Franchise 2020

International Comparative Legal Guides

Franchise 2020

A practical cross-border insight into franchise law

Sixth Edition

Featuring contributions from:

ǼLEX Dentons LLP Noerr LLP ALRUD Law Firm Faegre Baker Daniels Pehlivan & Guner Anand and Anand Freeths LLP Polsinelli Anderson Mōri & Tomotsune Hamdan AlShamsi Lawyers & Legal Consultants Rödl & Partner Arias, Charua, Macías & Prum, S.C. Hammad & Al-Mehdar Law Firm SCA Rubin, Meyer, Doru & Trandafir Badertscher Rechtsanwälte AG Hannes Snellman Attorneys Ltd Stewart Germann Law Office Bogsch & Partners Law Firm International Franchise Association The Richard L. Rosen Law Firm, PLLC British Franchise Association Jones & Co. THUM Rechtsanwaltskanzlei ǀ Law Firm Bustaman Kennedy Van der Laan TLT LLP Christodoulou & Mavrikis Inc. LINKEA Ventura Garcés López-Ibor Daniel Law Marsh & Maher Richmond Bennison

ICLG.com International

ISBN 978-1-83918-002-6 ISSN 2055-8082 Comparative Legal Guides Published by glg global legal group 59 Tanner Street London SE1 3PL United Kingdom +44 207 367 0720 Franchise 2020 www.iclg.com Sixth Edition Group Publisher Rory Smith

Associate Publisher James Strode

Senior Editors Contributing Editor: Caroline Oakley Rachel Williams Iain Bowler

Editor Freeths LLP Nicholas Catlin

Creative Director Fraser Allan

Printed by Ashford Colour Press Ltd.

Cover Image www.istockphoto.com

Disclaimer This publication is for general information purposes only. It does not purport to provide comprehensive full legal or other advice. Global Legal Group Ltd. and the contributors accept no responsibility for losses that may arise from reliance upon information contained in this publication. This publication is intended to give an indication of legal issues upon which you may need advice. Full legal advice should be taken from a qualiﬁed professional when dealing with speciﬁc situations. Table of Contents

Industry Chapters

1 IFA’s Role Shaping the History and Future of Franchising International Franchise Association

3 Franchising the Next Generation Pip Wilkins, British Franchise Association

Expert Chapters

6 Delivering Growth – The Third Way Iain Bowler, Freeths LLP

9 The Unprecedented Tariff Landscape: Why Franchisors and Franchisees Should Take Action for the Beneﬁt of their Supply Chain Joyce Mazero, Michelle Schulz & Luis F. Arandia, Jr., Polsinelli

18 Building and Managing an International Franchise Network Pauline Cowie, TLT LLP

22 Franchising in a Sea of Data and a Tempest of Legal Change Paul Luehr, Huw Beverley-Smith, Nick Rotchadl & Brian Schnell, Faegre Baker Daniels

Country Q&A Chapters

29 Australia 155 Netherlands Marsh & Maher Richmond Bennison: Robert Toth Kennedy Van der Laan: Martine de Koning

38 Austria 165 New Zealand THUM Rechtsanwaltskanzlei ǀ Law Firm: Dr. Hubertus Stewart Germann Law Office: Stewart Germann Thum, LL.M. 173 Nigeria 50 Brazil ǼLEX: Tiwalola Osazuwa & Frances Obiago Daniel Law: Hannah Vitória M. Fernandes & Antonio Romania Curvello 180 SCA Rubin, Meyer, Doru & Trandafir: Cristina Tararache Canada 59 Russia Dentons LLP: Helen Fotinos 187 ALRUD Law Firm: Maria Ostashenko & Vera Glonina China 68 Saudi Arabia Jones & Co.: Paul Jones & Xin (Leo) Xu 195 Hammad & Al-Mehdar Law Firm: Suhaib Hammad & Anas Jeser 76 England & Wales Freeths LLP: Iain Bowler 202 South Africa 86 France Christodoulou & Mavrikis Inc.: Alex Protulis LINKEA: Cecile Peskine & Clémence Casanova 211 Spain Ventura Garcés López-Ibor: Ricard Gené & Juan Botta 94 Germany Noerr LLP: Dr. Tom Billing & Veronika Minne 221 Sweden 104 Hungary Hannes Snellman Attorneys Ltd: Elisabeth Vestin & Sara Bogsch & Partners Law Firm: Dr. Tamás Gödölle, Dr. Pál Heikfolk András Gáspárdy & Dr. Márk Pécsvárady 228 Switzerland Badertscher Rechtsanwälte AG: Dr. Jeannette Wibmer 113 India Anand and Anand: Safir Anand & Twinky Rampal 237 Turkey Pehlivan & Güner: Haşmet Ozan Güner 121 Italy Rödl & Partner: Roberto Pera & Gennaro Sposato 244 United Arab Emirates Hamdan AlShamsi Lawyers & Legal Consultants: Hamdan 130 Japan Anderson Mōri & Tomotsune: Kenichi Sadaka & Aoi Inoue Al Shamsi

