Franchising can offer flexible and cost-effective solutions for firms looking to grow internationally. Expert Andrew Pena takes a look at what firms need to consider.
There are a number of different models for international franchising. They usually range from franchising via a:
(1) Developer model where the regional franchisee will usually open and operate units itself or via wholly or partly owned subsidiaries
(2) Master model where the regional franchisee will usually sub-licence franchisees to open outlets
(3) Hybrid model that allows the regional franchisee to grow by opening and operating units directly and via sub-franchisees
Prior to international franchising, the franchisor will need to register its brand as a trade mark in the country in which it is looking to franchise.
It will need to consider very carefully the rights and obligations of the franchisee in the new territory and, in particular, whether the international agreement should be subject to English law and jurisdiction (which is preferable for reasons of consistency) and/or there are any local laws that may need to be considered, especially if there are local franchising laws that place certain obligations on the franchisor.
The franchisor will also need to give thought to the appropriate corporate structure for each country and, in particular, whether to create a different structure for franchising internationally and fee structure for each country (which is likely to depend on the size of the territory and the strength of the brand) and the speed of growth it will expect from the international franchisee.
Launching a business internationally provides a good opportunity to review the corporate structure of a franchised business and, in particular, review whether the ownership and licensing of the intellectual property (including the brand, business model and systems) should be separated from the main trading companies.
Most international franchising operators will look to create a separate company for franchising its business internationally. Primarily, there are two reasons behind this. Firstly, there may be tax advantages in adopting a corporate structure that is located in a different jurisdiction and is separate from the main trading company.
Secondly, having a different corporate structure protects the main trading business in case there are unforeseen issues and complications with the international model. Additionally, and by way of further protection, the franchisor may look to use separate vehicles as the franchisor for each country.
Most international franchisors will place an obligation on the local developer or master franchisee to adapt the model and systems to ensure that they are compliant with local laws. However, a franchisor will need to obtain local advice to ensure that the contractual relationship with its master franchisee or developer are complaint with local laws. For example, in some countries, the franchisor may be required to provide pre-contract disclosure in a prescribed manner or may need to ensure that any agreement is complaint with any local laws.
Strong and well recognised brands often opt for developer based international agreements since this allows the franchisor greater control over the growth of an international brand. The main advantage of this type of model for the franchisor is that it is the developer is usually directly responsible for opening and operating each franchised outlet. This does, however, place a significant financial obligation on the developer since they would need to have the working capital in place (or at least good access to the financial resources that will be required) to meet the growth obligations under any developer agreement.
Master franchise agreement
Under a master franchise agreement, the local franchisee is usually entitled to recruit and train sub-franchisees to open and operate each outlet. Although this does, to some degree diminishes a franchisor’s, and in turn the master franchisee’s, control over the underlying business it does allow a much greater scope for growth. In this situation, the master franchisee effectively becomes the franchisor of the territory with individual franchisees operating beneath them.
In some cases, a international franchising operators can opt for more of a hybrid agreement which allows for certain units to be operated directly and some to be franchised (either through wholly or partly-owned subsidiaries or even unconnected third parties).
Franchising offers an extremely flexible model for the international growth of a business. Although some consideration will need to be given to the laws of each country – and some preparatory work done in respect of how the IP is ultimately held, the local registration of trader marks and the most appropriate corporate structure, fee structure and international model – franchising does offer a reasonably efficient and adaptable model to grow from a national to an international business quickly and cost effectively. It also provides a model that can be easily adapted to help a non-franchised national business to grow and expand internationally.
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