Our franchising solicitors are often asked about the benefits of franchising overseas. But if you don’t already have connections in a territory, it can be tricky to know where to start with international franchising expansion. Here we explain some key issues and introduce key franchising arrangements on a country-by-country basis.
- What is international franchising?
- What are the different models that can be used to enter markets overseas?
- Alternatives to franchising
- Other important things to consider when expanding a franchise internationally
- Franchising law internationally: the big picture
- Common legal approaches to franchise expansion across international jurisdictions
- Franchising in the USA
- Franchising in China
- Franchising in Russia
- Franchising in India
- Franchising in France
- Franchising in Germany
- Franchising in Japan
- International regulation of franchising (outside the EU)
- Regulation of franchising within the EU
- EU code of ethics
- Other aspects to overseas franchise regulation
What is international franchising?
International franchising is when an existing domestic franchise expands into foreign countries. Growing a business globally by way of franchising is comparatively low risk with minimal investment in comparison to other ways of achieving growth overseas.
What are the different models that can be used to enter markets overseas?
Broadly, the main models of franchising internationally are master franchises (sub-franchises), regional franchises, area development and direct franchising.
However, expanding a business abroad is not easy and what works in the UK may not translate abroad. There are pros and cons to all the international franchise models. Deciding which one to choose requires thorough research, which our franchising solicitors can help with. Below, we’ve outlined the advantages, disadvantages and typical usage of each type of international franchising model:
Master franchise (also known as a ‘sub-franchise’)
Alternatives to franchising
The main alternatives to international franchising are similar to domestic alternatives: distribution, licensing, resale and international joint ventures.
|Distribution||Goods are sold to a distributor to resell in a territory abroad and the distributor will trade under its own name. Exclusivity provisions will usually apply. The distributor does not need to acquire any know-how to sell the goods. Profits are based on the sale of goods to the distributor. The principal has little control. Find out more about our agency and distribution agreements legal services, and read our Agency & Distribution Agreements FAQs for more information.|
|Licensing||Know-how of licensor to manufacture, produce and sell goods and intellectual property rights are licensed to a licensee for a territory overseas. Exclusivity provisions will usually apply. Contrary to a franchise agreement a license agreement will relate to the manufacture of goods and not to the way in which the business is run. The principal has little control.|
|Resale||A reseller acts as a middle-man and finds buyers for a product in a territory abroad – it will not buy the goods on its own behalf to subsequently sell on. A reseller will have no access to a supplier’s intellectual property rights and will have little connection with the supplier.|
|International Joint Venture||Two or more businesses based in two or more countries pool resources to expand a specified business activity or project together in a territory. Through such a strategic alliance a business can gain competitive advantage through access to a partner’s resources and multi-national expertise, including markets, technologies, capital and people. A joint venture party will be entitled distribute profits according to a joint venture agreement and share costs between yourselves as agreed in the agreement. For more information, see our Joint Venture Agreements legal services and read our JV Agreements FAQs.|
Other important things to consider when expanding a franchise internationally
International expansion brings challenges such as cultural differences, intellectual property issues and legal considerations. For example, when franchising it is important to consider whether any changes will need to be made to the brand or if there are any concerns with using the trading name abroad as well as understanding how to protect a brand as well as the process and the costs involved. Intellectual property laws vary from country to country and seeking professional advice both in the UK and in the relevant country is essential. For more information, find out about our intellectual property solicitors and read our suite of intellectual property FAQS:
Franchising law internationally: the big picture
There are many countries that have very specific franchise laws but there are also many countries that do not, including the UK. Apart from understanding local laws that regulate franchised businesses other relevant considerations are disclosure obligations, competition law, employment law, agency and consumer laws.
Most international franchise agreements are also subject to competition law and include provisions that franchisors have to follow carefully such as laws relating to price fixing and exclusivity.
There are also codes of conduct/ethics that offer guiding principles for the relationship between the franchisors and franchisees. In some countries these codes and ethics are mandatory and incorporated into statute law as regulations but in other countries they are voluntary and often established by franchise associations. Although the end result is often similar each country creates its own unique blend of rules to regulate franchising.
