Franchising across borders: the reality & the risks
Thursday, February 22, 2018
Once a UK based Franchisor has established its brand and business in the domestic market, there is often a question of ‘how to grow the business further afield’. Franchising is often the preferred route to expansion, but with the proliferation of legislation to combat bribery, money laundering, modern slavery, as well as enhanced data protection requirements, compliance alone has become complex.
Once a UK based Franchisor has established its brand and business in the domestic market, there is often a question of ‘how to grow the business further afield’. Franchising is often the preferred route to expansion, but with the proliferation of legislation to combat bribery, money laundering, modern slavery, as well as enhanced data protection requirements, compliance alone has become complex. What’s more, there are other issues to contend with including intellectual property protection, training and support, quality control, supply chains, and if disputes occur, enforcement of judgments or arbitral awards.
Choice of business partner
In an arm’s length franchise, the Master Franchisee or Developer, depending on which structure is used, is responsible for growing the brand, managing the operation and the licence to use the intellectual property. But the Master Franchisee’s or Developer’s conduct affects the reputation of the brand not only within the territory but throughout the network. It’s critical that care is taken in choosing the right partner.
Investigating the financial resources and networks is also key. When choosing a business partner it’s important to assess whether the Master Franchisee has the ability to meet the development schedule that is negotiated, so that the prospect of early termination may be avoided.
A trial franchise is also a useful option. A trial with the business partner can ascertain whether the business relationship and the franchise will work in that territory and if the chemistry feels right.
Training and support
Even with agreements and documents in place to govern the relationship between the parties, it is important for the Franchisor to provide adequate training to the Master Franchisee or Developer on the practical application of the provisions using the Manual and it’s procedures for anti-bribery, anti-money laundering, staff and social media policies and data protection.
If the training is too theoretical the Master Franchisee or Developer can struggle to operationalise the manual and its content. Franchisors need qualified staff to support the Master Franchisee or Developer before the business starts and for on-going requirements. Failure to provide training and support leads to disputes and delays in the development of the business and the brand in the territory.
Protection of IP
Before any negotiations with a potential Master Franchisee or Developer, the Franchisor must apply for the registration of trade marks or domain name for the territory. The licence to use such intellectual property is granted under the Franchise Agreement.
In some jurisdictions the trademark has to be fully registered prior to the grant of franchise rights, but in most, an application made at the relevant Registry is adequate to start. In some countries where cyber-squatting is prevalent, franchisors may be better off keeping their intensions to expand confidential until applications for registration of the trade mark or domain name has already been made.
When Franchisors choose the franchise structures they use for entry into the country it is best to use one where they have more control over their intellectual property and ability to take action against a party violating intellectual party rights. In a Master Franchise model, the Franchisor does not have direct contractual relationship with the sub-franchisee.
The basics tenet of franchising is that the consumer must find the same quality and experience of a product or service anywhere, with certain modifications to adapt to the local culture or regulations. Ensuring standards are met by the Master Franchisee or Developer, means the Franchisor needs an inspection team ready to go overseas.
In some sectors, like food and beverages, Franchisors can make it mandatory for outlets using their brand to meet the highest level of safety and hygiene standards. Also practical guidance and updates are essential so that the franchisee operating the business understands what is required of them, otherwise disputes can occur in relation to what amounts to breach and substandard quality.
Franchisors may like to take interest in customer complaints and feedbacks, although it is technically the responsibility of the Master Franchisee to deal with. It can provide a good indication of what is going on.
In most franchise agreements, the Franchisor requires the Franchisee to purchase goods, equipment or certain services to be used only from suppliers designated by them or, in some cases, directly from the Franchisor. The justification for doing so is to maintain common identity, uniform quality and standards throughout the network.
Difficulties can however arise, especially if the products, equipment or services cost too much and the Master Franchisee, Developer or Unit Franchisee, finds that it is unable to compete or make a profit. Further problems can arise if the Franchisor’s goods or services can be sourced at a lower cost from alternate supplier(s) but the Franchisor is resistant.
Enforcement of a court judgement or arbitral award
Even if the governing law of the franchise agreement may be subject to English law or, the dispute processed through the English Courts or arbitration in London, it may not be simple to enforce the judgment or award in the jurisdiction where the Master Franchisee or Developer is located.
The judgment of an English court and whether it is enforceable in another country depends on whether there is a treaty for the recognition of judgments from courts from that country. If there is no such treaty, then the judgment will be made on the basis of a suit in the local courts before it can be enforced. This can be both time consuming and expensive for both parties.
If an arbitration takes place in England and the panel of arbitrators or, a single arbitrator makes an award in England, it can be enforced more easily through the courts of the Master Franchisee or Developer’s country, if it is party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958). Fortunately, a very large number of countries are party to it.
The enforcement process can be challenged by the Franchisee on certain grounds. The favourite one is if the arbitral award violates public policy. One way to avoid potential challenge is for the Franchisor to ensure the franchise agreement does not violate any mandatory local laws, although it may have English law as the governing law.
While taking good advice and precautions to avoid pitfalls can provide a franchisor lucrative income and its brand becoming known overseas, choosing the wrong partner and not allocating resources to provide support to the franchisee can be a costly mistake.