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Investing in an international franchise

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Choosing the right franchise system for you is often a difficult task. There are many aspects to consider. If you are contemplating the purchase of a franchise from a non-Australian brand, there is an extra layer of specific issues that you need to consider. Whilst each system presents its individual challenges, some of the more common issues explored below should be taken into account by a prospective franchisee.

Franchisor support

One of the most important factors in franchisee success is the level of support available from the franchisor. When contemplating an international franchise system you need to consider whether their support network will be there for you, otherwise you risk being left in the cold when things go wrong.

Where the system has no Australian head office, support will generally only be available over the phone and by email, which can be very limiting. If support services are based overseas in a different time-zone, this can have a major effect on your business if your hours of operation are not compatible.

You may also be required to attend conferences or franchisee meetings in another country which will add significant travel costs, and also force you to spend time away from managing your business.

Feasibility of the brand

Many international franchise systems mistakenly believe that their brand will work in the Australian market in the same way as it works in the original country. Ideally the franchisor would have undertaken substantial market research to understand the Australian market and to show that the brand can be successful in Australia.

A good international franchisor will analyse the Australian market and adjust the brand or system to accommodate the individual characteristics of the Australian market. This may be a difficult concept for a franchisor to come to terms with, especially if you are amongst the first franchisees in the Australian market.

Feasibility of the system

The quality of the franchisor’s systems and procedures is a critical factor in the success of a franchise. A system that is successful and profitable in one country may not be so in another region for a number of reasons, including an increased cost base, which can be due a higher cost of goods, staff costs or different local laws.

Supply chain

Where the system requires a franchisee to source products form suppliers overseas, it is important that the supply chain is robust and dependable. Many systems require franchisees to use the franchisor’s branded products, which in many cases are manufactured overseas. If an issue arises in the supply chain you could find yourself stranded without stock or ingredients.

Fees

A simple but important consideration when assessing an international franchise is the currency in which payments are to be made to the franchisor. Where fixed fees are payable in another currency over the course of the Franchise Agreement, fluctuations in the exchange rate may have a serious effect on the profitability of the franchise. When there is uncertainty about such costs, this will affect the franchisee’s ability to plan for the future.

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 this is the case then you may need to operate two sets of books for the business, one for the franchisor and another for your Australian tax purposes.

Marketing

You will need to ensure that the franchisor’s marketing plan is appropriate for the Australian market. The identity of the franchise will be critical to the success of your business and 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 your territory.

Intellectual property

The ownership of Intellectual Property (“IP”) is a critical aspect of any franchise system. It is very important that the franchisor either owns the IP itself or has a binding, long term license from the owner (often a related entity).

With new international systems coming into Australia the IP may not yet be developed or protected.  In some circumstances the franchisor may own IP rights in their jurisdiction, but another party may own them in Australia.  To avoid a possible infringement of the other party’s IP rights and to ensure the IP is protected it is important that you research and make inquiries as the ownership of the IP in Australia.

Legal requirements

International franchisors operating in Australia will need to comply with the Franchising Code of Conduct (“the Code”). However, they may not be aware of the Code and its requirements.  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 Australian laws.

Disputes with the franchisor

You will need to review the governing law and dispute resolution provisions in the Franchise Agreement.  It may be that the governing law is the law of the franchisor’s country of origin and that disputes need to be dealt with in that country.  Where disputes arise this will add considerably to the expense and difficulty of enforcing any of your rights against the franchisor.

What is a master franchisee?

Rather than run the franchise system in another country, many international franchisors choose to delegate that role to a master franchisee to run operations in a certain geographical territory. 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 pursuant to 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.

If you would like any further information please contact one of our Franchising lawyers.

Authors: Nick Rimington & Raynia Theodore