Your franchised business is performing well in Australia – you’ve cultivated a loyal following, expanded quicker than you anticipated, and you are reaping the rewards. It’s only natural in such circumstances to wonder beyond our shores girt by sea. It can’t be that hard to replicate the success offshore, right? Well, before you board that plane and start looking for international business partners, you need to consider the many issues involved in franchising internationally. This article sets out the many legal and structural decisions that you will need to make.
1. Local Business Structure
Before global domination ensues, it’s important to make sure you have properly structured your local operations. In particular, this involves making sure you have protected your assets and planned your tax.
To date, you may have been operating under a single corporate vehicle. However, with the expansion plans, it may be appropriate to incorporate different entities to perform different functions of this business (i.e. a holding company and an operating company).
Changing such operations will be much more challenging once the international agreements are in place. At that stage, it may be necessary to assign certain contractual rights and/or amend international registrations. You should also consider speaking with an accountant about setting up a trust to plan your tax.
2. Appropriate Expansion Model
You should ask yourself the following questions to help decide what expansion model you should adopt:
- Do you want to register a company overseas to operate as a local franchisor, and enter into a master franchise relationship between the two entities?
- Do you want to locate an appropriate third party franchisor in the relevant jurisdiction and grant to them a master franchise agreement?
- Will you need to register as a foreign trading entity (or equivalent)?
- Do you want to take a step back from your international operations, and leave the running of the business to someone else, and simply licence the right to use your intellectual property and systems to the local franchisor?
Considerations that will undoubtedly influence your choice will include:
- The level of international consistency you want;
- The control you wish to exercise;
- The money you want to expand on the international expansion; and
- The available personnel.
Unfortunately, the answer is unlikely to be as easy as addressing these issues and picking the right box. It will involve consideration of some of the other legal issues set out in this article, including local company law and tax law. You need to consider all matters in developing a holistic and clear plan for international expansion.
3. International Definitions of Franchise
Further, what is a franchise at law is likely to differ from country to country. In general, if a legal relationship looks, smells and sounds like a franchise – it will be a franchise regardless of the title of the relevant document and how the parties refer to each other. For example, in Australia, there is no statutory definition of what a franchise is, and it is necessary to turn to precedent to see how the courts have examined the issue. Also, Turkey relies on the franchising definition the Supreme Court provided. The language the court used is indicative of the need for local advice to establish precisely what and how the law applies in that jurisdiction.
Contrastingly, in some other countries, the term is defined within the applicable franchise/consumer law. For example, South Africa’s local consumer law contains a clear statutory definition.
4. International Franchising Laws
Some countries, like Australia, have in place a Franchising Code which is binding on all parties to franchise relationships. The prescriptive nature of such a Code means that any clause which is inconsistent with the Code, even if acceptable and operational in another jurisdiction, could be declared invalid.
Further, there are potential ramifications for not complying with the Code. The difficulty is that each country is different which makes it prudent to seek local advice before each and every planned expansion. For example, even among the EU, some countries such as Belgium, Spain and Sweden have laws regarding the provision of disclosure, while others such as Estonia don’t. In the US, franchisors doing business in the US market must provide as part of their disclosure documents financial statements which accord with the local US accounting principles, and may differ from those of other countries.
5. International Intellectual Property Laws
When thinking about taking your brand to a particular country, you should ensure you own the intellectual property rights. You can do this through international trade mark registration. Essentially, if you don’t register, someone else can, which can be disastrous for your international expansion.
The precise costs and the process will differ from jurisdiction to jurisdiction. It will depend on whether the relevant country has signed on to international conventions and/or is a member of the World Intellectual Property Organization. Again, you should speak with a trade marks lawyer.
6. Dispute Resolution
While it’s tempting to make local dispute resolution a requirement, this may not be permissible, or indeed practical as applicable laws may dictate where the procedure must take place. For example, the Australian Franchising Code dictates dispute resolution procedures must take place in the state of operation of the franchise business. Further, internationally acceptable dispute resolution procedures, such as that used in the International Chamber of Commerce International Court of Arbitration, may be appropriate and appealing to incoming master franchisees submitting to a foreign jurisdiction.