Common legal approaches to franchise expansion across international jurisdictions
Most jurisdictions take a similar approach to the following:
The information that needs to be disclosed is often the same such as the following
- details of franchisor
- description of franchise and market
- financial information about franchisor
- details of franchise network
- initial fee, investment and continuing fees
- purchase ties
- intellectual property rights
- financing arrangements offered
Some countries insist that a franchise agreement should contain certain standard clauses. There is a wide variety of approaches and no general trend or pattern can be identified other than a general desire for comprehensiveness.
Failure to comply normally entitles the franchisee to walk away from the agreement if acting within a reasonable time frame. Some jurisdictions impose fines for failure to comply and others involve the government in action.
Duty of good faith
Canada, China, Korea and Malaysia impose a duty of good faith on both the franchisor and the franchisee which impacts upon what the franchisor is permitted to do during the relationship. In Canada, all franchise agreements impose upon the parties a duty of fair dealing in its performance and enforcement. In Korea, both parties to a franchise transaction must exercise good faith in the performance of their duties and enumerates several specific franchisor and franchisee duties. In Malaysia both the franchisor and the franchisee are under a duty of good faith to each other and must act in an honest and lawful manner and endeavour to pursue the best franchise business practice of the time and place.
Some jurisdictions impose a minimum term for the franchise agreement. In Malaysia the franchise agreement must be for a minimum period of five years and in Indonesia it is 10 years.
Some jurisdictions require the franchisor to register relevant details and the documentation with a government agency both to enable the government to monitor franchisors doing business in the market and to ensure transparency.
Some jurisdictions impose requirements concerning dispute resolution.
Franchising in the USA
Franchising in the US is regulated both federally and at the state level.
The Federal Trade Commission regulates franchising at the federal level using the Disclosure Requirements and Prohibitions Concerning Franchising (‘FTC Franchise Rule’). The FTC Franchise Rule applies in all 50 states and US territories and protectorates and requires franchisors to make disclosures to prospective franchisees before the prospective franchisee can either sign a binding agreement or pay any money to the franchisor. Some states have franchise registration and disclosure laws that require franchisors to register the franchise before making an offer or sale and some states also have ‘franchise relationship’ laws which regulate major relationship issues such as termination, renewal, transfer and sourcing. State relationship laws override the provisions of a franchise agreement that are inconsistent with these laws.
Although advisable, there is no legal requirement to register the brand's trade mark before offering or selling a franchise.
Franchising in China
In the early 1990s there was no definition for the word ‘franchise’ and the Chinese government did not formally regulate franchising. However, the market is becoming more regulated and open and regulations developing fast. Domestic and foreign enterprises are regulated by different government agencies. The State Administration for Industry and Commerce (SAIC) governs the establishment and registration of Chinese domestic enterprises. A foreign-invested enterprise needs to seek approval from the Ministry of Commerce (MOFCOM) or its local counterparts. Other relevant government agencies are also involved if the foreign-invested enterprise is engaged in business sectors that require special approvals or permits.
To satisfy current franchise regulations in China, companies need to meet several conditions such as the so-called ‘Two-Plus-One Rule’. This demands that a franchisor must first have two company-owned entities either in its home country or in China for at least for one year, before being able to sell franchise rights in China. Thirty days before the franchisor and franchisee sign a franchising contract, the franchisor must also disclose to the franchisee certain information in accordance with regulations and provide a sample of the franchising agreement to the franchisee.
Although progress has been made to protecting intellectual property rights in China, enforcing these rights against infringements are still a challenge. One of the problems faced in China when franchising concerns trade marks. In China the first party to apply for a trade mark registration will be able to register it and can thereafter prevent others from using it. There is no obligation to have any intention of using the trade mark. This means that established brands will often find that their logo and name has already been registered by a competitor who in turn will prevent the brand from being able to use their own logo and trade mark. Although this can be opposed it is costly and time consuming and filing for registration first is the best way to protect a brand.
Even though there are certain challenges of coming into China’s market, the opportunities and perspectives should not be underestimated. Western products are seen favourably in the East, particularly if they have a strong brand presence. With regulation relaxing as international trade between China and the world increases, franchising can be a profitable venture in China.
