Franchising World March 2007

“It’s just a matter of finding the right partner and bringing them together.”

By Timothy Harwood

For a small U.S. government agency, albeit one with the large responsibility of supporting American investment in emerging markets, accustomed to elbowing its way into events arranged by better-known institutions, the Overseas Private Investment Corporation noticed a surprising trend in 2006.

Foreign governments, from Colombia and Panama to Vietnam and Thailand, were inviting OPIC to speak to their staffs and business associations about an industry they had obviously concluded offered a path to economic growth: franchising. They wanted to know how OPIC could, through its financing and political risk insurance products, help them to mitigate the risks associated with investing in developing countries and open the way to the developmental benefits associated with successful franchise operations–job creation, training, improved distribution networks and modernized business practices chief among them.

The Best of the American Dream
“I was surprised by the number of requests [to speak],” says OPIC Manager Juan Carlos Rivera-Montes. “These countries clearly felt franchising represented the best of the American Dream, by emphasizing entrepreneurialism and small businesses. They wanted to maximize the potential of the industry.”

“These were also countries eager to take advantage of free trade agreements, like CAFTA (Central America-Dominican Republic–U.S. Free Trade Agreement), or were growing cash economies, like Vietnam,” Rivera-Montes says. “Overall, the trend was clear: these were places that wanted their companies to become franchisors, not just franchisees, and to benefit specifically from the improved distribution networks that come with franchising. And they wanted to learn how OPIC could make it happen.”

From OPIC’s perspective, the timing could not have been better. The past five years have seen the agency fix its attention on supporting U.S. small businesses, franchise companies and franchisees among them, to significant effect. Following establishment of a Small Business Center and Department of Small and Medium-sized Enterprise Financing in 2003, OPIC financing support for U.S. small and medium-sized enterprises increased 43 percent–$103 million–from fiscal year 2004 to FY2005. James Morrison, president of the Small Business Exporters Association, called it “one of the most remarkable success stories in the history of federal government support for SMEs in international trade.”

Outreach Programs
Even more recently, in 2006, OPIC made a priority of reaching out to minority and women-owned businesses, and to countries in Central America and the Caribbean, both constituencies primed to reap the benefits of franchising.

OPIC held three outreach workshops for U.S. minority and women-owned businesses in the fall of 2006, in Atlanta, Chicago and Los Angeles, drawing nearly 400 business owners in total and such praise that OPIC Pres. and CEO Robert Mosbacher Jr. ordered up a new series for 2007. And during four visits to Central America following his October 2005 swearing-in as OPIC president, Mosbacher announced more than one-third of a billion dollars in OPIC support for projects in the region, primarily in the housing and microfinance sectors.

To top it off, as part of its ongoing commitment to make real the promise of the region, OPIC will host an international investment conference in El Salvador in May, aimed at increasing U.S. investment in Central America and the Caribbean.

Financing and Political Risk Insurance
These initiatives aside, OPIC has tailored its financing and political risk insurance products specifically to meet the needs of franchise systems and franchisees looking to expand into the emerging markets of Latin America, Africa, Asia and Eastern Europe.

American small businesses with annual revenues of less than $35 million, or U.S. citizens with net worth of less than $27 million may qualify for financing through OPIC’s Small Business Center, established in 2003 to streamline the agency’s application process. Committed to completing that process in fewer than 60 days, the SBC is able to provide qualified small businesses with direct loans from $100,000 up to $10 million.

For the next step up–American SMEs with consolidated annual revenues greater than $35 million and less than $250 million–OPIC is able to provide direct loans ranging from $10 million to $250 million.

Finally, for large U.S. franchisees, those with more than $250 million annual consolidated revenues, OPIC is able to provide financing through guarantees extended to eligible U.S. financial institutions, or to the franchise company. In certain cases, OPIC is able to support multi-store projects.

In all franchising projects it supports, OPIC expects a franchise company to demonstrate positive operating cash flow and a long-term contractual relationship with the local franchisee. Franchisees must present business plans based on 60 percent in debt financing for a new enterprise, or up to 75 percent in debt financing for a project involving the expansion of an existing enterprise.

Prospective franchisees seeking OPIC support should also know that preference is given to expansions of ongoing franchisee operation, and that external credit support, for example, a sponsor guaranty, will be required if existing cash flow is insufficient to service debt. Franchisees should also be market-savvy: they should be able to demonstrate that the franchisor’s brand and products and or services will be competitive in the target market, and that they can make good use of the business systems and technology offered by the franchise system.

Political risk insurance–that is, insurance not against commercial risk, but against political risks such as political violence (including terrorism), government expropriation of project assets, and currency inconvertibility–is another OPIC product ideally suited to help franchise operations expand in emerging markets.

OPIC can provide political risk insurance for an American franchisee or franchise company to cover either an equity investment or the flow of project royalties back to the United States. Just as important, particularly for franchises entering new markets, a commitment by OPIC to provide insurance to a franchisee–American or otherwise–can help a franchisee raise the necessary equity to obtain a loan from OPIC or another financial institution.

The combination of OPIC financing and political risk insurance has already rendered success stories. In 2004, a partnership between OPIC and United Parcel Service Inc. enabled UPS subsidiary Mail Boxes Etc. to expand in emerging markets worldwide, providing much-needed shipping services to developing countries. By the terms of a framework agreement with UPS Capital, OPIC is able to guaranty up to $6 million in loans made by UPS Capital to Mail Boxes Etc. and or UPS Store franchisees located in OPIC-eligible countries.

And in 2002, a $1.2 million OPIC loan enabled a U.S. franchisee of Wendy’s International to establish three Wendy’s fast food restaurants in Mexico, OPIC’s first franchise project in the country. Wend-Rey, Ltd. of Texas, on-lent the OPIC loan to its Mexican subsidiary to fund 75 percent of the start-up costs associated with the restaurants. In a classic franchising investment structure, the project capitalized on multi-restaurant strategy: additional restaurants diffused overhead costs across a larger sales base, thereby reducing each restaurant’s overall fixed costs.

For OPIC’s Rivera-Montes, these and other examples of successful OPIC-backed projects represent only the tip of the iceberg, and he encourages both franchise companies and prospective franchisees to consult OPIC’s Web site, www.opic.gov, to learn more about how OPIC might support expansion into new markets overseas.

“Ultimately, the countries that invite OPIC to speak are right: franchising represents the best of the American Dream. Certainly the competition we are seeing now, from countries like Spain and France, to support franchise expansion into developing countries, reinforces that conclusion,” he says. “Franchising is very entrepreneurial, very supportive of small businesses in that sense it’s tailor-made for minority and women-owned businesses, especially.”

“More than that, franchising enables OPIC to meet its goal of promoting economic growth and social development in developing countries,” he adds “The trends I see in franchising now, toward newer sectors like health care, child care, education and fitness, really help OPIC to achieve that goal. In the process, host countries benefit from job creation and training, transfer of technology and greatly improved distribution networks–all primary elements of economic growth.”

“For OPIC, we look forward to the challenge of increasing our support for franchising projects. It’s just a matter of finding the right partners and bringing them together.”  

Timothy Harwood is a communications officer at the Office of External Affairs, the Overseas Private Investment Corp.  He can be reached at 202-336-8744.