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08 October 2013
There has been growing interest from established brands in the retail, food and beverage and quick-service restaurant sectors in the use of franchising as a way to access new markets.
Companies with scope for more rapid expansion than their capital and human resources permit often turn to franchising as a means of exploiting that scope in full. This is because franchising can allow businesses to 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. Subordinated equity franchising, 'manchising' and various hybrid structures should be carefully considered.
Some 29 countries have franchise-specific laws, while others (eg, Germany) impose a complex and challenging regulatory environment through more general commercial laws. These laws regulate the franchise sales process and the content of the franchise agreement, while some require that the documentation be filed on a public register.
In order to establish an appropriate strategy, any retail or leisure company that is considering internationalising its 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 that 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 this. As such, the sales process will need to be adapted. All sales documentation must be amended to comply with the legal and regulatory requirements, not only in those jurisdictions with franchise-specific laws, but also those that impose a pre-contractual duty of care/duty of good faith (eg, Germany).
Countries such as the United States, 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 consequences of failure to comply with the disclosure requirements vary somewhat. In general, the franchisee is entitled to walk away from the agreement without restrictions, provided that 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 easily be overlooked, which results in difficulties for franchisors. Detailed practical and legal advice at an early stage from expert franchise lawyers will make a big difference.
Franchise-specific laws in countries such as the United States, Australia, Italy, Belgium, China, Vietnam, Malaysia and Indonesia impose mandatory contractual terms in the franchise agreement. These often include:
Any retail or leisure company considering international franchising must carefully consider the impact of these mandatory provisions on its proposed business model before it commits to doing a deal in a specific market, as this may substantially affect the commercial terms that it can offer.
It is essential that registration requirements in countries such as the United States, China, Indonesia, Malaysia and Spain are complied with. Some jurisdictions require the franchisor to register only relevant details, while others require registration of all documentation. In developing markets, this is to enable the government to monitor franchisors doing business in the market, while in more developed economies (eg, the United States 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 that sell franchises in only one province must file the information at the local Ministry of Commerce office of that province, whereas for cross-province franchising the papers must be filed with the ministry itself.
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