Franchising in Russia
Franchising in has recently undergone huge growth both in terms of foreign franchises entering the Russian market and through local franchising. In Russia the main rule of franchising is that the contracting parties must be commercial entities, as opposed to non-commercial entities or government agencies. Most franchisors are companies or joint ventures. With respect to laws, Russian franchising is similar to franchising used in most other countries to the extent that a franchisor licences to a franchisee certain rights which are often exclusive in a territory. However, apart from the requirement that the franchise agreement must be in writing few other statutory requirements apply.
When choosing the affiliate that will enter into the franchise agreement with a Russian franchisee, an overseas franchisor should take into account taxation (particularly any applicable double taxation treaties between the affiliate's country and Russia) and mandatory registration of a trademark with the Russian Federal Service for Intellectual Property (‘Rospatent’). There is no special franchising regulatory authority and Russian law does not provide for express pre-contractual disclosure obligations. However, a franchisor should be aware of certain new provisions of the Civil Code adopted in 2015 whereby the parties to negotiations to enter into an agreement must act faithfully from the start of the negotiations until completion. A party is recognised as not acting faithfully if either it provided the other party with incomplete or untrue information or it is silent regarding circumstances which should have been brought to the attention of the other party as to the character of the agreement.
Franchising in India
In recent years, the franchise industry in India has experienced a huge growth with a multitude of new brands adopting the franchising model. Franchising has become increasingly popular across the country as a business expansion method, and many domestic and multinational brands are now taking advantage of the unparalleled potential for franchising in India.
There is currently no specific legislation regulating franchising in India. Instead this is governed by a variety of statutes, rules and regulations. Direct franchising, which allows the franchisor to develop a successful franchise network and carry out due diligence of potential franchisees, is the most usual method of local franchising whereas international franchisors normally appoint a master franchisee and develop a franchise network through the master franchisee. There is also industry-specific and state legislation which may apply, depending on the relevant industry/sector. As such a franchising business may need to obtain and maintain licences and permits under the relevant state laws.
There are no pre-contract disclosure requirements in India. It is therefore prudent for the franchisee to conduct a thorough investigation and evaluation of the franchisor, the business and other aspects before concluding a franchising agreement and likewise it is in the interest of the franchisor to make suitable disclosures of all material facts to the franchisee at the time of negotiating the arrangement to avoid later disputes.
There is no mandatory requirement to register intellectual property rights under Indian law. The right to use a trade mark can either be granted under a simple licensing agreement or to a user registered with the Trade Marks Registry.
Franchising in France
Although well established in France, there is no specific legislation governing franchising and franchise law derives mainly from case law. Case law defines a franchise agreement as a relationship characterised by the existence of three elements:
- a trade mark licence;
- communication of specific know-how; and
- assistance provided to the franchisee by the franchisor. Franchising in France is also subject to general EU and French laws governing distribution, including competition laws.
French franchisors often rely on direct franchising for the French territory although master franchise agreements are also commonly used. Internationally master franchise agreements are frequently used if the franchisor has no experience in France. Pursuant to article L.330-3 of the French Commercial Code (known as the “Loi Doubin”), the franchisor must provide the franchisee with a disclosure document at least twenty days before the signing of a contract or at least twenty days before the payment of any sum or any investment related to the franchise. This is so that the prospective franchise has enough time to carry out its due diligence on its own without the franchisor being present. The sanctions for failing to comply with pre-contract disclosure obligations are both criminal and civil.
A trade mark must exist and the franchisor must have rights over the trade mark (although it is not required to own it) before the franchise agreement can be considered valid. The trade mark is then licensed under the franchise agreement which requires the trademark to be properly filed and registered with the French Intellectual Property (‘INPI’) or with the European Office for Harmonisation in the Internal Market (‘OHIM’) at the European level.
Franchising in Germany
There are no specific legal provisions governing a franchise contract in Germany. Franchise law is therefore largely dominated by court decisions arising from contract law and the Commercial Code, consumer protection laws, intellectual property laws, company law, competition and anti-trust laws are all taken into account as well as EU laws.
Although direct franchising seems to be the preferred method for local franchisors all methods of franchising are used in Germany. Master franchising seems to still be the preferred method of international franchising for international franchisors operating in Germany.
