Insufficient commitment to overcome the initial difficulties and financial requirements of exporting.
    To be successful in exporting, firms have to establish an export department to which they dedicate personnel and a budget, and for which they develop appropriate procedures, preferably in consultation with a qualified trade lawyer.
  • Insufficient commitment to overcome the initial difficulties and financial requirements of exporting.
    Firms that intend to expand into exporting will likely need an agent or distributor at some point. The key legal distinctions between an agent and distributor are: A distributor takes title to the goods and accepts the risk of loss.

    • A distributor makes profits by reselling the goods.
    • Distributors cannot contractually bind the company producing the goods.
    • Distributors establish the price and sales terms of the goods.

The first and most important consideration when drafting an agreement is to ensure that the agreement clearly states whether there is an agent or a distributor relationship.The Commercial Service of the Commerce Department provides a service to identify qualified agents, distributors, and representatives of U.S. firms. For each Agent/Distributor Service visit www.ita.doc.gov/cs/.

  • Failure to have a solid agent and or distributor’s agreement.
    You may be in your office when unexpectedly someone from a foreign country contacts you electronically and wants to buy a line of your products. What do you do next?
    Make sure the order is not on the denied list: Go to the Bureau of Industry and Security’s Web site to view the entire list of denied orders.
    The U.S. Department of Commerce’s Commercial Service Officers are a valuable resource for information about firms overseas.
  • Blindly chasing orders from around the world.
  • Failure to understand the connection between country risk and the probability of getting export financing.
  • Failure to understand Intellectual Property Rights (IPR).
    Intellectual property rights refer to the legal system that protects patents, trademarks, copyrights, trade secrets. It is important for exporters to understand how and whether intellectual property rights are protected in different countries. Visit STOPfakes.gov to learn more.
  • Insufficient attention to marketing and advertising requirements.
    Trade Shows and Trade Missions: Trade shows and missions may be in the virtual form or entail traveling to the foreign country. All Department of Commerce-sponsored shows and trade missions are listed on export.gov. Information is also usually posted on the websites for industry offices accessible from the International Trade Administration (www.ita.doc.gov). For an additional source of information on upcoming trade shows visit the website for Trade Show Central (www.tsnn.com) or 10times (10times.com/tradeshows) a website which lists trade shows around the world.
  • Lack of attention to product adaptation and preparation needs.
    The selection and preparation of a firm’s product for export requires not only knowledge of the product, but also knowledge of the unique characteristics of each market being targeted. Key considerations include:
    Product adaptation to standards requirements: As tariff barriers (tariffs, duties, and quotas) are eliminated around the world in accordance with the requirements of participation in the World Trade Organization (WTO), other non-tariff barriers, such as product standards, are proliferating. Exporters must understand conformity requirements to operate on an international basis. The DOC’s National Center for Standards and Certification Information (NCSCI) provides information on U.S. and foreign conformity assessment procedures and standards for non-agricultural products. You can visit their website by going to www.nist.gov.
    Product Engineering and Redesign: The factors that may necessitate re-engineering or redesign of U.S. products may include differences in electrical and measurement systems.
    Branding, Labeling, and Packaging: Cultural considerations and customs may influence branding, labeling and package considerations.

    • Are certain colors used on labels and packages attractive or offensive?
    • Do labels have to be in the local language?
    • Must each item be labeled individually?
    • Are name brands important?

    Installation: Another important element of product preparation is to ensure that the product can be easily installed in the foreign location. Importers and exporters need to know they may also consider providing training or providing manuals that have been translated into the local language along with the product.

    Warranties: In order to compete with competitors in the market, firms may have to include warranties on their products.
    Servicing: The service that U.S. companies provide for their products is of concern to foreign consumers. Foreign consumers want to know whether they can access spare parts, technicians who can service the product, and distributors of the products in their countries.

  • Failure to obtain legal advice.
    Utilize SBA’s ELAN service: Under the Export Legal Assistance Network (ELAN), your local SBA office can arrange a free initial consultation with an attorney to discuss international trade questions.
  • Failure to understand export licensing requirements.
    Businesses that are new to the export arena may confuse the local and state rules regarding business taxes, zoning and other issues, i.e., legal registrations, with the federal requirements governing export licenses. In order to export an item that may be on the restricted list, an export license is required. This allows the federal government to control the export of the goods. The license is not required for every item exported.

