International Comparative Legal Guides

Franchise 2020

Sixth Edition

A practical cross-border insight into franchise law

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ǼLEX

ALRUD Law Firm

Anand and Anand

Anderson Mōri & Tomotsune

Arias, Charua, Macías & Prum, S.C.

Badertscher Rechtsanwälte AG

Bogsch & Partners Law Firm

British Franchise Association

Bustaman

Christodoulou & Mavrikis Inc.

Daniel Law

Dentons LLP

Faegre Baker Daniels

Freeths LLP

Hamdan AlShamsi Lawyers & Legal Consultants

Hammad & Al-Mehdar Law Firm

Hannes Snellman Attorneys Ltd

International Franchise Association

Jones & Co.

Kennedy Van der Laan

LINKEA

Marsh & Maher Richmond Bennison

Noerr LLP

Pehlivan & Guner

Polsinelli

Rödl & Partner

SCA Rubin, Meyer, Doru & Trandafir

Stewart Germann Law Office

The Richard L. Rosen Law Firm, PLLC

THUM Rechtsanwaltskanzlei ǀ Law Firm

TLT LLP

Ventura Garcés López-Ibor

Featuring contributions from:

Disclaimer This publication is for general information purposes only. It does not purport to provide comprehensive full legal or other advice. Global Legal Group Ltd. and the contributors accept no responsibility for losses that may arise from reliance upon information contained in this publication. This publication is intended to give an indication of legal issues upon which you may need advice. Full legal advice should be taken from a qualified professional when dealing with specific situations.

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Strategic Partners

ISBN 978-1-83918-002-6 ISSN 2055-8082

Franchise 2020Sixth Edition

Contributing Editor:

Iain Bowler Freeths LLP

International Comparative Legal Guides

Group Publisher Rory Smith

Associate Publisher James Strode

Senior Editors Caroline Oakley Rachel Williams

Editor Nicholas Catlin

Creative Director Fraser Allan

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Table of Contents

Industry Chapters

6 Delivering Growth – The Third Way Iain Bowler, Freeths LLP

9 The Unprecedented Tariff Landscape: Why Franchisors and Franchisees Should Take Action for the Benefit of their Supply Chain Joyce Mazero, Michelle Schulz & Luis F. Arandia, Jr., Polsinelli

18 Building and Managing an International Franchise Network Pauline Cowie, TLT LLP

Country Q&A Chapters29 Australia

Marsh & Maher Richmond Bennison: Robert Toth

38 Austria THUM Rechtsanwaltskanzlei ǀ Law Firm: Dr. Hubertus Thum, LL.M.

50 Brazil Daniel Law: Hannah Vitória M. Fernandes & Antonio Curvello

59 Canada Dentons LLP: Helen Fotinos

68

76 England & Wales Freeths LLP: Iain Bowler

86 France LINKEA: Cecile Peskine & Clémence Casanova

94

Hungary Bogsch & Partners Law Firm: Dr. Tamás Gödölle, Dr. Pál András Gáspárdy & Dr. Márk Pécsvárady