139 Malaysia 250 USA Bustaman: Adhuna Kamarul Arifﬁn & Nor Athirah Khairol The Richard L. Rosen Law Firm, PLLC: Richard L. Rosen, Anuar Leonard Salis & John A. Karol

148 Mexico Arias, Charua, Macías & Prum, S.C.: Elias Charua García & Oscar Arias Corona ICLG.comXX

ICLG.com 18 Chapter 5

Building and Managing an International Franchise Network

TLT LLP Pauline Cowie

Introduction whether it has sufficient confidence to move forward to detailed discussions and the signing of a formal franchise agreement. It will The increasing globalisation of business means that even relatively also assist a company in evaluating the strengths and weaknesses of small companies may decide to franchise internationally, even when a potential franchisee and inform how the franchise agreement may they do not franchise in their home country. It is rare for a business of be structured. Companies that have already franchised their business, any size not to have considered franchising at some point in its whether domestically or internationally, will already have an under- evolution. Once first steps have been taken to franchise internationally, standing and insight into how critical it is to get the appointment of expertise developed and experience gained in setting up international the franchisee right. If things go wrong domestically, problems and franchise operations, entering into new international markets through disputes with a franchisee are much easier to handle than a disruptive franchising becomes easier as processes become more streamlined and and non-compliant franchisee in an overseas jurisdiction. lessons learnt on strategy and implementation are taken on board. Before starting the process, an understanding of culture and Whilst not without risk, these risks become easier to identify and custom, together with preliminary research on how familiar or manage. The key advantage of franchising over other expansion routes prevalent franchising is in the target country, will inform the is that companies are able to expand in international markets faster and approach to due diligence. In some countries, it is important to build more cost-effectively than company-owned operations which are the relationship with the prospective franchisee before any detailed capital-intensive, although company-owned operations can often be due diligence information is requested. Good communications in operated alongside franchised units. the initial stages are a means of building rapport and enable an assessment to be made as to whether the parties are in fact able to Key Considerations communicate without fundamental disagreement. When looking at the available options, companies can adopt a number Whilst companies who already franchise in the domestic market of strategies when building an international network. Choosing the will already conduct due diligence on franchisees, international due most effective expansion route is a key component and what might diligence will throw up a variety of additional challenges. Language suit in one territory, may not suit in another. It is not uncommon for may well be an issue, as well as differences in how the parties like to a company to have a number of different expansion routes. The communicate. There could also be cultural issues. All of these need choices made will depend on a variety of factors including: to be factored into the decision to proceed, and how best to ■ market potential; structure the arrangements. ■ numbers of suitable prospective franchisees; ■ how close the company wants its relationship to be with the Internal Processes and Procedures franchisees; When considering how and when a company develops its inter- ■ capacity to provide support and infrastructure; national franchise strategy, it should also review whether current ■ language and communication; internal processes are fit for purpose with expansion in mind. An ■ local law requirements and barriers to entry; in-depth look at how, practically, the company will manage multiple ■ taxation; and international franchisees is a crucial step and should be revisited at ■ financials, particularly the profitability of the franchise business appropriate points, remembering that the franchisees will be and the scope for deduction of potentially multiple levels of fees independent business-owners, rather than company employees, and from the franchise network. therefore require a different and more sophisticated approach. The company should assess current capacity and efficiencies of Avoiding Costly Mistakes procedures for developing and expanding an international franchise Whichever route to international franchising is chosen – having network, with a view to making changes to accommodate future made a decision to franchise internationally, whether in a particular plans. This can be achieved by: jurisdiction or generally – it is important to ensure that the company ■ mapping out current processes and identifying any existing and as franchisor complies with all compliance and legal requirements, anticipated day-to-day issues, making an assessment of their and that all necessary steps are taken to maximise success, bearing actual and potential impact and what should be prioritised for in mind the long-term nature of the relationship with franchisees. change. This will cover the period from initial discussions and One of the key areas to consider is how an assessment is made of signing of non-disclosure agreements, through to signing of the suitability of a prospective franchisee. By carrying out a thorough franchise agreements and coordinating the actions and initial assessment of the potential franchisee and due diligence documentation which need to be in place prior to opening; investigation, the franchisor will obtain sufficient information to ■ understanding where in the process information is obtained, by enable an informed decision to be made in principle, and as to whom and who needs to have that information both internally and externally. This could include teams such as finance, learning

