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Expanding into new markets through franchising



United Kingdom

Franflash - October 2012


There has been a growing interest from established brands in the retail and F&B and Quick Service Restaurants (QSR) sectors in the use of franchising as a way to access new markets during the last year.

Companies with scope for more rapid expansion than their capital and HR resources permit, often turn to franchising as the means of exploiting that scope to the full. This is because franchising can allow businesses to successfully re-engineer themselves. So that they can access foreign markets and generate new income streams, without the need for capital investment and an extensive management infrastructure.

A new trend is the tendency for some brands to forsake plain "vanilla" franchises, in favour of more sophisticated, finely tuned options. Such as subordinated equity franchising, "Manchising" and various hybrid structures should be carefully considered.

There are some 29 countries that have franchise specific laws. Whilst others, such as Germany, impose a complex and challenging regulatory environment, through more general commercial laws. These laws regulate the franchise sales process, the content of the franchise agreement, and some require that the documentation be filed on a public register.

In order to establish an appropriate strategy, any retail or leisure company considering internationalising their business through franchising, must take timely legal advice. Ideally, provided by franchise lawyers with outstanding legal expertise and a proven track record of advising franchisors in the target jurisdictions. This will ensure the franchisor's sales process, sales materials and legal documentation comply with the relevant laws. Merely opting for English Law in the franchise agreement will not achieve that.

The sales process will need to be adapted. All sales documentation will need to be amended to comply with the legal and regulatory requirements. Not only in those jurisdictions which have franchise specific laws, but also those that impose a pre-contractual duty of care / duty of good faith, such as Germany.

Regulation of the sales process

Countries such as the USA, Australia, France, Spain, Italy, Belgium, Sweden, Brazil, China and Vietnam take a similar approach to regulating the sales process and require set form pre-contractual disclosure. Although, the detailed requirements vary. Key disclosure issues include the how and when the disclosure must be made, mandatory cooling off periods before the deal can be finalised, the contents of the sales documentation, the basic details of the franchisor, a description of the franchise and of the brand, financial information about the franchisor, details of the franchise network, details of any litigation, details of all payments due, such as the initial fee, initial investment and continuing fees, claims about the earning likely to be made, details of any restrictions on the franchisee, descriptions of the obligations that the parties owe towards one another, details of any purchase ties, details of the franchisor’s intellectual property rights, details of financing arrangements offered by the franchisor and details of any exclusivity granted.

The consequences of failure to comply with the disclosure requirements vary somewhat. It generally entitles the franchisee to walk away from the agreement without restrictions, provided it acts within a reasonable period of entering into the agreement. The franchisee can also sue the franchisor for damages. Some jurisdictions also impose fines for failure to comply. Certain jurisdictions enable the government to take the initiative although most simply grant the right to the franchisee.

Despite a general similarity of approach, no two countries have identical pre-contractual disclosure requirements. These subtle but important differences can be easily overlooked and then result in difficulties for franchisors. Detailed practical and legal advice at an early stage from expert franchise lawyers will make a big difference.

Regulation of contractual terms

Franchise specific laws in countries such as the USA, Australia, Italy, Belgium, China, Vietnam, Malaysia and Indonesia impose mandatory contractual terms in the franchise agreement. These often include a minimum term, a duty of good faith, restrictions on termination, restrictions on post termination non competition clauses and so on. Any retail or leisure company considering international franchising must carefully consider the impact of these mandatory provisions on their proposed business model before they become committed to doing a deal in a specific market, as they may substantially affect the commercial terms that they can offer.

Registration requirements

It is essential that registration requirements in countries such as the USA, China, Indonesia, Malaysia and Spain are complied with. Some jurisdictions require the franchisor to register only relevant details whilst others require registration of all the documentation. In developing markets this is to enable the government to monitor franchisors doing business in the market whilst in more developed economies (such as the USA and Spain) it is to ensure transparency and maintain a certain level of quality.

In some countries, there are multiple registration requirements. For example, franchisors in China who sell franchises in just one province, must file the information at the local office of the MOFCOM of that province, whereas for cross-province franchising the papers have to be filed with MOFCOM itself.

For more information please contact your usual Fieldfisher contact.