INTERNATIONAL FRANCHISING

If you are thinking about expanding your business abroad, please see our Overview of International Franchising, below. For further information, please contact us and we would be delighted to assist you.

You will need to establish at an early stage a number of issues, including:

• Trade mark (and domain name) protection in the target country;
• What are the exchange control central bank restrictions and witholding taxes in the target country;
• Will you have to comply with any francise disclosure, registration or relationship laws; and
• What structure should you adopt for your international expansion.

If you are looking for specialist legal advice in Europe please see EuroFranchise Lawyers – a grouping of Europe’s leading franchise lawyers. It is a very active group which meets twice a year in plenary session and its members work together frequently on international franchising issues. All members of EuroFranchise Lawyers are experts in franchise law who have thorough knowledge of the franchise law and practice and have wide experience in drafting franchise agreements.

An Overview of International Franchising

There are essentially five ways in which a franchise system can be expanded overseas:

1. The franchisor either from its “home” headquarters or from a foreign branch operation grants individual franchises to franchisees in the target country.

2. The franchisor establishes a subsidiary in the target country and that subsidiary acts as the franchisor.

3. A joint venture is established between the franchisor and a third party with knowledge of the target country. The joint venture will act as the franchisor in the target country and may be granted a master franchise agreement.

4. The franchisor enters into a master franchise agreement.

5. The franchisor enters into a development agreement.

Direct Franchising

A franchisor may enter into individual franchise agreements for each outlet (single-unit franchisee). Here the franchisor has direct control over each franchisee and generates a revenue stream that does not need to be shared with others. However, there may be problems repatriating revenue as well as difficulties in dealing with the unknown markets which include language, culture, laws, regulations and business practices.

A successful single unit franchisee may go on to acquire more units, becoming a multi-unit franchisee in due course. This type of franchising arrangement is common in retail franchises but not in service franchises. Multi-unit ownership may be beneficial for both parties; the franchisor lowers the acquisition cost of a new franchise, while the franchisee also grows by extending the operations to one or more new locations in the same country or in different countries.

Master Franchise Agreement

In a master franchise agreement another business is given the right to sub-franchise the franchisor’s business concept within a given territory usually in accordance with a development timetable. These rights are secured by an initial fee charged by the franchisor. The grant of a master franchise enables a franchisor to expand without substantially increasing the size of its management team. Here the franchisee, in effect, acts as the franchisor in the target country. The disadvantage of this approach is the loss of control over sub-franchisees (with whom the franchisor has no contract) and the franchisor’s heavy reliance on another business entity over which it has no direct control other than through the master franchise agreement.

Development Agreement

Development agreements oblige a developer to open multiple outlets (rather than appoint sub franchisees) in accordance with a development schedule. These agreements have broadly the same advantages and disadvantages as master franchise agreements except that the franchisor may, even more than with a master franchise agreement, be putting “all its eggs in one basket” by entrusting to one business the obligation to open multiple outlets.

Other Agreements

Apart from master franchise and development agreements there are a number of alternative structures which may be relevant to your proposed expansion.

IP Rights

Intellectual property rights are territorial in nature. That is to say, rights that exist in a given country or region are applicable only in that country or region. When planning to go overseas with a franchise operation, it is important to ensure that your intellectual property rights are protected in that territory. Franchisor should take steps to register their intellectual property rights (especially their trademark) in the country where the franchise business is going to operate (and even in the surrounding territories taking into account possible expansion strategies of the future). You do need to investigate whether a third party has beaten you to any registrations and/or whether your chosen domain names are available.

Laws that Apply to Franchising

Not all countries have specific legislation on franchising but for those that do not a variety of other laws including agency, employment, commercial codes, anti-trust, competition, consumers’ rights and trademark – laws may have to be reviewed.

Franchise disclosure laws

Some countries have disclosure laws that require information to be provided to prospective (new and renewing) franchisees before any contract is signed or any money is paid. Sometimes, as is the case in the United States of America, the disclosure requirements are onerous and expensive to comply with.

Registration requirements

In some countries the franchise agreement and other documents have to be registered with a government body.

Competition laws

Generally franchise agreements are subject to competition laws.

Other laws

A variety of other laws relating to employment, tax, exchange control, insurance and other consumer protection laws may also have to be reviewed.

For further information, please contact us