and development, real estate and supply chain. It will also be will not be authorised to enter into any sub-franchise agreements. important to ensure that controls are in place so that relevant The franchisor will have direct responsibility for supporting the fran- information is verified as being correct before being actioned; and chisees and will receive payments of fees and charges directly from ■ considering solutions to address any areas of inefficiency on a the franchisees. This is most commonly used where there is neither priority basis, looking across the spectrum of people, processes an intention to grant a large number of franchises, nor an and technology. The company should also consider including the expectation that franchisees will operate on a large scale. The reason use of automation and any opportunities to make these processes for this is that it can become complex to manage a large number of more efficient to manage both costs and risks. franchisees at a distance unless the business has personnel on the ground and an existing support network and infrastructure. If there Expansion Routes is a support network in place – often this might be because the business is already trading in that country, or supplies products on a International franchising may take place alongside a corporate wholesale basis – then it may make sense to enter into strategically presence, as well as forming part of a varied strategy to penetrate placed direct franchises. The business will need to consider any international markets. The more common forms of international language barriers and the distance between its domestic operations expansion are as follows: and the franchisees, as well as any operational challenges.

Entering into direct franchises at a distance can mean that it is Master Franchising difficult for a franchisor to ensure that the franchisees are, at all times, compliant with the terms of their franchise agreements. In This is where the company as master franchisor enters into an agree- addition, the franchisor should consider whether it is able logistically ment for a defined territory with a single master franchisee. The to provide adequate support to the franchisees. If it is not, it may master franchisee will be granted rights to enter into sub-franchise leave itself vulnerable to claims from those franchisees and having agreements with sub-franchisees, often with an agreed development to deal with network issues. The franchisor will also need to plan. The master franchisee may be required to establish one or more consider how it can best protect itself to ensure that payments are pilot operations to test and, with agreement, adapt the franchise made on time from a large number of direct franchisees – which can format for the territory. The master franchisor will usually adopt a be difficult to manage – and what security could be obtained to assist ‘light touch’ approach, leaving the master franchisee to recruit, in this process. support and manage the franchise network, but regular contact and If a franchisor wants to have a direct relationship with franchisees support to the master franchisee will still be required. For this type in a country and has the means and resources to do so, it might of arrangement to work, there must also be sufficient, realistically decide to establish a branch or subsidiary in that country to avoid achievable profitability for all parties (i.e. the master franchisor, master some of the issues identified above. The franchisor would grant franchisee and sub-franchisees) to ensure an adequate return. franchises through the branch or subsidiary that would become the The disadvantage of this route is that the master franchisor will franchisor in that country. The advantages of this route are that it not have a direct relationship with the sub-franchisees, which in turn would be physically close to the franchisees and therefore able to has its disadvantages (see Direct Franchising below). However, there monitor performance and compliance by the franchisees more easily; are advantages too, particularly where the territory is far away and as well as being able to retain all franchisee fees received, rather than the right master franchisee with adequate resources is appointed. splitting them with a master or area developer franchisee. A relatively small-scale operation established by the franchisor for this Area Developer purpose may not give the franchisees much comfort, but strategically may suit the franchisor’s purposes provided that it is able and willing to comply with regulatory and taxation requirements. This is a variation on the master franchise model and can take two forms: Joint Venture ■ in the first scenario, the area developer is appointed by the franchisor to recruit franchisees for that territory but is not entitled to operate any units in the territory. Here, the franchise relation- Whilst not a common means of international franchise expansion, ship is between the franchisor and the franchisees who are it can be used to great effect where the potential joint venture introduced to the franchisor by the area developer. The area partner has specific supply chain relationships, infrastructure and developer may be required to provide certain support services local market knowledge which the franchisor wants to benefit from. at a local level to support the franchisees, such as training, In certain jurisdictions, it may be the only viable route to market marketing and business development, in return for a fee; or entry. The joint venture partner may also see it as the best means of ■ alternatively, the franchisor may agree to enter into an agreement ensuring adequate support from the franchisor and continuing with the area developer for it to develop and open units itself interest in the operations, rather than a more distant master franchise rather than introducing potential franchisees to the franchisor relationship. or appointing sub-franchisees. A separate franchise agreement A joint venture is not the classic way of franchising but can be may then be entered into for each unit. The development of the effective in difficult jurisdictions and with large franchise partners, area will be in accordance with an agreed development plan. although it does require more involvement from the franchisor The former model has much in common with master franchising; through management of the joint venture and potentially a seat on the latter with direct franchising. the board. The joint venture will be regulated by an agreement, which will need to be adapted to reflect each party’s contributions Direct Franchising and strategic long-term aims. A key area is intellectual property, which will be retained by the franchisor and which will need to be licensed in. A franchise agreement will also need to be put in place As with domestic franchising, the franchisor enters into one or more with the joint venture company, including a development schedule franchise agreements directly with franchisees in the overseas in accordance with the agreed business plan. territory. The franchisees will each only be authorised to trade from an agreed location or within an allocated part of the territory. They