Get advice from experts

Preparing for and keeping abreast of international trade can be secured by seeking out advice from the following resources:

  • Export counselors
  • Export seminars and workshops
  • International trade consultants
  • Seasoned exporters
  • Trade associations

Online Resources

Since countries throughout the world benefit by international trade, federal and state governments everywhere have assessment and training resources. For example, the U.S. government provides many valuable resources of information. The U.S. Small Business Administration offers aid to small international businesses through two major programs: business development assistance and financial assistance. Our first recommended resource is, therefore, the U.S. Small Business Administration’s Office of International Trade.

U.S. Government resources

  • The U.S. International Trade Administration’s website www.trade.gov seeks to increase jobs in the U.S. by increasing the number of companies exporting and expanding the number of markets current U.S. companies sell to. It offers market information, trade leads, and overseas business contacts.
  • The Department of Commerce Web site www.commerce.gov furnishes trade opportunities for U.S. Business and export-related assistance and market information. Trade specialists will work with businesses to identify key markets, build market-entry strategies and provide the guidance needed to take products and services from the U.S. to global markets. Their activities include participation at trade shows online.
  • The U.S. Government Export Portal www.export.gov provides online trade resources and one-on-one assistance for your international business. Training and counseling is a multi-phase step. Counselors can help you design a training program to match your specific needs.
  • You can find articles about protecting your Intellectual Property abroad at www.stopfakes.gov as well as toolkits for Brazil, China, Korea, Malaysia, Mexico Peru, Russia and Taiwan.

Non-governmental resources:

  • Search engines such as Google, Yahoo or bing provide a huge database of information (type in “international trade”) that will require selectivity to retrieve the most helpful information.
  • The Federation of International Trade Associations www.fita.org provides portals to trade leads, market research, a global trade shop, and even a job bank.
  • www.worldbid.com is a large network of international trade marketplaces, providing trade leads and new business contacts.

THE TOP TEN DO’S

  • Consider international trade as a growth opportunity.
  • Investigate franchising for global expansion.
  • Evaluate your competition’s international business.
  • Develop a master international marketing plan.
  • Dedicate personnel, a budget, and appropriate procedures.
  • Create a solid agent or distributor’s agreement.
  • Understand the importance of intellectual property rights.
  • Research marketing and advertising requirements.
  • Conform to the unique needs of each geographical market.
  • Take advantage of free online resources.

THE TOP TEN DON’TS

  • Minimize the complexities of global expansion.
  • Overlook international trade as an asset for hollow corporations.
  • Disregard taste and other global preferences.
  • Fail to obtain export counseling.
  • Blindly chase orders from around the world.
  • Neglect to investigate country risks.
  • Ignore the importance of legal advice.
  • Fail to understand export licensing requirements.
  • Forget to understand distinctions between an agent and a distributor.
  • Ignore the importance of adapting to foreign markets.


Copyright © 1993, 1997-2016, My Own Business, Inc. All Rights Reserved.

Franchising Basics

Adapted from content excerpted from the American Express® OPEN Small Business Network

When you’re considering starting your own business, you have a choice of either starting from scratch, buying an existing business, or looking at a business opportunity like a franchise. Owning and operating a franchise can be as much work as other options, and it can also be quite profitable.

There are thousands of franchised businesses, covering nearly every conceivable industry, from well-known national brands to smaller, local opportunities. The challenge is to decide on one that both interests you and is a good investment. Many franchising experts suggest that you comparison shop by looking at multiple franchise opportunities before deciding on the one that’s right for you. Use the answers to the questions below to help you learn more about the concept.When you buy a franchise, you are buying the right to use a specific trademark or business concept. The business you run is essentially the same as all other business being run under the same name. In order to do this, you may have to buy things like products, tools, advertising assistance, and training from the franchisor (the company that owns the rights to the business).

While you own the business, its operation is governed by the terms of the franchise agreement. For many, this is the chief benefit of franchising — you are able to capitalize on business format, trade name, and support system provided by the franchisor. The oft-quoted line is that franchising allows people to go into business for themselves, not by themselves.You get a number of advantages when you purchase a franchise:

  • Reduced risk – Franchises traditionally have a much lower failure rate than other start-up businesses. The reason? You’re buying a business concept where most of the kinks have already been worked out by someone else
  • You get a complete package – The guesswork usually associated with starting a business is taken care of. You total package can include trademarks, easy access to an established product; a proven marketing method; equipment; inventory; etc
  • Strength in numbers – When you’re become a franchisee, you have the buying power of the entire network, which can help you get product and compete with larger national chains
  • Business processes – Many franchisors provide their franchisees with various proven systems including financial and accounting systems; ongoing training and support; research and development; sales and marketing assistance; planning and forecasting; inventory management; etc. They’ll show you the techniques that have made the business successful and help you utilize them in developing your own business
  • Financial and site selection assistance – Some companies will help you finance your initial franchise, letting you get by with as little upfront cash as possible. They also may help with site selection, making sure that your business is located in an area where it can thrive
  • Advertising and promotion – Not only will you benefit from any national or regional ad and promotional campaigns from the franchisor, but they may also help out in other areas — from providing camera-ready copy for your own advertising efforts to developing in-store point-of-sale materials designed to drive customers through your business. It would cost you a great deal to develop these materials on your own

Franchising is certainly not for everyone. Here are some of the potential disadvantages:

  • Lack of control – The essence of a franchise — buying and operating a proven concept — can make it seem like you’re more of a manager than a boss. This may be difficult for some people, especially those that are more entrepreneurial. This type of person may find it hard to conform to someone else’s system
  • Cost – It can take a good deal of cash to open and operate a franchise. Upfront costs can be significant, and you may find that ongoing royalty fees will have a major impact on your cash flow
  • You’re not alone – Just as a franchisor’s reputation can benefit your individual business, the franchisor’s problems are also your problems. So if the parent company comes upon hard times, your individual franchise may also suffer because of how closely you’re tied in
  • You’re committed – Your franchise agreement is a binding contract, and can be quite restrictive. You’re locked in to certain business practices, fees, and even the look of your business. If you don’t agree, you may have no recourse except to adhere to these guidelines

You should consider having your attorney, accountant or other advisor review the disclosure documents and proposed contracts before entering into any agreement. This advice, coupled with your own research, can help save you money and keep you from making a bad investment.The disclosure document provided to you by the franchisor can serve as a window into the company’s operations. It is important to review it completely (preferably with the assistance of an attorney, accountant or business advisor) to learn all you can about the franchisor.

Some things to look for:

  • Does the franchisor have a track record of success? – Learn all about the franchisor’s personal and business names, its organization; its background; and its financial history. You’ll also need to determine whether this success can be duplicated in your area
  • What will it cost me? – The circular should have complete list of fees that you will be required to pay both to start your franchise and operate it. It will also tell you other obligations, such as inventory or equipment that must be purchased from the franchisor
  • Will my territory be exclusive? – You will want to determine whether or not the franchisor can open other stores in your area, or even sell its product by mail order to customers in your region. You also might have to meet certain sales criteria to maintain your exclusivity
  • What products can I sell and how can I sell them? – You may only be allowed to sell certain products that are on the franchisor’s approved list. And you may be limited in the ways you can sell them. For instance, you might be allowed to handle walk-in traffic to your store, but you may be prevented from selling outside your location
  • What services will the franchisor provide to me? – Look for what services will be provided to you prior to opening, and after you’re open for business. You’ll also want to read about what training is necessary, where it will take place, and what it will cost you. Also, check to see what trademarks and patents you will receive
  • Is there any bad news I should know about? – The documents must disclose any actions involving violation of franchise law, fraud, embezzlement, or unfair business practices. They also must disclose whether the franchisor, any predecessors, or any partners or officers have declared bankruptcy in the past 15 years. And be sure to read financial statements closely
  • How much can I expect to make from this business? – The circular contains hypothetical profit projections, along with the formula for how these figures were created. Be aware that economic conditions vary from region to region, so these figures do not assure success of a particular outlet. Instead, use these figures combined with estimates of costs and expenses in your area

Here are some of the things you should look at when evaluating a franchise:

  • Profitability – Make sure that both the franchisor and individual franchisees are healthy
  • A track record of success – Is this concept viable? Has it succeeded elsewhere? Does the franchisor have a good credit rating?
  • A strong USP – You’ll want a business that stands apart from the competition, since you don’t want to be perceived as selling the same old thing
  • Effective financial management and other controls – A strong monitoring system will help you identify your problems and deal with them more effectively
  • A good image – It’s important that the public has a positive image of the franchisor, since you’re basing your business on its reputation. Also, look for a concept that can expand nationally so your business can grow locally
  • Integrity and commitment – You actually want the franchisor to spend a lot of time checking you out, because you want to make sure it has strong requirements for all its franchisees, since your success in intertwined with its
  • A successful industry – Look for opportunities in industries that are growing

