International franchising: the legal issues

Franchise organisations are often approached by people from other countries asking if they can become the operator or master franchisee for that brand in their particular country. It can be tempting to consider international development (particularly with a seemingly willing contact in another country); however, such a step requires a great deal of thought. Franchisors will need to consider their true motivation for international expansion, the costs involved (both human and financial resources), local competition, the laws in a specific country and the long-term intention and investment.

Going international is challenging, no matter how well established a brand is in other countries. It is not something to be tried without market analysis, good advice and preparation. There are franchise consultants in the UK who specialise in international expansion and often have a network of contacts throughout the world. It is highly recommended that any UK business considering expanding overseas speaks to appropriate advisers at the outset.

When franchising internationally, there are a number of legal and practical considerations to bear in mind.

Protecting the brand overseas

Arguably a franchisor’s most important element is its brand, particularly its trade name and trademarks. Franchisors considering franchising overseas should contemplate certain questions: 

• Will the brand translate to another country, or might it need to be tweaked or translated to make it more appropriate for a new market? 
  
• Is there another business in the target country already trading with the same or similar name? 
  
• Are appropriate domain names and social media handles available in other countries? 
  
• What intellectual property will need to be formally registered and what (if any) may achieve automatic protection? 

The laws governing intellectual property in different jurisdictions can vary widely. Those considering international expansion should ideally consult both their own brand protection specialist and one in the target market in order to determine what protection will be required, gain an understanding of the process, costs and timescales to achieve it and whether there are likely to be any issues. In the initial stages, it is a good starting point to carry out searches of relevant trademark registers, local trade press and wider internet resources. 

Franchise agreement

A well-established franchisor is likely to have a robust, well-drafted franchise agreement for its home territory. Although it may work well, the agreement will need to be reviewed by a local lawyer in the relevant territory into which the franchisor is expanding and tailored accordingly. A number of provisions may need to be altered and thought should be given to any payment mechanisms (particularly when exchange rates are involved). This point should be considered as currency fluctuations can make a substantial difference to monies paid overseas over a long period.

It is also important to take advice on the enforceability of obligations, restrictions, non-compete clauses and guarantees within other countries; local lawyers should be able to provide guidance on this. Jurisdiction clauses may allow for a franchisor to take action against a defaulting party in their territory, but consideration will need to be given to practicalities and costs in that regard. 

Local laws and disclosure requirements

This is particularly important to consider and any business looking to set up overseas will need advice from lawyers in that country. Certain countries have clear laws relating to franchising (for example, the US, Australia, Canada and several countries in Europe) and others have a strict approach to laws relating to business generally, such as competition rules, foreign trade and investment. Some countries also have disclosure requirements, whereas others may have a more relaxed approach. 

In terms of the operation of the business itself, it is sensible to check whether there are any particular laws relating to the provision of services or products that form the core business. Are there any restrictions on the importation of certain goods? Are employment/labour laws different? Will this affect the standard operation of the business by a franchisee and will the franchise model need to be adapted to comply?

Operations manual/terms of trade

As different countries have different laws and requirements, it will be important to consider the operational aspects of the business and the documentation used (with customers, suppliers, etc). Manuals may need to be updated to reflect local regulation of service provision or product specification and sourcing. Other documents may need to be amended to incorporate legal requirements and terms of trade that are applicable for a particular industry within a particular country.

The list above contains some of the key legal considerations for international franchising; however, it is not exhaustive and different businesses may need to consider other legal requirements specific to their industry. Many of the legal considerations above also involve practical, commercial elements. Distance, time, language and culture can vary substantially.

Franchisors looking to go international will need to check out the competition in the target market, prepare detailed business plans and budgets, consider funding arrangements and take advice from consultants, lawyers and accountants (both in their home country and in the target territory). They may also need to update their franchise agreement, operations manual and other contracts (and possibly translate them) and develop procedures and processes for franchisee recruitment, training and monitoring.

There may be other matters to consider depending on the circumstances. Although there is a lot to think about, with the right approach and appropriate advice, international expansion can be exciting and successful.

Vicki Mitman is a franchise specialist solicitor with Birketts LLP and a British Franchise Association-qualified franchise professional. Vicki can be contacted by email at vicki-mitman@birketts.co.uk or on 01603 756 442.