Franchise 2020 ICLG.com © Published and reproduced with kind permission by Global Legal Group Ltd, London 20 Building and Managing an International Franchise Network

Conversion of Existing Company Operations ■ master franchisees failing to manage their franchise network of sub-franchisees properly, which often only comes to light when complaints are received at head office from sub-franchisees; A company may already have a presence in an international market ■ failing to achieve minimum performance criteria, whether in and, as with its home territory, conversion of some or all existing relation to the numbers of opened units or turnover; company-owned operations to a franchise model is an increasingly ■ data breaches and failure to comply with data privacy and popular route. The business will obtain the benefit of the transfer protection laws; of costs in operating the units to franchisees, and a steady flow of ■ failing to provide adequate financial and reporting information income from fees. Maintaining a small presence in an overseas when it is not possible to obtain the relevant information by territory means that the franchisor can support and manage the fran- other means; chise network and retain more control. Experience shows that ■ numerous small but persistent breaches; or conversion of existing units to a franchise model increases the return ■ breaching non-compete obligations. to shareholders and the business benefits from highly motivated Companies need to consider how they will monitor and manage business owners. breaches of the franchise agreement by international franchisees. Keeping international franchisees on track by regular contact and Managing New Franchise Openings putting in place effective compliance programmes is an essential Assuming that the structural issues are resolved and the due diligence requirement of successful programmes. Franchisees need to be process is completed, the company will also need to ensure that it is educated about compliance and the steps which need to be taken to able to manage the opening of new international franchised busi- ensure that they address any deviations promptly. They need to nesses as friction-free and seamlessly as possible. From signature to receive adequate levels of support on an ongoing basis. A structured commencement of operations, all parts of the organisation must be support programme and communication strategy with franchisees kept appropriately informed and ensure that they are aligned with can often keep up motivation levels and address any problem areas the timescales and procedures for franchise openings. This will before they become bigger issues, when more formal action might include dealing with any specific complexities in a particular territory need to be taken. and the logistics involved in the supply chain. Use of technology to assist companies in communicating with and From a legal and risk perspective, as a minimum before training managing compliance is an increasingly important part of the and operations commence, a check should be made to ensure: management of international franchisees. The more the company ■ that all franchise agreements are issued correctly and are signed can design this into the procedures to be used by the franchisees in and completed properly, including ensuring that all ancillary the business system, the more it will reap the benefits and pre-empt agreements are properly signed and dated; any issues which may arise. The company should also consider ■ if translations, legalisation or notarisation of documentation is updating and making changes to IT networks to support inter- required, that these have been obtained; national expansion, including by taking advantage of CRM, project ■ where disclosure and/or registration is required, that the busi- management and billing systems. ness has complied with the formalities within the relevant Technology also enables a company to disseminate information timeframes and that there is an audit trail to confirm this; and quickly and in a standardised way, such as changes in operational ■ that any required financial protection, such as letters of credit or manuals and policies and online training modules. An intranet can even payment in advance, is received before shipments of be a useful tool to keep franchisees informed and up to date with products are made. company developments. As well as communication, the use of tech- Putting in place adequate procedures for producing, negotiating, nology to improve processes and procedures as well as customer approving, signing and reporting on international as well as experience, can add value from a business and franchise perspective. domestic franchise agreements is a key component of good fran- International franchisees may also be able to suggest ideas for chise management. consideration and, if approved, manage implementation at a local or Whilst it is not contemplated that franchise agreements will be even a wider level. Often the best ideas for innovation come from reviewed on a regular basis, there invariably becomes a point at franchisees, as there may be innovations and technologies commonly which it becomes necessary to ensure that franchisees are kept on used in some countries or jurisdictions which the company may not track regarding compliance with their obligations under their fran- be aware of. chise agreements. Having fully completed and signed agreements Master franchisees can be provided with systems which replicate which are compliant with local law requirements is a fundamental the company’s own systems, so that they can manage their sub-fran- step in ensuring that a company has the tools to manage compliance. chisees in the same way that the company manages its domestic Keeping a centralised repository of agreements with key dates such franchisees. If this is on the basis that the company retains access as dates for renewal, production of business and marketing plans, to such systems, it has the advantage of enabling the company to reporting and payments; as well as keeping track of unit openings exercise step-in rights effectively in the event of a dispute or and minimum performance requirements, will assist greatly in this termination, and potentially to assist in the resale of the master fran- task, which should be reviewed on a regular basis. chise’s territory. Of course, privacy and data laws need to be complied with by all parties, and mapping out their respective Ongoing Management of the Franchise Network responsibilities as to how compliance is maintained is a key component of devising the international strategy. Handling multiple franchisees across multiple jurisdictions can be a challenge, as the organisation deals with an increasingly sophisticated business model combining company-owned operations with the Conclusion management of complex supply chains. There isn’t a ‘one size fits all’ approach to international franchising. Keeping franchisees motivated, fully supported and interested in Opportunities arise and commercial considerations dictate the final the business, as well as listening to any concerns and challenges, can detail and structure. Taking a good look at internal processes and help to avoid conflict. procedures, and using the latest technology to optimise efficiencies Areas of dispute can involve the following: and manage risk, will be integral to achieving successful outcomes. ■ non-payment of franchise and other fees and payments at all or on time;

