Franchising Overseas

When it comes to expanding your business overseas,				The Madrid Protocol provides a one-stop filing system
franchising has become the Modus Operandi of the				so that the franchisor can file for trade mark
day. In Singapore, many businesses including				protection in his own country as well as his targeted
restaurants, café chains and fashion chains				countries at the same time. It does not give you an
have shown interest in and considered setting up				international trade mark that is recognised by all its
overseas franchises. It makes sense financially for				member states or all countries across the globe, but
them in the sense that the franchisor (the business				provides a convenience of filing in different countries at
owner that grants the franchise) can charge an initial				one go and also reduces the costs of filing.
fee to the overseas franchisee (the person who takes				The Paris Convention on the other hand, provides a
the franchise). Franchising in effect provides an almost				very useful mechanism allowing the franchisor to file
cost-free expansion since the original business				the trade mark in his home country first at an earlier
receives royalties and a constant stream of income				date and subsequently, within a given time frame,
from the franchise. But there are pitfalls to avoid.				when he decides to file his trade mark in his targeted
Franchising may not be suitable for all businesses and				country, he is able to claim priority or use his first and
an overseas operation can fail for a number of				earlier filing date in his own country as the date of filing
reasons.				in the targeted country. The Paris Convention gives the
This article sets out briefly some of the challenges a				franchisor time to source for funds before filing for
franchisor venturing overseas may face and how to				trade mark protection in the targeted countries and the
overcome and resolve them.				peace of mind that comes with knowing that he can
Franchise Systems				be protected by filing first in his home country.
Companies that wish to enter into a franchise				Take a real-life example of a Korean cosmetics
agreement should familiarise themselves with the				company setting up its business in Singapore. It
franchise system. There are three different ways to				registered its trade mark first in Korea sometime in
operate a franchise:				December 2005 before coming into Singapore. Upon
Unit franchise:				entry into the Singapore market, it then filed for trade
The business owner allows only one franchise outlet,				mark protection in Singapore under the Paris
and licenses all trade marks and other proprietary				Convention sometime in March 2006. However, the
rights to only that one outlet.				directors quickly received notification from the
Area franchise				Singapore trade marks registry that there was an
The franchisee is only allowed to operate under the				identical trade mark filed by their competitor in January
trade mark or brand name in one designated				2006. Taking advantage of the Paris Convention, the
geographical area, such as the province of New South				Korean company was able to claim the earlier filing
Wales as compared to the whole of Australia.				date in Korea of December 2005 as their date of filing
Master franchise				in Singapore and this allowed them to effectively
The franchisee is entitled to operate in the whole				override their competitor's earlier application. This
country, sometimes with a right to create				helped prevent a situation where the Korean company
sub-franchises and appoint sub-franchisees within the				would either have had to shelve its plans in Singapore
country.				or embark on costly litigation to recover its trade mark.
Costing would differ for each of the above types of				In general, it is usually not advisable to leave trade
franchises and is also affected by the potential market				mark matters such as registration to the franchisee.
size and share in the targeted country.				The trade marks should always, where possible, be
Regulations and Other Legal Issues				filed in the name of the franchisor otherwise the brand
The next things to look out for when considering				value or recognition of the trade mark may be
whether to franchise are the laws and local regulations				diminished in the long run since the public in the
in the targeted countries, which will impact on the				targeted country may come to identify the trade mark
franchisor. In countries such as the USA, the franchisor				with the local franchisee and not the franchisor.
must comply with stringent disclosure requirements				Other Intellectual Property Rights
while in countries like Indonesia, the franchisor may be				Copyright
required to register the franchise agreement with the				This is another form of intellectual property rights which
relevant authority before commencing operations.				may be of interest to the franchisor. Copyright can
These requirements do not really present too much of				attach to many possible mediums and is not confined
a problem to the franchisor, but they have to be				to brand or logos alone. Instructional manuals, business
complied with nonetheless. The franchisor should also				forms, software and other items may all be protected
pay particular attention to laws and regulations in				by copyright. Unlike trade marks, copyright usually does
various other countries that directly affect the business				not have to be registered and can be protected in
of the franchise. One example of what we mean here				many foreign countries at one time if these countries
is that, since February 2005, franchising has not been				are all signatories to the same international copyright
allowed in China for foreign retail brands which do not				convention.