104

Germany Noerr LLP: Dr. Tom Billing & Veronika Minne

113 India Anand and Anand: Safir Anand & Twinky Rampal

121 Italy Rödl & Partner: Roberto Pera & Gennaro Sposato

130 Japan Anderson Mōri & Tomotsune: Kenichi Sadaka & Aoi Inoue

139 Malaysia Bustaman: Adhuna Kamarul Ariffin & Nor Athirah Khairol Anuar

148 Mexico Arias, Charua, Macías & Prum, S.C.: Elias Charua García & Oscar Arias Corona

165 New Zealand Stewart Germann Law Office: Stewart Germann

173 Nigeria ǼLEX: Tiwalola Osazuwa & Frances Obiago

180 Romania SCA Rubin, Meyer, Doru & Trandafir: Cristina Tararache

187 Russia ALRUD Law Firm: Maria Ostashenko & Vera Glonina

195 Saudi Arabia Hammad & Al-Mehdar Law Firm: Suhaib Hammad & Anas Jeser

202 South Africa Christodoulou & Mavrikis Inc.: Alex Protulis

211 Spain Ventura Garcés López-Ibor: Ricard Gené & Juan Botta

155 Netherlands Kennedy Van der Laan: Martine de Koning

221

228

Sweden Hannes Snellman Attorneys Ltd: Elisabeth Vestin & Sara Heikfolk

237

Switzerland Badertscher Rechtsanwälte AG: Dr. Jeannette Wibmer

244

Turkey Pehlivan & Güner: Haşmet Ozan Güner

250 USA The Richard L. Rosen Law Firm, PLLC: Richard L. Rosen, Leonard Salis & John A. Karol

22 Franchising in a Sea of Data and a Tempest of Legal Change Paul Luehr, Huw Beverley-Smith, Nick Rotchadl & Brian Schnell, Faegre Baker Daniels

China Jones & Co.: Paul Jones & Xin (Leo) Xu

United Arab Emirates Hamdan AlShamsi Lawyers & Legal Consultants: Hamdan Al Shamsi

Expert Chapters

1 IFA’s Role Shaping the History and Future of Franchising International Franchise Association

3 Franchising the Next Generation Pip Wilkins, British Franchise Association

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Chapter 5

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Building and Managing an International Franchise Network

Pauline Cowie

Introduction The increasing globalisation of business means that even relatively small companies may decide to franchise internationally, even when they do not franchise in their home country. It is rare for a business of any size not to have considered franchising at some point in its evolution. Once first steps have been taken to franchise internationally, expertise developed and experience gained in setting up international franchise operations, entering into new international markets through franchising becomes easier as processes become more streamlined and lessons learnt on strategy and implementation are taken on board. Whilst not without risk, these risks become easier to identify and manage. The key advantage of franchising over other expansion routes is that companies are able to expand in international markets faster and more cost-effectively than company-owned operations which are capital-intensive, although company-owned operations can often be operated alongside franchised units.

Key Considerations When looking at the available options, companies can adopt a number of strategies when building an international network. Choosing the most effective expansion route is a key component and what might suit in one territory, may not suit in another. It is not uncommon for a company to have a number of different expansion routes. The choices made will depend on a variety of factors including: ■ market potential; ■ numbers of suitable prospective franchisees; ■ how close the company wants its relationship to be with the

franchisees; ■ capacity to provide support and infrastructure; ■ language and communication; ■ local law requirements and barriers to entry; ■ taxation; and ■ financials, particularly the profitability of the franchise business

and the scope for deduction of potentially multiple levels of fees from the franchise network.

Avoiding Costly Mistakes Whichever route to international franchising is chosen – having made a decision to franchise internationally, whether in a particular jurisdiction or generally – it is important to ensure that the company as franchisor complies with all compliance and legal requirements, and that all necessary steps are taken to maximise success, bearing in mind the long-term nature of the relationship with franchisees.

One of the key areas to consider is how an assessment is made of the suitability of a prospective franchisee. By carrying out a thorough initial assessment of the potential franchisee and due diligence investigation, the franchisor will obtain sufficient information to enable an informed decision to be made in principle, and as to

whether it has sufficient confidence to move forward to detailed discussions and the signing of a formal franchise agreement. It will also assist a company in evaluating the strengths and weaknesses of a potential franchisee and inform how the franchise agreement may be structured. Companies that have already franchised their business, whether domestically or internationally, will already have an under-standing and insight into how critical it is to get the appointment of the franchisee right. If things go wrong domestically, problems and disputes with a franchisee are much easier to handle than a disruptive and non-compliant franchisee in an overseas jurisdiction.

Before starting the process, an understanding of culture and custom, together with preliminary research on how familiar or prevalent franchising is in the target country, will inform the approach to due diligence. In some countries, it is important to build the relationship with the prospective franchisee before any detailed due diligence information is requested. Good communications in the initial stages are a means of building rapport and enable an assessment to be made as to whether the parties are in fact able to communicate without fundamental disagreement.

Whilst companies who already franchise in the domestic market will already conduct due diligence on franchisees, international due diligence will throw up a variety of additional challenges. Language may well be an issue, as well as differences in how the parties like to communicate. There could also be cultural issues. All of these need to be factored into the decision to proceed, and how best to structure the arrangements.