7. International Company Laws
The system of registration of companies, and the legal requirements once they are registered, differ from country to country. For example, you will need to investigate the different requirements relating to local directors and local officers. Again, in South Africa, company formation is subject to Black Economic Empowerment policies of the Black Economic Empowerment Act 2003. There may be commercial incentives and obligations to consider in establishing a company in South Africa.
8. Contractual Construction Issues
In essence, a franchise agreement is simply a commercial contract between two parties. Thus, how the law construes an agreement depends on the contractual construction in the relevant jurisdiction.
In Australia, common law will invalidate a penalty clause found in a contract. This may not be the case in other jurisdictions. Similarly, certain contractual provisions, such as a restraint of trade clauses, may be subject to specific legislation. In NSW, these clauses are void thanks to the Restraints of Trade Act 1976.
Further, laws may be implied into a contract. The existence and nature of such implied terms are also likely to depend on local laws. In Australia, an implied term of good faith was commonly argued to be a fundamental aspect of franchising long before it was introduced into the Franchising Code of Conduct in 2015, while in Turkey, parties are held to be subject to an implied term of “confidence and trust”.
9. Practical Considerations
When franchising internationally, there will be numerous practical considerations, including:
- The appropriate language;
- The currency to adopt;
- Who bears any conversions fees;
- The forum for dispute resolution; and
- How any translations will occur
You should consider your target market when making these considerations. For example, if Asia is your target market, there would be little utility in naming the pound as the unit of currency. Similarly, while it may be convenient for you as the franchisor to name Australia as the forum for dispute resolution, this is unlikely to appeal to a northern hemisphere based master franchisee.
10. Local Tax Laws
Tax laws are not universally uniform. Depending on the type of business operation, your business may be subject to additional taxes than under the Australian Tax Laws.
11. Regulatory Laws
Expanding your food business? Getting across food safety requirements in the new jurisdiction is prudent.
Want to take your transport franchise business to another country? You may want to look into registration and road rules before you go.
Regardless of the type of business, it will no doubt be subject to local regulatory provisions, which, again, should be subject to local advice and investigation in the preliminary planning stages.
12. Import/ Export Laws
While world trade has no doubt become easier, exporting goods to another country is itself subject to a minefield of regulations and legal requirements. If you want to maintain the position as approved supplier, it is prudent to ensure you are aware of the process, requirements and associated taxes of doing so.
13. International Employment Laws
Depending on the expansion model adopted, it is advisable to obtain some basic local advice on the operation of employment laws in the relevant country. Here, such factors as minimum wages, payment for training, statutory entitlements and benefits will be relevant to planning not only how the business will operate overseas, but also in developing your modelling and associated fees, charges and local retail pricing.
By way of example, a Big Mac costs around US$1.57 in the Ukraine, compared with US$6.59 in Switzerland due, at least in part, to the difference in labour costs.
Further, while the relevant franchise agreements will almost always define the relationship between the parties as that of independent contractors, there is a prospect for the relationship to be deemed that of employer/employee under local laws.
For example, in Spain, a franchisee runs the risk of being deemed a joint employer of the franchisor if it relies on said franchisor to manage its personnel and fails to act as a real independent entrepreneur.
These are just some of the legal issues you’re going to have to consider on your path to global domination. Of course, there are cultural issues too. For example, a ski-school wouldn’t be such a roaring success in the tropics. If you’re planning on franchising internationally, your first stop should be to the offices of a local franchising expert. This expert will be able to help you put in place an action plan, recommend local experts and lines of enquiry, and help you understand your requirements.
If you have any questions about franchising internationally or need assistance taking your franchise overseas, get in touch with our franchise lawyers on 1300 544 755.