have a minimum of two shops and more than one				Patents
year of operations in China. This amendment to the				These do not quite fit into the business model of
franchise regulations has made it difficult for				franchises since patents are, by their nature, confined
established local brands to franchise to China.				to subject matter of heavy industrial application. This
Of course there are perfectly legal solutions to avoid				may change in the future as many countries such as
the problems that may be encountered. The rules				Singapore have made or are making changes to their
differ from country to country and, therefore, any				laws, allowing business methods to be patented. Like a
prospective franchisor must seek legal advice when				trade mark, a patent has to be registered and have its
venturing into a foreign jurisdiction for the first time to				own equivalent of an international system of
ensure that all such regulations and formalities required				registration by way of the Patent Co-operation Treaty.
under the laws of the targeted country are complied				The Paris Convention also applies to patents.
with.				Control over Franchisees
Of course in some cases, it may still not be advisable				It is always advisable to exercise some supervision
to commit to a franchise agreement even though all				and control over a franchisee. The first step towards
the indications are positive. Some product lines may				this is to incorporate the right clauses in your franchise
simply be unsuitable for franchising.				agreement at the onset. The franchisor should insist on
Common Problems Faced by Franchisors				some form of reporting requirements and a right to
There are a range of problems that could be				inspect accounts. There should also be some
encountered by franchisors and we have attempted				provisions to safeguard the franchise concept and
to address the most common ones here.				sometimes the franchisor's business methods.
Initial Investment				Generally, the franchisor should be looking to protect,
One of the problems when embarking on a franchise,				by way of contractual clauses in the agreement, what
especially for local companies or SMEs (small medium				may not be protectable under intellectual property
enterprises) seeking to expand overseas, is the costs				laws.
involved in the early stages of a franchise. Preparation				This helps the franchisor to prevent a situation where
for franchising has to be done without the guarantee				the franchisee acquires knowledge, copies the
of payment and collection of franchise fees and				franchise concept and uses this to compete with the
royalties in the short term. The costs involved include:o				franchisor. This can sometimes happen at the end of
developing the franchise concept (normally done with				the franchise period. Basically, there should be
the help of engaging external consultants)o overseas				restrictions imposed on the franchisee when dealing
market researcho legal matterso providing supporto				with materials or other property of the franchisor, and
looking for suitable franchiseeso trainingo product				these should be returned and accounted for by the
costso supply of products to the franchisees				franchisor upon the expiry or termination of the
For retail chains, financial problems with shipment and				franchise.
manufacturing (even after executing an agreement				See You in Court - But Which Court?
with the franchisee) have to be considered. The				It may be at times necessary to take legal action
sizable initial costs plus the time lag (about half a year				against an errant overseas franchisee that is outside
to more than one year for preparations) before the				the jurisdiction of the courts and also beyond the
franchisor can recoup the money from the franchisee,				control of the laws in the franchisor's home country.
may result in cash flow problems for the franchisor.				It is advisable to make some provisions for this in your
This is especially so for smaller retail chains with a				franchise agreement. The two important
yearly turnover of say US$1m to US$5m as they may				considerations here are the place to sue and the law
not have the financial resources to provide or				to apply. It is important to seek legal advice for these
compensate for any delays.				matters since your choice of place and law often
One example we experienced that illustrates this point				determines success and directly affects the prospects
is the case of a Singapore shoe retail chain (with				of recovery as rules may differ from country to
about 5-6 shops) which embarked on a franchise for				country. Some countries may have bilateral reciprocal
its shoe retail chain in Indonesia. In the contract, it was				enforcement regimes allowing their respective courts
stated that the balance of payment would be paid				to recognise and enforce each other's judgments
after the goods had arrived at the Port of Jakarta.				while others may be signatories of international
However, the payment was not made. Despite this,				conventions to the same effect. It is important to know
the franchisor had no alternative but to release the				these in order to choose your place to sue and the
goods as they were already in the Port of Jakarta. He				applicable law.
