Overseas Private Investment Corp.: opening new foreign markets for franchising: federal...

The states of northeastern Brazil are known for their fine handicrafts: brightly-colored and reverent woodcarvings sold on the streets of cities such as Salvador in Bahia State are so respected in artistic circles that the Inter-American Development Bank (IDB) has given them their own exhibition,

Finding a way for Brazilians to profit from their country's proven artistic talent need not be an exploitative process. (Indeed, Brazilian advertising agencies consistently win international awards for their eye-catching campaigns.) Democratizing access to the benefits of Brazil's excellence in graphic arts, rather than a cynical manipulation, should be an ideal way to both maintain cultural traditions and to support the country's economy.

Signs Now Brazil Corp., a subsidiary of the Signs Now Corp., a commercial graphics franchisor based in Bradenton, Fla., is doing just that, spanning the divide between street vendor and art dealer to provide Brazilian businesses with signs, exhibit graphics, posters, banners and other products. Signs Now, which has nearly 270 franchisees in the U.S., broke into the Brazilian market by acquiring the assets of a competitor in 1997, along with which came a number of franchisee agreements in the Latin American country.

When Signs Now Brazil sought to expand its store in Salvador, however, so that it could outreach to potential clients in seven surrounding states, it faced a challenge: developing countries typically lack the financial institutions and its franchisors the financial wherewithal to provide the capital necessary to fund franchisees to a degree promising at least a fighting chance for success.

OPIC Eases Investment Abroad

The franchisor turned to the Overseas Private Investment Corp. (OPIC), a federal agency that helps American companies--including franchisors--to invest in emerging markets abroad. In short order, OPIC put together a $1 million loan for the franchisee, NH Servicos de Sinalizacao Ltda., to purchase state-of-the-art printing equipment and move its store in Salvador to a larger, more strategic location in the city.

The project is the first to qualify for OPIC support under the agency's new franchise policy, by which the franchisor is not required to invest equity in the project. Instead, Signs Now Brazil meets OPIC's requirement for "significant involvement" by a U.S. business by contributing business concepts, training programs and management expertise to the project. The project also falls under OPIC's program of support for U.S. small businesses.

The transaction seems matter-of-fact: a mid-sized and growing franchise--not yet a household name--seeks expansion into a developing country, and through the vehicle of a government agency finds access to a new market not saturated with competition, one eager for dependable, quality products available at a good price, and, as it happened, in a sector which speaks to a strong tradition in the local culture. But, without the support of OPIC, Signs Now would have faced an uphill battle to find financing for its franchisee, and not been able to take advantage of a thirsty new market in a fast-growing region of Latin America's largest economy.

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OPIC hopes that the Signs Now Brazil project provides a clarion call to U.S. franchisors, that profitable opportunities await them in emerging markets such as Latin America and sub-Saharan Africa, eastern Europe and southern Asia, if they only seek them out. Consumers in those regions are fairly crying out for the quality, affordable services that U.S. franchisors offer. Those goods and services could, in turn, form a solid foundation for further economic growth in places precisely like Bahia State, making them even better U.S. trade partners.

Not A New Development

Supporting franchises internationally is not a new development for OPIC. Over the past decade, OPIC has helped franchisors such as Coca-Cola, McDonald's and Wendy's gain footholds in markets like Russia, Hungary, Peru and Brazil; more recently it has provided small loans--roughly $100,000--to Mail Boxes Etc. for the establishment of franchises in Panama and Belize. And OPIC does so with plenty of capacity: over the agency's 30-year history, it has supported $138 billion worth of investments that have generated $63.6 billion in U.S. exports and created nearly 250,000 American jobs.

What is new is OPIC's focus on smaller franchisors such as Signs Now, which, under OPIC's small business definition, are U.S. companies with annual revenues of less than $250 million. For them, OPIC has dropped its requirement that their overseas franchisees demonstrate at least 25 percent U.S. ownership--effectively broadening OPIC's potential universe of support to thousands of franchisees which have traditionally lacked access to long-term capital financing. International Franchise Association President Don DeBolt said of the policy change, "OPIC is out ahead of the business community in recognizing that franchises are an ideal vehicle to help emerging markets establish working free market systems."

By the new approach, OPIC can provide loans of up to $4 million either to the U.S. franchisor to on-lend to franchisees in developing countries, or to the local franchisees themselves. In the latter case, the U.S. franchisor would meet OPIC's "significant involvement" standard through the receipt of fees or royalties from the franchisee; local use of the franchisor's trademark; a long-term contractual relationship with the franchisee; and the franchisee's reliance on business systems developed by the franchisor.

And, Not A Guarantee of Success

OPIC support for a U.S. franchisor is not a guarantee of success, of course; as in any American case, an OPIC-supported venture is exposed to the vagaries of the local economy. And, the franchisor should approach OPIC with a market in mind, and with a record of solid business management experience and good cash flows.

The allure of the OPIC approach, rather, is the opportunity for U.S. franchisors to break into markets they would not have considered, yet which offer a clientele hungry for reliable and quality services, and relatively little competition. Franchisors, both large and small, who make that geographical--and psychological--leap overseas, are likely to find those opportunities lucrative.

Said Signs Now's Ursula Hoffmaster, "Our Brazilian project is fundamental to our growth, and OPIC's financing helped Signs Now enter a market we would not otherwise have been able to access. I couldn't be more excited about working with OPIC."

RELATED ARTICLE: "Franchising indeed could become the business ambassador of world peace through global economic prosperity."

By Raj Dwivedy, Ph.D.

Toe U.S. franchise sector is composed of a few big companies but most other companies are small and medium-sized (SMEs). Many SME franchisors are keen to expand and multiply their operations in the global markets. Thus, the franchising sector has become a very significant part of the U.S. economy, annually creating many new jobs, new entrepreneurs, and new services as well as new export opportunities for American franchisors.

Moreover, franchising, as a method of distributing goods and services, has become accepted in most countries in the world. Several countries are using the franchising concept as a tool for economic development. Malaysia has successfully adopted franchising as a model for its economic growth and development. Even the World Bank and regional development banks are promoting franchising development as a paradigm for economic growth and development. Further, an unprecedented global demand for franchising, the globalization of the economy, and the proliferation of regional and global trade agreements have resulted in a rapid expansion and diversification of the international market for franchising products, services and know-how.

Both exporting and importing nations generally view the franchising commerce positively. Because franchising quickly creates jobs, transfers technical and managerial know-how, offers quality goods, and friendly and reliable services at a reasonable price to local consumers, many developing countries are currently looking at franchising as a new paradigm for economic growth and development.

Big companies have resources, expertise and experience in exporting. However, SMEs seriously lack such resources. As a result, they shy away front exporting and miss out on lucrative export opportunities. The U.S. Department of Commerce is committed to helping SMEs expand and multiply their exports. The department organizes and leads trade missions for U.S. SMEs and the export community, and offers them opportunities to exploit the benefits of exporting. Thus, this development offers advantages for the U.S. franchise sector--the most competitive in the global marketplace--to help U.S. franchisors expand and multiply their exports of franchising products, services and know-how, and help emerging markets of the world achieve economic growth and prosperity through franchising.

Raj Dwivedy, Ph.D. is chief economist, U.S. Dept. of Commerce, International Trade Administration. lie can be reached at Raj.Dwivedy@mail.doc.gov.

Ralph Matheus is director of finance for the Overseas Private Investment Corp. He can be reached at 202-336-8452, or at rmath@opic.gov.)