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Relating to increasing your business abroad, franchising has become the Modus Operandi of the day. In Singapore, many companies including restaurants, cafe chains and fashion chains have shown interest in and considered setting up abroad franchises. It is sensible financially for them in the sense that the franchisor (the enterprise owner that grants the franchise) can charge an initial payment to the abroad franchisee (the one who takes the franchise). Franchising in effect gives an almost cost-free expansion since the original enterprise receives royalties and a constant stream of revenue from the franchise. But there are pitfalls to avoid. Franchising might not be suitable for all companies and an abroad operation can fail for a lot of reasons.
This text sets out briefly a number of the challenges a franchisor venturing abroad may face and methods to overcome and resolve them.
Franchise Methods
Firms that want to enter into a franchise agreement should familiarise themselves with the franchise system. There are three other ways to operate a franchise:
Unit Franchise:
The enterprise owner allows just one franchise outlet, and licenses all trade marks and different proprietary rights to solely that one outlet.
Area Franchise
The franchisee is only allowed to operate under the trade mark or brand name in one designated geographical area, such as the province of New South Wales as compared to the entire of Australia.
Master Franchise
The franchisee is entitled to function in the entire country, sometimes with a right to create sub-franchises and appoint sub-franchisees inside the country.
Costing would differ for each of the above types of franchises and can be affected by the potential market size and share in the targeted country.
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Regulations And Other Legal Points
The next issues to look out for when considering whether or not to franchise are the legal guidelines and local regulations in the targeted nations, which will influence on the franchisor. In nations such as the USA, the franchisor must adjust to stringent disclosure necessities whereas in nations like Indonesia, the franchisor could also be required to register the franchise agreement with the relevant authority before commencing operations. These necessities do not likely present too much of an issue to the franchisor, but they have to be complied with nonetheless. The franchisor should also pay particular attention to legal guidelines and regulations in varied other nations that directly affect the enterprise of the franchise. One example of what we mean right here is that, since February 2005, franchising has not been allowed in China for overseas retail brands which don’t have a minimal of 2 retailers and a couple of yr of operations in China. This amendment to the franchise regulations has made it troublesome for established local brands to franchise to China.
In fact there are perfectly authorized solutions to avoid the issues that could be encountered. The foundations differ from country to country and, due to this fact, any potential franchisor must seek authorized advice when venturing into a overseas jurisdiction for the first time to ensure that all such regulations and formalities required under the legal guidelines of the targeted country are complied with.
In fact in some instances, it may nonetheless not be advisable to commit to a franchise agreement even though all the indications are positive. Some product lines may merely be unsuitable for franchising.
Widespread Problems Faced By Franchisors
There are a range of issues that might be encountered by franchisors and we have attempted to deal with the most common ones here.
Initial Investment
One of many issues when embarking on a franchise, particularly for local firms or SMEs (small medium enterprises) seeking to expand abroad, is the prices involved in the early levels of a franchise. Preparation for franchising has to be completed with out the guarantee of payment and collection of franchise charges and royalties in the short term. The prices involved include:
o creating the franchise idea (normally performed with the help of participating external consultants)
o abroad market research
o authorized issues
o providing support
o looking for suitable franchisees
o training
o product prices
o provide of products to the franchisees
For retail chains, financial issues with cargo and manufacturing (even after executing an agreement with the franchisee) have to be considered. The sizable initial prices plus the time lag (about half a yr to more than one year for preparations) before the franchisor can recoup the cash from the franchisee, may end in money circulation issues for the franchisor. That is particularly so for smaller retail chains with a yearly turnover of say US$1m to US$5m as they could not have the financial resources to provide or compensate for any delays.
One example we experienced that illustrates this point is the case of a Singapore shoe retail chain (with about 5-6 retailers) which launched into a franchise for its shoe retail chain in Indonesia. In the contract, it was acknowledged that the balance of payment could be paid after the goods had arrived at the Port of Jakarta. However, the payment was not made. Despite this, the franchisor had no alternative but to release the goods as they have been already in the Port of Jakarta. He solely received payment at a time much later than the agreed date. This delay caused him some money flow difficulties.
Problems like this can and ought to be addressed legally in the franchise agreement just as they would be in a contract for international or cross-border sales of goods.
Monetary issues may also result in the lack of sufficient preparation in coming up with the franchise concept. This will, in turn, result in inconsistency in the high quality of the products and different levels of support or dedication by the franchisor in several countries. The food in a franchise outlet in say, Australia, where the franchisor is situated, would taste significantly better than these in one other outlet from the same franchise in China. Although the situation may improve after a while, that is the same old problem that local brands or small medium enterprises face at the onset.
The Trade Mark Downside
Usually, trade marks are crucial intellectual property rights in a franchise. Trade marks are territorial in nature and the franchisor should register its trade mark in the targeted country before it can be protected there. Registration in your own home country will not be adequate and your local registration is not going to be recognised in another country.
The franchisor may sometimes find that his trade mark has already been registered in the targeted country by a local third party as was the case with a specific popular Indonesian fashion brand seeking to franchise in Korea and Thailand. It discovered the hard way about stolen trade marks when it discovered, after entering into a franchise agreement with a local franchisee, that its own brand name had already been registered by other firms in these countries. To make issues worse, it determined to give these issues to the local franchisee instead, considering that the local franchisee could be more familiar with the situation. This caused him critical financial losses as he had already shipped his products to the franchisee. The franchisee subsequently defaulted on payment and did nothing to resolve the trade mark problem. From this it becomes clear that some initial market research in the targeted nations and legal advice are needed if you want to start your franchise.