Unlike common-law countries, and contrary to the legal situation in France, Italy and Spain, there is no specific compliance procedure under German law or under German franchise practice. A written standard compliance procedure does not exist. There is also no regulatory authority responsible for enforcing franchising laws and requirements in Germany. However, there is the non-governmental body German Franchise Association, and members thereof must abide by the principles contained in its code of ethics.
There is also no explicit German pre-contractual disclosure law in connection with franchise contracts. Under German case law and the German Franchise Association's guidelines on pre-contractual disclosure obligations franchisors should disclose certain basic information. However, German courts have stressed that, as a general rule, the franchisee must carry out its own due diligence. However, case law stipulates that the franchisor must not provide misleading information and must disclose all necessary information. Any missing or misleading information could lead to a franchisor being held liable in a claim for damages.
To obtain trade mark protection in Germany registration with the German Patent and Trademark Office is advisable, as well as registration as a community trademark with the European Trademark Office. However, unregistered trade marks generally provide the same rights as registered trademarks but to enforce its rights, a claimant must be able to prove that the sign has gained protection and for which goods and services.
Franchising in Japan
Franchising in Japan has grown steadily in the last ten years. The laws that regulate franchising are contained in the Medium and Small Retail Commerce Promotion Act if the franchise business falls under the definition of a specified chain business, the Franchise Guidelines contained in the Act on Prohibition of Private Monopolisation and Maintenance of Fair Trade which regulate the offer and sale of franchises and the Japan Franchise Association (JFA) which provides voluntary rules and guidelines for franchise businesses.
The preferred method of franchising domestically is direct franchising. International franchisors typically use master franchise agreements to enter the Japanese market.
A franchisor must provide disclosure documents before entering into a franchise agreement if the franchise business falls under the definition of a specified chain business under the Medium and Small Retail Commerce Promotion Act which is designed to protect medium and small-sized retail or restaurant-related franchise businesses. These disclosure obligations will not be applicable if the franchisees are large franchisees. Whether the business falls under the definition must be carefully checked on a case-by-case basis.
Trade marks must be registered in order to be protected and to do so an application for registration should be made to the Commissioner of the Japan Patent Office. In Japan, if there has been any application for registration of a trade mark that is identical or similar to another trade mark, the person who first applied for registration is entitled to the trade mark, not the person who has started using the trade mark first. Although exclusive trade mark licences can be registered with the Japan Patent Office there is no obligation to do so.
International regulation of franchising (outside the EU)
There is no common approach to regulating franchising internationally. Each country has its own approach to regulation of the franchise model either through franchise-specific laws, general commercial laws or Codes of Conduct/Ethics. Whilst certain countries have clear laws relating to franchising (for example, the US, Australia, Canada and several countries in Europe) 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. The fact that there is no common approach creates challenges for companies seeking to franchise their businesses internationally. The International Franchise Association is a useful source of information and advice and provides detailed economic information and overviews of important franchising laws for both established and emerging economies around the world including specific country profiles.
Regulation of franchising within the EU
There are no EU-wide franchise specific regulations. Although there is franchise-specific regulation in 8 of the EU member states (France, Spain, Italy, Romania, Sweden, Estonia, Lithuania and Belgium) no two are the same. The remaining 19 member states regulate franchising entirely by the application of general law, again with little uniformity. Surprisingly, it is the member states without franchise-specific legislation that most heavily regulate franchising. With respect to self-regulation very few national franchise associations that do exist and only a small percentage of EU franchisors are members of the ones that do. Self-regulation in the EU lacks a clear consistent and effective approach to enforcement and does not adequately reduce the risks inherent in the franchisor/ franchisee relationship. Although the national franchise associations work to promote franchising as an ethical way of doing business there is an inevitable conflict of interest between representing franchising and franchisors and is not helped by the fact that the associations are funded by franchisors.
There is no universally accepted rationale for how franchising in the EU should be regulated or even what the aims of that regulation should be. This lack of clarity has created difficulties and complications. No EU member state franchise law meets all of the criteria for good regulation; transparency, proportionality, consistency and accountability.
