Signing up to an international franchise: what does it mean?
Becoming one of the first Australian franchisees of a successful international brand is an immensely exciting prospect.
However, when signing up to an international franchise, there are issues that must be considered, over and above the usual questions that must be asked by every prospective franchisee.
The level of support of the franchisor can significantly affect a franchisee’s ability to succeed. If the system has no Australian head office, support may only be available over the phone and by email. If support services are based in a different time-zone, practical day-to-day support may be limited.
Any requirement to attend conferences or franchisee meetings overseas, could add significant travel costs, and also force you to spend time away from managing your business.
Feasibility of the franchise brand and system
Some international franchisors assume their brand and system will work in the Australian market in the same way as it works in the original country. This cannot be taken for granted for numerous reasons including different local laws and the possibility of an increased costs base caused by higher cost of goods, staff and/or occupancy costs.Ideally, the franchisor has undertaken substantial market research and has reasonable grounds to show that the brand and the system can be successful in Australia.
A good international franchisor will be willing to adjust the brand or system to accommodate the characteristics of the Australian market.
The franchise supply chain
Where the system requires a franchisee to source products from suppliers overseas, it is important that the supply chain is robust and dependable. If the franchisor's branded products are manufactured overseas and an issue arises in the supply chain, franchisees could be left without stock or ingredients. Costs of shipping stock or ingredients to Australia can increase costs for Australian franchisees.
Consider the currency in which payments are to be made to the franchisor. Where fixed fees are payable in another currency, fluctuations in the exchange rate may have a serious effect on the profitability of the franchise.
Additionally, where there are multiple currencies involved you need to consider whether the franchisor requires financial reporting and record keeping to be done in their native currency. If so, you may need to operate two sets of books for the business, one for the franchisor and another for Australian tax purposes.
You will need to ensure that the franchisor's marketing plan is appropriate for the Australian market. You need to ensure that there is a solid, researched plan in place, especially where the brand is new to Australia. The style and approach to marketing in the country of origin may differ significantly, so you should make sure that the marketing plan is compatible with the Australian market.
If you are contributing to a global marketing fund as part of your payment obligations, you need to make sure that a fair share of the marketing budget is allocated in Australia.
It is very important that the franchisor either owns the intellectual property (IP) itself or has a binding, long term license from the owner of the IP.
A new international franchisor’s IP may not yet be protected in Australia. Sometimes, something similar to a franchisor’s IP is already owned by another party in Australia. Conducting your own research is important to ensure the franchisor’s IP is protected in Australia and to avoid infringing another party's IP rights.
Legal requirements for international franchise brands
International franchisors operating in Australia must comply with the Franchising Code of Conduct (the Code) and other Australian laws. However, they may not be aware of the Code or other Australian laws.
The franchisor should provide you with a disclosure document and franchise agreement and you should seek advice in relation to these documents to ensure they comply with the Code and other Australian laws.
Disputes with the franchisor
Recent changes to the Code make it unlawful for a franchise agreement to require you to attend mediation outside of Australia and/or outside the state or territory in which the franchise is located. You need to review the governing law and dispute resolution provisions in the franchise agreement to ensure they comply with the Code.
What is a master franchisee?
Some international franchisors choose appoint a master franchisee to run operations in Australia. The master franchisee takes on the responsibilities of a franchisor and grants franchises to individuals.
The benefit of this arrangement is that you can deal directly with a local master franchisee, which will negate many of the problems discussed above.
However, a master franchisee is only acting in accordance with an agreement with the franchisor which could be terminated or expire in the future. At that point, your agreement with the master franchisee may not survive unless the franchisor finds another master or takes over the system itself.
How do I protect myself?
The above considerations mean prospective franchisees must take particular care when considering purchasing a franchise from an international franchisor. Advice should be sought from an expert in international franchising so that you are aware of all the additional risks.
Authors: Raynia Theodore and Louise Wolf, MST Lawyers.