Internal Processes and Procedures When considering how and when a company develops its inter-national franchise strategy, it should also review whether current internal processes are fit for purpose with expansion in mind. An in-depth look at how, practically, the company will manage multiple international franchisees is a crucial step and should be revisited at appropriate points, remembering that the franchisees will be independent business-owners, rather than company employees, and therefore require a different and more sophisticated approach. The company should assess current capacity and efficiencies of procedures for developing and expanding an international franchise network, with a view to making changes to accommodate future plans. This can be achieved by: ■ mapping out current processes and identifying any existing and

anticipated day-to-day issues, making an assessment of their actual and potential impact and what should be prioritised for change. This will cover the period from initial discussions and signing of non-disclosure agreements, through to signing of franchise agreements and coordinating the actions and documentation which need to be in place prior to opening;

■ understanding where in the process information is obtained, by whom and who needs to have that information both internally and externally. This could include teams such as finance, learning

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and development, real estate and supply chain. It will also be important to ensure that controls are in place so that relevant information is verified as being correct before being actioned; and

■ considering solutions to address any areas of inefficiency on a priority basis, looking across the spectrum of people, processes and technology. The company should also consider including the use of automation and any opportunities to make these processes more efficient to manage both costs and risks.

Expansion Routes International franchising may take place alongside a corporate presence, as well as forming part of a varied strategy to penetrate international markets. The more common forms of international expansion are as follows:

Master Franchising

This is where the company as master franchisor enters into an agree-ment for a defined territory with a single master franchisee. The master franchisee will be granted rights to enter into sub-franchise agreements with sub-franchisees, often with an agreed development plan. The master franchisee may be required to establish one or more pilot operations to test and, with agreement, adapt the franchise format for the territory. The master franchisor will usually adopt a ‘light touch’ approach, leaving the master franchisee to recruit, support and manage the franchise network, but regular contact and support to the master franchisee will still be required. For this type of arrangement to work, there must also be sufficient, realistically achievable profitability for all parties (i.e. the master franchisor, master franchisee and sub-franchisees) to ensure an adequate return.

The disadvantage of this route is that the master franchisor will not have a direct relationship with the sub-franchisees, which in turn has its disadvantages (see Direct Franchising below). However, there are advantages too, particularly where the territory is far away and the right master franchisee with adequate resources is appointed.

Area Developer

This is a variation on the master franchise model and can take two forms: ■ in the first scenario, the area developer is appointed by the fran-

chisor to recruit franchisees for that territory but is not entitled to operate any units in the territory. Here, the franchise relation-ship is between the franchisor and the franchisees who are introduced to the franchisor by the area developer. The area developer may be required to provide certain support services at a local level to support the franchisees, such as training, marketing and business development, in return for a fee; or

■ alternatively, the franchisor may agree to enter into an agreement with the area developer for it to develop and open units itself rather than introducing potential franchisees to the franchisor or appointing sub-franchisees. A separate franchise agreement may then be entered into for each unit. The development of the area will be in accordance with an agreed development plan.

The former model has much in common with master franchising; the latter with direct franchising.

Direct Franchising

As with domestic franchising, the franchisor enters into one or more franchise agreements directly with franchisees in the overseas territory. The franchisees will each only be authorised to trade from an agreed location or within an allocated part of the territory. They

will not be authorised to enter into any sub-franchise agreements. The franchisor will have direct responsibility for supporting the fran-chisees and will receive payments of fees and charges directly from the franchisees. This is most commonly used where there is neither an intention to grant a large number of franchises, nor an expectation that franchisees will operate on a large scale. The reason for this is that it can become complex to manage a large number of franchisees at a distance unless the business has personnel on the ground and an existing support network and infrastructure. If there is a support network in place – often this might be because the busi-ness is already trading in that country, or supplies products on a wholesale basis – then it may make sense to enter into strategically placed direct franchises. The business will need to consider any language barriers and the distance between its domestic operations and the franchisees, as well as any operational challenges.

Entering into direct franchises at a distance can mean that it is difficult for a franchisor to ensure that the franchisees are, at all times, compliant with the terms of their franchise agreements. In addition, the franchisor should consider whether it is able logistically to provide adequate support to the franchisees. If it is not, it may leave itself vulnerable to claims from those franchisees and having to deal with network issues. The franchisor will also need to consider how it can best protect itself to ensure that payments are made on time from a large number of direct franchisees – which can be difficult to manage – and what security could be obtained to assist in this process.