only received payment at a time much later than the				Sub-Franchising and Exchange of Goods
agreed date. This delay caused him some cash flow				Another problem with franchising is the inconvenience
difficulties.				caused to end consumers when it comes to the
Problems like this can and should be addressed legally				exchanging of defective products. This is especially so
in the franchise agreement just as they would be in a				where there is sub-franchising created in different
contract for international or cross-border sales of				places in the same country. For instance, in Australia,
goods.				when a customer buys an item of clothing from an
Financial concerns can also lead to the lack of				outlet in Sydney, he would not be able to exchange it
adequate preparation in coming up with the franchise				in the franchise in Melbourne. This also happens in
concept. This can, in turn, lead to inconsistency in the				Indonesia, especially if the shop is owned by different
quality of the products and different levels of support				people. That is why some retail chains like Hammer
or commitment by the franchisor in different countries.				and Nail (Indonesia) prefer to own the business
The food in a franchise outlet in say, Australia, where				themselves. This can be used either as an alternative
the franchisor is located, would taste much better than				or a stepping stone to establishing a fully fledged
those in another outlet from the same franchise in				franchise.
China. Though the situation may improve after some				Raise Public Awareness First
time, this is the usual problem that local brands or small				It may be easier for local brands who want to expand
medium enterprises face at the onset.				overseas by franchising to consider setting up their
The Trade Mark Problem				own flagship store in the overseas country first. This
Usually, trade marks are the most important intellectual				would raise public awareness of their brand and
property rights in a franchise. Trade marks are				product in the targeted country and help to attract
territorial in nature and the franchisor will have to				more franchisees later on. Famous local brands such
register its trade mark in the targeted country before it				as BreadTalk in Singapore may not be known to
can be protected there. Registration in your own home				anyone in overseas countries, such as Germany. As
country is not good enough and your local registration				such, potential investors in Germany would be hesitant
will not be recognised in another country.				to invest in the brand. By setting up a flagship store, the
The franchisor may sometimes find that his trade				franchisor can test the local market.
mark has already been registered in the targeted				However, before venturing overseas, research should
country by a local third party as was the case with a				also be done on consumer behaviour to make sure
particular popular Indonesian fashion brand seeking to				that the consumers in that country would appreciate
franchise in Korea and Thailand. It found out the hard				the product, bearing in mind that different countries
way about stolen trade marks when it discovered,				have different cultures, tastes and market trends.
after entering into a franchise agreement with a local				Franchising -
franchisee, that its own brand name had already been				A Great Tool for the Right Business with the Right
registered by other companies in these countries. To				Knowledge
make matters worse, it decided to leave these issues				Franchising is a useful tool when it comes to expanding
to the local franchisee instead, thinking that the local				your business overseas. However, as we have shown
franchisee would be more familiar with the situation.				here, there are also potential pitfalls and risks involved.
This caused him serious financial losses as he had				This can be avoided or at least minimised if the
already shipped his products to the franchisee. The				necessary preparatory work is carried out before you
franchisee subsequently defaulted on payment and did				venture into a franchise agreement with a foreign
nothing to resolve the trade mark problem. From this it				partner.
becomes clear that some initial market research in the				Acquiring knowledge of consumer behaviour patterns,
targeted countries and legal advice are needed when				local market conditions and regulations, developing a
you want to start your franchise.				suitable franchise concept as well as paying attention
Registering Your Trade Marks in Foreign Countries				to various details in your franchise agreements are just
The Madrid System for the International Registration of				some of the more critical matters that you, as
Marks ("Madrid Protocol") and the Paris Convention for				franchisor, should take note of.
the Protection of Industrial Property ("Paris				Knowing your market and your rights as a franchisor
Convention") are two very important international				or a trade mark owner lays down the foundation for
treaties regarding the registration of trade marks.				the creation of a successful franchise.

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Franchising Overseas