Whilst they all seek to reduce misconduct by franchisors and maintain market confidence by imposing a degree of stability in their individual national markets, the lack of uniformity of approach and content means that on an EU level they actively promote instability which negatively impacts market confidence in franchising. None of the member state franchise laws actively promote franchising or seek to educate potential franchisors or potential franchisees about its risks and benefits.
|Estonia, Lithuania Romania|
|Germany, Austria, Greece & Portugal|
|The UK, Ireland and Cyprus|
None of the EU member states come close to meeting all of the criteria for good regulation such as transparency, proportionality, consistency and accountability. The lack of a similar approach to the regulation of franchising in the EU member states results in cross border trade by franchisors being obstructed.
EU code of ethics
The European Code of Ethics for Franchising is the franchising industry’s self-regulatory code, designed for all stakeholders in the franchise industry in Europe, both franchisors and franchisees, looking for guidance on best practice in franchising relations. The Code which is not legally binding is promoted and defended by each of the national associations and within each association their franchise-company members commit to abide by the Code on becoming members of their national franchise association.
The main principles covered by this set of provisions are good faith and fair dealings. The Code is binding for all European Franchise Federation’s (EFF) Members as well as their respective memberships. However, it also serves as guidelines across the franchise industry and serves as guidance to legislators, the judiciary and other professional organisations as a standard. The national franchise associations that are members of the EFF have the right and freedom to adopt for their country additional extensions to the Code to fit the evolution of franchising in their market. These extensions may not contradict the Code.
The text of the Code covers details on the following topics:
- Definition of franchising
- Guiding principles
- Recruitment, advertising and disclosure
- Selection of individual franchisees
- The franchise agreement
- Code of ethics and the master-franchise system
- National extensions / interpretations (such as application, disclosure, confidentiality, language, term, renewal and adoption)
- World Franchise Council’s ‘Principles of Ethics for Franchising’ (introduction, acquisition, conduct and termination).
List of European Franchise Federation (EFF) Members (updated October 2012):
- Austria, Austrian Franchise Association (ÖFV)
- Belgium, Belgian Franchise Federation (FBF/BFF)
- Britain, British Franchise Association (BFA)
- Croatia, Croatian Franchise Association (FIP)
- Czech Republic, Czech Franchise Association (CAF)
- Denmark, Danish Franchise Association (DFA)
- Finland, Finnish Franchise Association (FFA)
- France, French Franchise Federation (FFF)
- Germany, German Franchise Association (DFV)
- Greece, Greek Franchise Association (GFA)
- Hungary, Hungarian Franchise Association (MFSZ)
- Italy, Italian Franchise Association (AIF)
- Netherlands, Netherlands Franchise Association (NFV)
- Poland, Polish Franchise Association (POF)
- Portugal, Portuguese Franchise Association (APF)
- Serbia, Serbian Franchise Association (SURF)
- Slovenia, Slovenian Franchise Association (SFA)
- Sweden, Swedish Franchise Association (SF)
- Switzerland, Swiss Franchise Association (SFV)
- Turkey, Turkish Franchise Association (UFRAD)
Other aspects to overseas franchise regulation
The International Franchise Association Code of Ethics
The International Franchise Association (IFA) has a Code of Ethics that is intended to establish a framework for IFA members to implement best practices in franchise relationships and to protect, enhance and promote franchising.
The IFA Code of Ethics is not legally binding, but it contains general guidelines relating to:
- Mutual respect among franchisees and franchisors
- Trust, truth and honesty
- Compliance with the law
- Appropriate conflict resolution
The vision of the IFA Code of Ethics is to be the leader for franchising worldwide. It has created the IFA Ombudsman program to assist members with the resolution of disputes arising from business issues and the Franchise Mediation Program (FMP) when a more structured mediation service is necessary to resolve differences. As members of the International Franchise Association, franchisees and franchisors have a responsibility to voice their concerns and offer suggestions on how the Code can best serve its members.
The World Franchise Council
The World Franchise Council is an international entity comprising of franchise associations of 43 countries. The World Franchise Council supports the development and protection of franchising and promotes a collective understanding of best practices in fair and ethical franchising worldwide. The World Franchise Council supports self-regulation by means of its Principles of Ethics for franchising.