When it comes to expand your business abroad, franchising has become the modus operandi of the day. In Singapore, many businesses including restaurants, coffee chains and fashion chains have shown interest and considered setting up overseas franchises. It makes sense financially for them in the sense that the franchisor (the business owner that provides franchise) can charge an initial fee to the foreign franchisee (the one that takes the franchise). Franchising actually provides almost no cost expansion from the original company gets royalties and a steady stream of income from the franchise. But there are pitfalls to avoid. Franchising may not be suitable for all businesses and foreign operations can fail for various reasons.
This article sets out briefly some of the challenges a franchisor venturing abroad may face and how to overcome and solve them.
Franchise Systems
companies that want to enter into a concession agreement should study the franchise system. There are three different ways to operate the franchise
Unit franchise
The business owner makes only one franchise outlet, and leave all the trademarks and other proprietary rights to only one outlet
Area franchise
The franchisee is allowed to operate under the brand or brands in one geographical area, such as the province of New South Wales in comparison to the whole of Australia.
Master franchise
The franchisee the right to operate throughout the country, sometimes with the right to create sub-franchises and appoint sub-franchise in the country.
Costa would differ for each of the above types of franchises and also affect the potential market size and share in the targeted country.
Regulations and other legal issues
Coming there to look out for when considering whether the concessions are laws and local regulations in target countries, which will affect the franchisor. In countries like the US, the franchisor must comply with strict disclosure requirements than in countries such as Indonesia, the franchisor may require you to sign a franchise agreement with the authority before commencing. These requirements do not really present much of a problem to the franchisor, but they have to be met anyway. Franchisor should also pay special attention to the laws and regulations in various other countries that have a direct impact on the operation of the franchise. One example of what is meant here is that since February 2005, the franchise has not been allowed in China for retail brands that do not have at least two stores and more than one year of operations in China. This change in the franchise rules have made it difficult for established local brands to the franchise to China.
course, perfectly legal solutions to avoid problems that may arise. The rules are different from country to country and by any prospective franchisor must seek legal advice when venturing into foreign jurisdiction for the first time to ensure that all such laws and formalities required by law relative to the country are met.
Of course, in some cases, it may still not be advisable to undertake a franchise agreement despite all indications are positive. Some product lines can simply be unsuitable for franchising.
Common Problems faced by franchisors
There are various problems that could be encountered with franchisors and we have tried to deal with the most common ones here.
initial investment
One of the problems when embarking on a franchise, especially for local companies or SME (small medium enterprises) seeking to expand overseas, the cost involved in the beginning of the franchise. Preparations for the concession has to do without a guarantee of payment and collection of franchise fees and royalties in the short term. Costs include:
o develop franchise concepts (usually done with the help of hiring external consultants)
o overseas market
o legal issues
o provide support
o looking for suitable franchise
o Training
o product cost
o supply of products to the franchise
For retail, financial problems with the transmission output (even after the implementation of the agreement with the franchisee) must be considered. The substantial initial costs plus delay (about half a year more than one year for preparation) before the franchisor can recover money from the franchisee, may cause cash flow problems for the franchisor. This is especially so for small retailers with an annual turnover of say US $ 1m to US $ 5m which they may not have the resources to provide or compensate for delays.
One example have experienced that illustrates this point is a Singapore shoe retail chain (with 5-6 outlets) that launched the franchise for the shoe retail chain in Indonesia. The agreement stated that the balance payment would be paid after the products were in port Jakarta. However, the payment was not made. Despite this, the franchisor had no choice but to release the product as they were already in the port of Jakarta. He only got paid in time much later than the agreed date. This delay caused him some cash flow difficulties.
Problems like this can and should be addressed legally in the concession agreement as they would be in agreement on international or cross-border sale of goods.
Financial concerns can also lead to a lack of adequate preparation to come up with the franchise concept. This can in turn lead to inconsistency in the quality of products and different levels of support or commitment franchisor in different countries. The food in the franchise outlet in say, Australia, where the franchisor is located, would taste much better than those in other output from the same franchise in China. While the situation may improve after some time, this is usually a problem that local brands or small medium businesses face in the beginning.
The Trade Mark Problem
Typically, the most important brand intellectual property rights in the franchise. Trademarks are territorial in nature and franchisor must register its brand in the targeted country before it is possible to protect it. Register in their own home country is not good enough and local registration will not be recognized in another country.
The franchisor can sometimes find that his trademark has been registered in the country targeted by a local third party as was the case with a distinctive popular Indonesian fashion brand trying to franchise in Korea and Thailand. It found out the hard way about the theft of trademarks when it discovered, after entering into a franchise agreement with a local franchisee, to its own brand had already been registered by other companies in these countries. To make matters worse, they decided to leave this issue to the local franchisee place, thinking that the local franchisee was aware of the situation. This caused him serious financial losses he had already shipped their products to the franchisee. The franchisee since defaulted on payment and did nothing to resolve the trademark problems. From this it becomes clear that some initial market research in target countries and legal advice is required when you want to start your franchise.
Registering Marks Abroad
The Madrid System for the International Registration of Marks (“Madrid Protocol”) and the Paris Convention for the Protection of Industrial Property (“Paris Convention”) are two very important international agreements the registration of trademarks.
