Taking your franchise overseas

Many franchisors from time to time contemplate taking their brand overseas. If done properly, international expansion can be very rewarding in both a personal and financial sense. If done poorly, however, without adequate preparation and before your system is in a position to be exported overseas, the experience can be quite damaging.

Structure

It is not uncommon to hear many terms being discussed in the context of international franchising. While there is no one correct model to be followed, some of the main structures to consider include the following:

1. Master franchisee: Typically this involves the Australian franchisor granting rights to an overseas entity to establish the system and to grant sub-franchises to third parties.

2. Direct franchising: In this case, the franchisor enters the foreign market itself, granting franchises directly in that country. Sometimes this is done by the acquisition of a rival system in the foreign country in order to give the franchisor a starting base.

3. Area developer: Under this model a local party is given area developer status, which entitles it to open a set number of units. This sort of structure relies heavily on the area developer having sufficient capital resources to be able to set up the requisite number units and to meet the minimum performance criteria set by the franchisor.

4. Joint venture: Here a franchisor either actually holds shares in the foreign developer or alternatively the parties enter into a joint venture arrangement for the two entities to establish and operate the system overseas. One of the benefits of holding shares in the developer is that in certain countries (in particular the Gulf states) such ownership confers additional rights to the Australian franchisor. This may be of particular interest as some foreign countries do not recognise Australian companies or Australian law.

The most appropriate model to be adopted will in part depend on the country into which you are seeking to expand, your own financial resources, and also cultural and economic issues in the destination country. Experience suggests that the best developers should be established local business people who have a proven track-record in the relevant country, have established offices and IT systems and a commitment to success and cooperating with the franchisor and the system. Ultimately the success of international expansion will depend heavily on attracting the right developer, irrespective of the structure to be adopted.

Trademarks

Before seriously entertaining the prospect of expanding overseas it is important to properly protect the intellectual property of your system. Most franchisors know the importance of protecting their trademark domestically, but few consider it to be an issue until international expansion is an issue. If overseas expansion is a possibility for your system, immediately make enquires of your advisors to protect trademarks.

Previously it was very difficult, time-consuming and expensive to seek to register trademarks in various countries. However, since July 2001 Australia has been a signatory to an international treaty known as the Madrid Protocol for International Trade Marks (Madrid Protocol), which enables registration of trademarks in other countries more simply and cheaply. Monitoring and maintaining marks overseas is also simpler and less costly. So far, over 60 countries are signatory to the Madrid Protocol, including the UK, US, EU, Japan and China.

The Madrid Protocol enables one application to be lodged in order to register a trademark in all or any of the countries currently signatories to the treaty. You will also be able to designate any countries that become members in future without filing a new application.

Many of the traditional add-on costs by agents in various jurisdictions are now also avoided through the Madrid Protocol, as applications are filed via the Trade Marks Office in Australia, are in English and attract fees in Australian currency. An international registration will continue to exist indefinitely, subject to renewal every 10 years. Any further trademark maintenance, such as assignment or change of address, will be streamlined through IP Australia.

In order to seek protection under the Madrid Protocol an application must be based on an Australian trademark registration or pending application. Class specifications must also be for the same goods and services as those detailed in the Australian trademark application.

Another issue to bear in mind when registering trademarks internationally is to ensure that the trademark is protected in English and the local language; e.g. Arabic or Chinese characters should also be the subject of a separate trademark.

Due diligence/research

Prior to granting any rights overseas it is obviously important to determine whether or not the system is realistically capable of being transferred overseas and being successful. Just because a franchisor has enjoyed domestic success does not guarantee success in a foreign market.

A priority is to ascertain whether there is a genuine demand for the product or service overseas, that culturally the system will be accepted, that it can be adapted for a foreign country and the financial modelling of the system makes it viable in an offshore location.

Indeed, financial modelling is a critical part of successful international operation. Prior to expanding a system you should carefully analyse the business model to ensure it is capable of being adapted successfully overseas. By way of example, the cost of goods sold in Australia may be significantly different overseas when one takes into account stock supply issues. Are products capable of being sourced locally at competitive rates and within the range contemplated by your Australian business model, or will they need to be purchased from the franchisor direct at significant additional cost? Further, the issue of wages in certain countries may make your model more or less competitive. It is also important to consider issues such as cost of store development, fixed costs such as rents and the impact of different royalty structures on the financial viability of operators.

Operations manuals

Prior to expanding overseas it is imperative that all operational procedures are comprehensively documented in manuals and that those manuals have been tested in the Australian marketplace. Inadequate manuals will reflect poorly on you as a franchisor and lead to discontent.

Your agreement with the developer should enable the developer to suggest changes to the manuals and to amend these to accommodate cultural issues and local customs. However, be wary of substantive changes in this regard as it will ultimately compromise your system, given that a cornerstone of successful franchising is uniformity.

Also consider who will be responsible for converting the manual into a foreign language. You should maintain control of this process to ensure that the translation is truthful and does not undermine your system.

Fee structure

One of the most commonly asked questions pertains to the fee that should be imposed to secure rights for a foreign territory. One possible option is to consider the amount of units that can be established in the territory against the number of units likely to be established, and use this as a starting point.

The upfront fee should be calculated so that the developer can recover the initial fee during the term of the grant and make a reasonable return on investment. It is also important to establish performance criteria in consultation with the developer so that it remains focused on maximising the development of the system.

Other possible fees for Australian franchisors include an initial training fee, royalties, transfer fees upon the transfer of territory rights, and so on.

Charging royalties overseas can be problematic. Culturally, some countries prefer a flat fee rather than a percentage royalty. As such, the charging of a percentage royalty in such countries makes it difficult to sell sub-franchises, and from experience results in sub-franchisees not truthfully declaring all sales.

In addition, if you are supplying stock directly to operators overseas the royalty charged is likely to be less in such circumstances.

You should also require the developer to have an advertising fund to be used for the benefit of the system as a whole.

Stock supply

If you are considering supplying stock overseas it will be necessary to address:

l Local labelling laws

l Import duties

l Term of supply

l When risk in the stock passes

l Whether the products can be legally imported into the country.

Miscellaneous

Other considerations include:

l Training: Will initial training occur overseas or locally? If locally, who will pay the costs of travel and accommodation?

l Store construction: Who will be responsible for constructing and fitting out premises? Are all materials readily available overseas or must they be prepared and shipped from Australia?

l Insurance: Some countries do not view insurance as importantly as in Australia and accordingly terms in an agreement concerning the taking out of insurance may be a point of potential disagreement.

l Reporting: What sorts of reports will be required, how often and will online access be given?

l Conversion of the franchise agreement: It is highly recommend that you seek the advice of local professionals to convert the franchise agreement so that it complies with all local laws.

l Legal issues: Litigation of disputes and enforcement of judgments overseas continues to be a complicated affair. There is specific terminology under the regulations that should be adopted to ensure ease of enforcing obligations internationally.

Conclusion

International expansion is a detailed process, with different specific requirements in each country. For example, changes recently made to Chinese law mean that effective from 1 February 2005 it is no longer possible to grant franchise rights in that country until the franchisor has owned and operated two company-owned stores for a period of no less than 12 months. Similar considerations apply in some European countries.

Careful planning is vital in any international expansion program and, as always, it is necessary to seek appropriate professional advice on the matter. However, even though domestic expansion can also be rewarding, there is no question that given economies of scale and the vastly larger populations of some countries, international expansion is potentially extremely lucrative and can be very personally gratifying. l

Chris Nikou has been involved in taking some of Australia’s best-known brand names overseas and is partner in charge of franchising at Middletons Lawyers .