If a franchisor wants to have a direct relationship with franchisees in a country and has the means and resources to do so, it might decide to establish a branch or subsidiary in that country to avoid some of the issues identified above. The franchisor would grant franchises through the branch or subsidiary that would become the franchisor in that country. The advantages of this route are that it would be physically close to the franchisees and therefore able to monitor performance and compliance by the franchisees more easily; as well as being able to retain all franchisee fees received, rather than splitting them with a master or area developer franchisee. A relatively small-scale operation established by the franchisor for this purpose may not give the franchisees much comfort, but strategically may suit the franchisor’s purposes provided that it is able and willing to comply with regulatory and taxation requirements.

Joint Venture

Whilst not a common means of international franchise expansion, it can be used to great effect where the potential joint venture partner has specific supply chain relationships, infrastructure and local market knowledge which the franchisor wants to benefit from. In certain jurisdictions, it may be the only viable route to market entry. The joint venture partner may also see it as the best means of ensuring adequate support from the franchisor and continuing interest in the operations, rather than a more distant master franchise relationship.

A joint venture is not the classic way of franchising but can be effective in difficult jurisdictions and with large franchise partners, although it does require more involvement from the franchisor through management of the joint venture and potentially a seat on the board. The joint venture will be regulated by an agreement, which will need to be adapted to reflect each party’s contributions and strategic long-term aims. A key area is intellectual property, which will be retained by the franchisor and which will need to be licensed in. A franchise agreement will also need to be put in place with the joint venture company, including a development schedule in accordance with the agreed business plan.

Conversion of Existing Company Operations

A company may already have a presence in an international market and, as with its home territory, conversion of some or all existing company-owned operations to a franchise model is an increasingly popular route. The business will obtain the benefit of the transfer of costs in operating the units to franchisees, and a steady flow of income from fees. Maintaining a small presence in an overseas territory means that the franchisor can support and manage the fran-chise network and retain more control. Experience shows that conversion of existing units to a franchise model increases the return to shareholders and the business benefits from highly motivated business owners.

Managing New Franchise Openings Assuming that the structural issues are resolved and the due diligence process is completed, the company will also need to ensure that it is able to manage the opening of new international franchised busi-nesses as friction-free and seamlessly as possible. From signature to commencement of operations, all parts of the organisation must be kept appropriately informed and ensure that they are aligned with the timescales and procedures for franchise openings. This will include dealing with any specific complexities in a particular territory and the logistics involved in the supply chain.

From a legal and risk perspective, as a minimum before training and operations commence, a check should be made to ensure: ■ that all franchise agreements are issued correctly and are signed

and completed properly, including ensuring that all ancillary agreements are properly signed and dated;

■ if translations, legalisation or notarisation of documentation is required, that these have been obtained;

■ where disclosure and/or registration is required, that the busi-ness has complied with the formalities within the relevant timeframes and that there is an audit trail to confirm this; and

■ that any required financial protection, such as letters of credit or even payment in advance, is received before shipments of products are made.

Putting in place adequate procedures for producing, negotiating, approving, signing and reporting on international as well as domestic franchise agreements is a key component of good fran-chise management.

Whilst it is not contemplated that franchise agreements will be reviewed on a regular basis, there invariably becomes a point at which it becomes necessary to ensure that franchisees are kept on track regarding compliance with their obligations under their fran-chise agreements. Having fully completed and signed agreements which are compliant with local law requirements is a fundamental step in ensuring that a company has the tools to manage compliance. Keeping a centralised repository of agreements with key dates such as dates for renewal, production of business and marketing plans, reporting and payments; as well as keeping track of unit openings and minimum performance requirements, will assist greatly in this task, which should be reviewed on a regular basis.

Ongoing Management of the Franchise Network Handling multiple franchisees across multiple jurisdictions can be a challenge, as the organisation deals with an increasingly sophisticated business model combining company-owned operations with the management of complex supply chains.

Keeping franchisees motivated, fully supported and interested in the business, as well as listening to any concerns and challenges, can help to avoid conflict.

