There are two ways to expand your franchise overseas. The first involves a detailed analysis of potential markets for your products and services; diligent investigation into potential franchise partners; and a well thought through international expansion strategy. The second involves a phone call out the blue from someone in Australia wanting to pay you for a franchise.
It would be too simplistic to classify these as a "right way" and a "wrong way" to franchise. For many Franchisors the "phone call" method is often the catalyst for exploring international growth. Provided all the necessary research is completed before a deal is signed, there is no automatic reason why a franchise awarded in this way would not be a success.
So what research does a Franchisor need to do? Quite simply, the more research you do, the better. This article seeks to pose three suggested questions that any franchisor should consider from a legal perspective before signing up a foreign franchisee. It is by no means a full list of everything you will need to consider!
Is franchising regulated in the territory?
As you may be aware, the franchising industry in the UK is not directly regulated by UK government. However, in many countries worldwide, franchising is subject to strict legislation. Whether this is laws in the USA requiring franchisors to prepare a disclosure document, or laws in Australia requiring franchisors to comply with the Franchising Code of Conduct it is important to know how legislation impacts franchising in your target territory.
How will local laws impact your Franchise Agreement?
The Franchise Agreement you are signing with an international franchisee may say that the governing law of the agreement is the "Law of England and Wales". Regardless, did you know that certain post-termination non-compete clauses are potentially unenforceable in Denmark? Or that, if you terminate your Norwegian franchisee, a Norwegian court may decide you have to pay that franchisee compensation in certain circumstances? It is important to understand that, no matter what the governing law clause says, certain local laws in an overseas territory may override the terms of the franchise agreement.
Given this, I would always recommend engaging a local law firm in the territory (preferably one experienced in franchising) to conduct a compliance review of the Franchise Agreement before the deal is signed. In addition to advising on the Franchise Agreement's enforceability, this local lawyer will also be able to let you know if there are any other aspects of local law (or indeed business practice) that might impact the operation of the franchised business in the Territory
What model should you use?
There are many franchising models that can be used for expanding internationally. Here are a few examples:
Master Franchising –The franchisor appoints a business entity with local knowledge to operate franchise units itself and appoint others (known as "sub-franchisees") to do so. This is by far the most common method.
Direct Franchising – The franchisor in the UK contracts directly with a franchisee in the territory to operate one franchise unit.
Area Development Franchising – Similar to a Master Franchise but the Master Franchisee is not allowed to sub-franchise (allowing the franchisor to maintain more control).
In addition, you may choose to open a branch/subsidiary operation in the territory to act as the franchisor? Or you could enter into a joint venture relationship with the franchisee (the joint venture company acting as the franchisee). Naturally, there are advantages and disadvantages involved in all these methods and there is no "one size fits all" approach.
Andrew Fraser, Harper Macleod LLP
Andrew is an Associate in the Franchising Team at Harper Macleod LLP who acts on behalf of franchisors and franchisees throughout the UK and Internationally on all manner of franchising issues including franchising businesses, buying and selling franchised businesses and managing franchise disputes.
Prior to joining Harper Macleod, Andrew was a Franchise Consultant with one of the UK's leading franchise consultancy practices helping businesses to grow through franchising; existing franchisors to improve and expand their networks; and working with large retailers to franchise internationally. He has worked with a wide range of clients from sole traders to global companies, such as Ralph Lauren, Esprit and American Eagle Outfitters.