Pauline Cowie is a Partner with over 30 years’ experience in advising franchising clients, extensive international experience, and leads TLT’s Franchising team. She has advised on innovative franchise structures and in the retail, leisure, ﬁnancial services, IT/telecoms and not-for-proﬁt sectors. She is a former member of the British Franchise Association’s Legal Committee and a regular speaker at franchise events. Pauline has been frequently named as a Leading Individual in the legal directories for her franchising expertise, and won a British Finance Association award for innovation and development in June 2019.

TLT LLP Tel: +44 333 006 1443 3 Hardman Square Email: [email protected] Manchester M3 3EB URL: www.tltsolicitors.com United Kingdom

TLT LLP is a top-50 UK commercial law firm. We support some of the UK’s major institutions, high-growth businesses, large corporates, public institutions, and well-known brands, helping them to grow and protect their interests and achieve successful outcomes in a straightforward and accessible way. We provide strategic advice and support on day-to-day legal needs. We advise across all three UK legal jurisdictions of England & Wales, Northern Ireland and Scotland, from our offices in Bristol, London, Manchester, Glasgow, Edinburgh and Belfast. We also have a specialist ship finance team in Piraeus, Greece. We have significant experience advising clients in our focus sectors: Leisure; Food and Drink; Retail and Consumer Goods; Financial Services; Digital; Clean Energy; Real Estate; and the Public Sector. The firm has a strong track record of consistent growth, driven by client need. TLT has over 100 partners and employs around 1,000 people. www.tltsolicitors.com

Current titles in the ICLG series Alternative Investment Funds Environment & Climate Change Law Pharmaceutical Advertising Anti-Money Laundering Family Law Private Client Aviation Law Financial Services Disputes Private Equity Business Crime Fintech Product Liability Cartels & Leniency Foreign Direct Investments Project Finance Class & Group Actions Franchise Public Investment Funds Competition Litigation Gambling Public Procurement Construction & Engineering Law Insurance & Reinsurance Real Estate Copyright International Arbitration Sanctions Corporate Governance Investor-State Arbitration Securitisation Corporate Immigration Lending & Secured Finance Shipping Law Corporate Investigations Litigation & Dispute Resolution Telecoms, Media & Internet Laws Corporate Recovery & Insolvency Merger Control Trade Marks Corporate Tax Mergers & Acquisitions Vertical Agreements and Dominant Firms Cybersecurity Mining Law Data Protection Oil & Gas Regulation Employment & Labour Law Outsourcing Enforcement of Foreign Judgments Patents

@ICLG_GLG The International Comparative Legal Guides are published by glg global legal group