The Madrid Protocol provides a one-stop filing so that the franchisor can file for trademark protection in his country and target their countries at the same time. It does not give you an international trade mark, which is recognized by all its member states or to all countries around the world, while providing the convenience of the application in different countries at one go and also reduces the cost of application.
The Paris Convention on the other hand also very useful system allows the franchisor to register the trademark in his country first in the first day and then, within a specified time frame, when he decides to make his brand a target of his land, he able to claim priority or use the first and previous filing his in his country as the filing date of the targeted country. The Paris Convention gives the franchisor the time to source for funds before filing for trademark protection in target countries and the peace of mind that comes with knowing that he can be protected by filing first in his home country.
Take real-life examples of Korean cosmetics companies set up their operations in Singapore. It registered its brand first in Korea sometime in December 2005 before coming to Singapore. Upon entry into the Singapore market, it is proposed for trademark protection in Singapore under the Paris Convention sometime in March 2006. However, managers were quickly notice from Singapore trademark registration that was a trademark filed by their competitors in January 2006. Taking advantage of the Paris Convention, Korean company was able to claim the first filing in Korea in December 2005 as the date of filing in Singapore and this allowed them to actually ignore the introduction of competitor’s. This helped prevent the situation where the Korean company would either have had to shelve plans in Singapore or embark on expensive litigation to recover its brand.
Generally, it is generally not advisable to go trademark issues such as registration to the franchisee. Brands should always, if possible, record the name of the franchisor a brand value or recognition of the trade mark may be reduced in the long run from the public in the targeted country can come to know the brand with local franchisee and not the franchisor.
Other Intellectual Property
Copyright
This is another form of intellectual property that may be of interest to the franchisor. Copyright can follow many possible media and is not limited to one brand or logo. Instruction manuals, forms, software and other factors may all be protected by copyright. Unlike trademarks, copyrights, generally do not need to be recorded and can be protected in many foreign countries only if these countries are all members of the same international copyright.
patent
This does not quite fit into the business model of franchises since patents are in nature, tied to the subject of much industry. This may change in the future as many countries as Singapore have made or are making changes in their laws, allowing business methods to be patented. As a trademark, a patent must be registered and have its own equivalent of the international system of registration by the Patent Cooperation Treaty. The Paris Convention also applies to patents.
Control of the franchise
It is always good to exercise some control and management franchisee. The first step towards this is to incorporate appropriate provisions in the franchise agreement at the beginning. Franchisor should require some kind of notification and the right to inspect accounts. There should also be some provisions to ensure the franchise concept and sometimes trading strategies franchisor is. Generally, the franchisor should seek to protect, by contractual provisions in the contract, it may not be protectable under intellectual property laws.
This helps the franchisor to avoid situations where the franchisee acquires knowledge, copies franchise concept and uses it to compete with the franchisor. This can sometimes happen at the end of the franchise period. Basically, there should be no restrictions imposed on the franchisee when dealing with chemicals or other assets franchisor, and shall be made taking into account the franchisor upon expiry or termination of the franchise.
See you in court – ?. but each court
There may at times be necessary to sue confused overseas franchisee outside the jurisdiction of the courts and also force the laws in your country franchisor is
It is advisable to take some measures its franchise contract phone. Two important points here are the place to sue and law to be applied. It is important to seek legal advice for those cases where the choice of place and law often determines the success and have a direct impact on the prospects of recovery and rules can vary from one country to another. Some countries may have bilateral reciprocal enforcement regimes allow national courts to recognize and enforce decisions of each other while others may be party to international conventions for the same substance. It is important to know this to choose your place to sue and applicable law.
Sub-Franchising and exchange of goods
Another problem with franchising is the inconvenience caused to end consumers when it comes to the exchange of defective products. This is especially so since the sub-concession to the different parts of the same country. For example, in Australia, when a customer purchases an item of clothing from the outlet in Sydney, he would not be able to exchange it in the franchise in Melbourne. This also happens in Indonesia, especially if the store is owned by different people. That’s why some retail chains like Hammer and Nail (Indonesia) prefer to trade themselves. This can be used either as an alternative or a stepping stone to establish a fully fledged franchise.
public awareness First
It may be easier for local brands that will expand overseas with franchising to consider setting up their own flagship store their foreign country first. This would increase public awareness of the brand and products in the targeted country and help to attract more franchisees later. Famous local brands such as Bread Talk Singapore may not know that some foreign countries, such as Germany. As such, potential investors in Germany would be hesitant to invest in the brand. By setting up a flagship store, the franchisor can test the market.
But before venturing abroad, research should also be consumer behavior to ensure that consumers in the country would last, bear in mind that different countries have different cultures, tastes and market trends
franchising -.
A great tool for the right business with the right knowledge
franchising is a useful tool when it comes to expanding your business overseas. However, as we have shown here, there are also potential pitfalls and risks. This can be avoided or at least minimized if the necessary preparatory work is carried out before you venture into franchise agreement with a foreign partner.
Acquiring knowledge of consumer behavior, the conditions of the local market and regulations, develop appropriate franchise concept as well as pay attention to things in the concession agreements devices are just some of the more important issues that you, as a franchisor, should be taken into account .
Knowing your market and your rights as a franchisor or a brand owner laid the groundwork for the establishment of a successful franchise.