Registering Your Trade Marks In International Nations
The Madrid System for the International Registration of Marks (“Madrid Protocol”) and the Paris Convention for the Protection of Industrial Property (“Paris Convention”) are 2 essential international treaties concerning the registration of trade marks.
The Madrid Protocol gives a one-stop filing system so that the franchisor can file for trade mark protection in his own country in addition to his targeted nations at the same time. It doesn’t provide you with a global trade mark that’s recognised by all its member states or all nations throughout the globe, but gives a convenience of submitting in several nations at one go and in addition reduces the prices of filing.
The Paris Convention on the other hand, gives a very useful mechanism permitting the franchisor to file the trade mark in his home country first at an earlier date and subsequently, within a given time-frame, when he decides to file his trade mark in his targeted country, he is ready to claim priority or use his first and earlier filing date in his own country because the date of filing in the targeted country. The Paris Convention gives the franchisor time to supply for funds before filing for trade mark protection in the targeted nations and the peace of mind that comes with realizing that he may be protected by filing first in his home country.
Take a real-life example of a Korean cosmetics company setting up its business in Singapore. It registered its trade mark first in Korea someday in December 2005 before coming into Singapore. Upon entry into the Singapore market, it then filed for trade mark protection in Singapore under the Paris Convention someday in March 2006. However, the directors shortly received notification from the Singapore trade marks registry that there was an identical trade mark filed by their competitor in January 2006. Profiting from the Paris Convention, the Korean company was in a position to claim the earlier filing date in Korea of December 2005 as their date of filing in Singapore and this allowed them to successfully override their competitor’s earlier application. This helped forestall a situation where the Korean company would either have had to shelve its plans in Singapore or embark on pricey litigation to recover its trade mark.
Usually, it is normally not advisable to leave trade mark issues such as registration to the franchisee. The trade marks should all the time, where possible, be filed in the name of the franchisor, otherwise the brand value or recognition of the trade mark could also be diminished in the long term since the public in the targeted country may come to identify the trade mark with the local franchisee and never the franchisor.
Different Intellectual Property Rights
Copyright
That is one other type of intellectual property rights which may be of interest to the franchisor. Copyright can attach to many possible mediums and is not confined to brand or logos alone. Tutorial manuals, business forms, software program and different items may all be protected by copyright. In contrast to trade marks, copyright normally doesn’t need to be registered and might be protected in lots of overseas locations at one time if these locations are all signatories to the same international copyright convention.
Patents
These don’t quite fit into the enterprise model of franchises since patents are, by their nature, confined to subject matter of heavy industrial application. This may increasingly change in the future as many nations such as Singapore have made or are making modifications to their legal guidelines, permitting enterprise methods to be patented. Like a trade mark, a patent has to be registered and have its own equivalent of a world system of registration by means of the Patent Co-operation Treaty. The Paris Convention also applies to patents.
Control Over Franchisees
It is all the time advisable to exercise some supervision and control over a franchisee. Step one in the direction of that is to incorporate the right clauses in your franchise agreement at the onset. The franchisor should insist on some type of reporting requirements and a right to examine accounts. There should also be some provisions to safeguard the franchise idea and sometimes the franchisor’s business methods. Generally, the franchisor must be seeking to protect, by means of contractual clauses in the agreement, what may not be protectable under intellectual property laws.
This helps the franchisor to forestall a situation where the franchisee acquires information, copies the franchise idea and uses this to compete with the franchisor. This will sometimes happen at the end of the franchise period. Mainly, there must be restrictions imposed on the franchisee when dealing with materials or other property of the franchisor, and these must be returned and accounted for by the franchisor upon the expiry or termination of the franchise.
See You In Court – But Which Court?
It may be at times necessary to take legal action against an errant abroad franchisee that’s outside the jurisdiction of the courts and in addition beyond the control of the legal guidelines in the franchisor’s home country.
It is advisable to make some provisions for this in your franchise agreement. The two necessary considerations here are the place to sue and the legislation to apply. It is very important seek legal advice for these issues since your choice of place and legislation usually determines success and directly affects the prospects of restoration as rules may differ from country to country. Some nations may have bilateral reciprocal enforcement regimes permitting their respective courts to recognise and enforce each other’s judgments while others could also be signatories of international conventions to the same effect. It is very important know these in order to choose your place to sue and the relevant law.
Sub-Franchising And Exchange Of Goods
Another problem with franchising is the inconvenience caused to end consumers in terms of the exchanging of defective products. That is particularly so where there is sub-franchising created in different places in the same country. As an example, in Australia, when a buyer buys an item of clothing from an outlet in Sydney, he wouldn’t be able to exchange it in the franchise in Melbourne. This also happens in Indonesia, particularly if the shop is owned by different people. That’s the reason why some retail chains like Hammer and Nail (Indonesia) choose to own the business themselves. This can be used either as an alternative or a stepping stone to establishing a completely fledged franchise.
Elevate Public Awareness First
It may be simpler for local brands who want to broaden abroad by franchising to contemplate organising their own flagship store in the abroad country first. This may increase public awareness of their brand and product in the targeted country and help to attract extra franchisees later on. Famous local brands such as BreadTalk in Singapore may not be known to anyone in abroad nations, such as Germany. As such, potential investors in Germany could be hesitant to put money into the brand. By organising a flagship store, the franchisor can check the local market.
However, before venturing abroad, research should also be done on consumer behaviour to ensure that the consumers in that country would respect the product, taking into consideration that totally different nations have totally different cultures, tastes and market trends.