Areas of dispute can involve the following: ■ non-payment of franchise and other fees and payments at all or

on time;

■ master franchisees failing to manage their franchise network of sub-franchisees properly, which often only comes to light when complaints are received at head office from sub-franchisees;

■ failing to achieve minimum performance criteria, whether in relation to the numbers of opened units or turnover;

■ data breaches and failure to comply with data privacy and protection laws;

■ failing to provide adequate financial and reporting information when it is not possible to obtain the relevant information by other means;

■ numerous small but persistent breaches; or ■ breaching non-compete obligations.

Companies need to consider how they will monitor and manage breaches of the franchise agreement by international franchisees. Keeping international franchisees on track by regular contact and putting in place effective compliance programmes is an essential requirement of successful programmes. Franchisees need to be educated about compliance and the steps which need to be taken to ensure that they address any deviations promptly. They need to receive adequate levels of support on an ongoing basis. A structured support programme and communication strategy with franchisees can often keep up motivation levels and address any problem areas before they become bigger issues, when more formal action might need to be taken.

Use of technology to assist companies in communicating with and managing compliance is an increasingly important part of the management of international franchisees. The more the company can design this into the procedures to be used by the franchisees in the business system, the more it will reap the benefits and pre-empt any issues which may arise. The company should also consider updating and making changes to IT networks to support inter-national expansion, including by taking advantage of CRM, project management and billing systems.

Technology also enables a company to disseminate information quickly and in a standardised way, such as changes in operational manuals and policies and online training modules. An intranet can be a useful tool to keep franchisees informed and up to date with company developments. As well as communication, the use of tech-nology to improve processes and procedures as well as customer experience, can add value from a business and franchise perspective. International franchisees may also be able to suggest ideas for consideration and, if approved, manage implementation at a local or even a wider level. Often the best ideas for innovation come from franchisees, as there may be innovations and technologies commonly used in some countries or jurisdictions which the company may not be aware of.

Master franchisees can be provided with systems which replicate the company’s own systems, so that they can manage their sub-fran-chisees in the same way that the company manages its domestic franchisees. If this is on the basis that the company retains access to such systems, it has the advantage of enabling the company to exercise step-in rights effectively in the event of a dispute or termination, and potentially to assist in the resale of the master fran-chise’s territory. Of course, privacy and data laws need to be complied with by all parties, and mapping out their respective responsibilities as to how compliance is maintained is a key component of devising the international strategy.

Conclusion There isn’t a ‘one size fits all’ approach to international franchising. Opportunities arise and commercial considerations dictate the final detail and structure. Taking a good look at internal processes and procedures, and using the latest technology to optimise efficiencies and manage risk, will be integral to achieving successful outcomes.

Building and Managing an International Franchise Network

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Pauline Cowie is a Partner with over 30 years’ experience in advising franchising clients, extensive international experience, and leads TLT’s Franchising team. She has advised on innovative franchise structures and in the retail, leisure, financial services, IT/telecoms and not-for-profit sectors. She is a former member of the British Franchise Association’s Legal Committee and a regular speaker at franchise events. Pauline has been frequently named as a Leading Individual in the legal directories for her franchising expertise, and won a British Finance Association award for innovation and development in June 2019.

TLT LLP 3 Hardman Square Manchester M3 3EB United Kingdom

Tel: +44 333 006 1443 Email: pauline.cowie@TLTsolicitors.com URL: www.tltsolicitors.com

TLT LLP is a top-50 UK commercial law firm. We support some of the UK’s major institutions, high-growth businesses, large corporates, public institutions, and well-known brands, helping them to grow and protect their interests and achieve successful outcomes in a straightforward and accessible way. We provide strategic advice and support on day-to-day legal needs. We advise across all three UK legal jurisdictions of England & Wales, Northern Ireland and Scotland, from our offices in Bristol, London, Manchester, Glasgow, Edinburgh and Belfast. We also have a specialist ship finance team in Piraeus, Greece. We have significant experience advising clients in our focus sectors: Leisure; Food and Drink; Retail and Consumer Goods; Financial Services; Digital; Clean Energy; Real Estate; and the Public Sector. The firm has a strong track record of consistent growth, driven by client need. TLT has over 100 partners and employs around 1,000 people.

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