It’s important to learn as much as you can before purchasing any kind of business so you can make an informed decision. There are a wide variety of sources you can approach to learn about a franchise opportunity. Here are some things you can do:

  • Interview the franchisor – Make sure that you feel comfortable with the franchisor, and that all your questions can be answered to your satisfaction
  • Interview existing franchisees – Speak with current franchisees to see how they feel about the business. Are they happy with their investment? Are they making as much money as the expected?
  • Read the business and trade press – Spend some time in the library or on the Internet looking through the media. Often, you’ll learn a lot more about the company than they volunteer in disclosure documents
  • Check references – Don’t just speak to franchisees. Call bank and other business references supplied by the franchisor
  • Go to independent agencies – Find out whether any complaints have been lodged against the company
  • Get a credit report – Get a report on the franchisor from Dun & Bradstreet, TRW/Experian, or one of the other credit reporting agencies. You’ll learn a lot about how the company conducts business

There are basically two types of fees you should expect to pay for your franchise — upfront fees and ongoing fees.

The first is the initial upfront fee, which is what you pay the franchisor for the rights open your franchise. Essentially, you are purchasing the rights to use the franchisor’s trademarks, business methods, and distribution rights. This licensing charge can be significant, especially for a well-known, established franchise — it’s not unusual for it to be in the tens of thousands of dollars. Often, it is also based on the value of the territory or trading area, so the larger your market, the more you could end up paying.

Be aware that this upfront fee may be in addition to any other start-up costs you will have to incur. The initial franchise fee may or may not include things like training costs; start-up promotional fees; inventory; build-outs (some franchisors require your space to have specific architectural elements); equipment/fixtures (you may be required to purchase or lease specific equipment and fixtures from the franchisor); and any other costs that are necessary to open your business.

You will also have to pay ongoing fees to maintain the rights to your franchise. Most franchisors charge a royalty fee, typically a percent of your gross sales, not your profits. This royalty fee can range from 1 percent to as much as 15 percent, although 5 percent is typical. Remember, you are paying this royalty on gross sales (your total receipts, less sales tax, returns and refunds), so it can potentially take a significant bite out of your profits.

Some franchisors charge a regular fee (payable weekly, monthly or quarterly) in lieu of royalty payments. This type of fee may also be part of the mark-up you are charged for goods or services you are required to purchase.

It is also common for franchises to pay a portion of the franchisor’s local, regional and national advertising and promotional costs. These fees are usually put into a cooperative advertising fund that ultimately benefits all franchises through increased exposure to your trade name.This is one of the key decisions you will need to make if you decide to go the franchise route. There’s a trade-off you will need to evaluate in terms of risk and ultimate pay-off.

A franchise with an established track record has many benefits — significant name recognition; proven marketing methods; entrenched business plans and training systems; strong management; and a history that is easy for you to investigate. On the downside, you might find that the franchisor has already saturated your market (so good locations may not be available, or other outlets may encroach on your area); fees may be higher; and you may find that the larger the company, the harder it is for you to be heard should any disagreements arise.

An emerging franchise gives you the chance to get in on the ground floor of what could be a highly profitable growth opportunity. Newer franchises also tend to have lower upfront and royalty fees, and they may be more willing to negotiate and accommodate individual franchises. On the other hand, smaller franchise opportunities may lack name recognition; they may not have enough experience to make their system work; you may find yourself being a test-case for their procedures; and the chance of franchisor failure could be much greater.
Copyright © 1995-2016, American Express Company. All Rights Reserved.

Franchise Agreement Checklist

Provided by the International Finance Corporation

This checklist will help you think about the information you should obtain before entering into a franchise agreement. Find out as much information as you can about the franchise. Read all documents and agreements carefully, and do not sign anything without understanding it first. You may adapt the tool to reflect your business needs, type of clientele, products and services you offer. Seek independent advice from a lawyer, accountant or business adviser who has experience in franchising.


Attachments:

Checklist of Basic Franchise Agreement Terms


For more resources


Copyright © 2000 – 2017, International Finance Corporation. All Rights Reserved.

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The material in this work is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. IFC does not guarantee the accuracy, reliability or completeness of the content included in this work, or for the conclusions or judgments described herein, and accepts no responsibility or liability for any omissions or errors (including, without limitation, typographical errors and technical errors) in the content whatsoever or for reliance thereon.