¶ … risk that one needs to be concerned with when selling a franchise (and this is a general case, not only the case of Germany) is that the franchiser (that is, the person who buys the franchise) may not fulfill all his contractual obligations. These include a certain quality standard and a brand image of the mother company (the franchisor). This obviously may lead to the fact that the customers will associate with the mother company a certain level of quality that is less than that agreed upon and less that the one the company actually has in the country of origin. This can cause serious prejudice to the brand image. If we think of a classical case of franchising, McDonald's, a level of quality may include a certain degree of organization, in order to avoid long lines, a certain quality of the products (for example, the franchise contract foresees that the franchiser has to throw out the French fries if they are not sold in a determined number of minutes), etc.
Another general risk that may occur for the franchisor when selling a franchise refers to the control exercised. In the international management theory, there are several types of control that one can use. We can mention here direct and indirect control, as well as current and checking control. Because we are discussing a franchise, where the franchiser is not a branch of the mother company, but an independent company with contractual obligations, the only type of control that may actually apply here is a checking control that is the comparison from time to time of actual results with the results that were mentioned in the contract. As is the case with this type of control, it may often come too late: we may discover that the franchiser has not fulfilled his obligations and be forced to call off the entire operation, but the harm has already been done- the image of the company has already suffered. So, one of the risks that we have to mention when we talk about a franchise operation refers to the difficulty of properly controlling that the operations functions according to the contract signed by the parties.
A third and final "general" risk in a franchise operations refers to the possibility that the franchiser may try to benefit from the franchise and later on, after the franchise contract is terminated, may want to use the know how to start his own business and become a serious competitor on the local market for the original franchisor. This is a serious matter. We have to keep in mind that a franchise is basically a contract involving know how sharing in an international context. The main advantage for the franchiser is that he will gain access to the franchisor's information and knowledge regarding the business. It is much cheaper for him to thus start his business because he will save on some of the initial costs of starting the business. In this case, he may become a serious competitor for the franchisor, using know how from the original franchise.
The first specific risk that I would take into consideration regarding franchising in Germany is the so called geographical risk. When I talk about geographical risk, I refer strictly to the distance between the two countries. In our specific case, this is a risk: Germany and the United States are separated by a couple of thousands of kilometers and several time zones. This is not necessarily something lethal for the business, but it needs some additional adjustments than, let's say, if the franchise was sold in Canada. As I have mentioned here above, a long distance between the partners will mean decreased control facilities for the franchisor and tougher means to keep an eye on the business. Of course, this is the 21st century and communication nowadays is almost instant, but a direct for of control, where the franchisor evaluates the performances of the franchiser is most necessary in such an operation.
Another risk that we should take into consideration when selling a franchise in Germany relates to political risk. We cannot as yet refer to an anti-American policy when we talk about Germany, however, we should remember that in recent years, in conflicts such as the ones in Yugoslavia, Kosovo and, most recently, Iraq, the Germans have strongly manifested themselves against the American interventionist policy. Along with Russia and France, they were the most vehement opponents of the military interventions both in Yugoslavia and Iraq. Manifestations for peace were encountered in Berlin as well as other important cities of Germany. So, even if this is not actually a current, it should be taken into consideration: there is a slight political risk to sell a franchise to Germany because of increased European aversion towards the United States. Let us only compare the United Kingdom with Germany- the political risk in the United Kingdom would be in this case almost zero. Also very small...
I am referring here to some of the Neo-Nazi supporters, as well as the Communist reminiscences of some of the people in former Eastern Germany. Of course, the two mentioned above are only two quite unimportant elements of political risk. The main element refers to the political parties and to political stability, and, in this case, Germany has NO political risk. Germany is a republic, where the Chancellor, head of the government, is the most important man in state. Parliamentary elections come every four years and there usually is an alternation in the parties that lead the Government. The two most important parties are the Social- Democrat Party (now in power) and the Christian-Democrat Party. Political stability and alternation to power are two main characteristics of the political environment in Germany and, in this sense, political risk is almost zero.
A second specific risk that we need to address refers to the legal risk, this including institutional risk. This is a delicate subject, mainly because there are two types of legislations in Germany. The first legislation is the German legislation: national laws, with limited applicability to the German territory, such as the German Constitution. But there is also the Communitarian Law that is the legislature conceived at the European level by the upper bodies of the European Union (the European Commission and the European Parliament). In this sense, the legislative framework is quite large and needs to be studied carefully. However, the fact that franchising has been promoted by the decision organizations in the European Union in the last years can only be encouraging. Indeed, recent years have seen different European laws conceived in order to facilitate access to finance and to create an adequate legal environment. We should keep in mind, though, that unification of European legislation is a slow and cumbersome process and we may expect future changes.
I will be addressing economic risk and financial risk as two separate entities. When talking about economic risk, I refer to free access to production factors, to the infrastructure, to the quality of the workforce and to economic instability. However, in the case of the American franchisor, this has hardly much importance. This is because, by contract, the franchiser is held to deliver certain percentages of the profits to the franchisor. How he delivers it and with what production factors, that is a problem of his own. If we have a glance at the elements comprising economic risk, we will see that, in this particular case, the economic case is almost zero. Germany has an excellent infrastructure and the workforce is renowned for its products. Engineers have the upper hand over managers here. In any case, there is no doubt about the quality of the workers here. There would be a point to be made about communication with the local managers, this will however be addressed in the cultural risk context.
A serious concern involves financial risks, with risk of exchange rate, credit risk or solvability risk. The franchise is sold in the beginning for a certain fixed sum of money, but the franchise contract stipulates that the company buying the franchise has to pay a percentage of sales to the franchisor. These are made in the franchisor's currency, as is our case, in American dollars. As Germany is part of the Euro zone and has begun using the Euro with the end of the 20th century, differences in the exchange rate between the two currencies can be in the franchisor's disadvantage. Let's discuss this case. Suppose the German franchiser has to pay 5% of sales to the American franchisor. As discussed, this represents 10,000 euros, payable as $12,000 (at an exchange rate of 1E = $1). If the exchange rate falls so that 1E = $1.1, than the American franchisor has already lost $1,000, because the German franchiser will only have to pay $11,000.
Although it is not a direct concern, the American franchisor also has…
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