Following international regulations can be tricky for franchises looking to expand overseas. But a little support on the ground can help you dot the Is and cross the Ts
Since franchising is based on the principal of replicating a business multiple times, there is – at least theoretically – no reason why a franchise has to be restricted to one area or even one country. For example, Canadian coffee shop Tim Hortons is preparing to launch its first stores in the UK, joining a long list of now familiar franchise networks, including McDonalds, Subway and Domino’s Pizza. And it’s not just networks moving across the pond: many UK brands are expanding in Europe, as well as venturing further afield into places like China and Dubai.
The reason why so many franchises are choosing to do this is obvious: international expansion means access to new franchisees, customers and revenue streams. But how they go about doing it can be more complicated.
Routes to international markets
There are several routes open to a franchisor that chooses to operate internationally. The first and perhaps simplest method is for the franchisor to operate directly in international territories. The franchisor grants franchises to franchisees in the local area, either directly or, more commonly, through a subsidiary or associate company set up for this purpose. The advantage is that the franchisor retains direct control over its franchisees and, significantly, the franchisor gets to retain all of the franchise fees without having to pay a cut to a middleman.
While this approach seems attractive at first glance, the franchisor does risk not being familiar with local culture and laws in the new area. It can also be difficult to properly support franchisees and enforce the franchise agreement if franchisor and franchisee are based in different countries. In light of this, the direct route tends to be appropriate only where the new area is legally and culturally very similar to the original country, for example, the US and Canada or England and Ireland.
To overcome the risks associated with a lack of local knowledge, the franchisor will often work with a partner from the new territory. This can be done in a number of ways, most commonly by granting a master licence to the partner who will be responsible for establishing and growing the network in the local area. This will normally include recruiting and policing local franchisees, although in some instances the partner will themselves operate franchised outlets.
For the franchisor, one of the benefits of this approach is that they’ll be able to exploit the partner’s local knowledge. In addition, the burden of recruiting, supporting and policing franchisees in another part of the world is lifted – or at least shared. The main downside is that franchise fees will have to be shared between the partner and franchisor.
Compliance with local laws will naturally be a key consideration for any network looking to expand overseas. Franchising in the US is far more heavily regulated than in the UK and Europe, making it generally easier for a US network to expand into the UK than vice versa. Compliance with US law includes both adhering to federal and state laws. This means that the legal requirements that apply to the network can vary from state to state even within the US.
Although franchising across Europe is less regulated, there are still differences in local territories. For example, France has specific rules on the information that must be disclosed to potential franchisees before they sign up. Germany also has pre-contract disclosure requirements, albeit introduced through case law rather than statute. The UK doesn’t have these strict requirements. Disclosure of certain information pre-contract is considered good practice but is not a legal requirement.
Franchise agreements always contain non-compete and confidentiality provisions to protect the franchisor’s knowledge, brand and systems but can be seen as anti-competitive. This means they must comply with competition law. In the UK and Europe, the rules on competition are similar, having generally been derived from the same piece of EU legislation. In the US, restrictions may be examined under anti-trust laws, as well as under laws in each state. Local tax laws and the proper tax treatment of franchise fees and royalties will also need to be thoroughly checked.
In view of the differences in territorial laws, franchisors that are looking to expand overseas ought to have their franchise agreement reviewed by a local lawyer in that territory to ensure it’s compliant with local rules.
A network looking to expand overseas will also need to consider international protection for its intellectual property. Trademarks can be protected by national registration in the target countries. In some cases, it may be appropriate to take advantage of systems that allow a single application to be made for registration across multiple territories – such as a Community Trademark, which offers protection in all EU member states, or the Madrid System, where a single application can result in protection in up to 114 countries, including China and the US.
Similarly, the operations manual is protected by copyright law in the UK but the franchisor will need to check the scope of copyright protection and any formal requirements for copyright to exist in the target territory.
There’s no doubt that international expansion offers a wealth of opportunity for franchise networks. Just make sure you avoid the pitfalls by being aware of all the potential legal challenges you might face.