For a variety of reasons, franchise companies may decide to expand their franchise in Italy directly, by establishing a subsidiary in Italy, which will deal directly with franchisees.
Unlike a franchise, an affiliate or a branch, a subsidiary is a business entity that has stock shares controlled by the franchisor’s company.
Parent companies may own 100% of a subsidiary (wholly-owned subsidiary) or more than a 50% control over a subsidiary (partially owned subsidiary). Regardless of whether a subsidiary is wholly owned or partially owned, a parent company has a strong say in how that subsidiary operates.
Establishing an Italian subsidiary provides the foreign franchisor with several benefits.
Advantage 1: Parent Company provides vision and guidance
One of the primary advantages of a foreign-owned subsidiary is that the parent company can still provide guidance, direction and support to its subsidiary. While the Italian subsidiary has the right to develop its franchise network, the parent company will always have significant influence over the principles, vision, and tactics that govern the subsidiary. That control helps ensure that the Italian subsidiary will operate with the same culture and values as those of the parent company, and will have access to the parent company’s talent pool of experienced executives and rank-and-file employees.
Advantage 2: Parent Company can share its resources
Another advantage of a foreign-owned subsidiary is that the parent company can share its resources, especially the financial systems, administrative services and marketing strategies that have proven successful in the past. Rather than starting from scratch, the subsidiary receives a framework, from which it can quickly ramp up its franchise operations. This not only helps ensure the foundation of the subsidiary is strong, it also saves time and money. In addition, the parent company can provide cash flow and investment, should the subsidiary suffer unexpected losses.
Advantage 3: Access to the Italian market
Establishing a foreign subsidiary also enables a parent company to expand its target consumer and to introduce its products and services to a new group of Italian prospects. This not only generates revenue in Italy, but also it can have the tangential effect of helping the subsidiary access markets in neighboring countries.
On the other hand, establishing a subsidiary in Italy may have some risks.
Disadvantage 1: Subsidiary can be expensive
One of the major drawbacks of a foreign-owned subsidiary is that establishing this business can eat up the financial resources of a parent company. That’s why the parent company must conduct feasibility studies to determine not only what the costs are to get the subsidiary up and running but also what it will cost in the next years to sustain that subsidiary, based on various economic factors.
Disadvantage 2: cultural and political challenges in Italy
By definition, a foreign-owned subsidiary is a company that didn’t develop organically from the country in which it operates. As a result, there are cultural and political challenges that may arise, which could negatively affect the success of that subsidiary.
Avv. Valerio Pandolfini
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The information contained in this article is of a general nature and is not to be considered an exhaustive examination of the various issues, nor is it intended to express an opinion or provide legal advice. Specific legal advice must be provided with regard to individual cases.