And succeed. Ayla Karmali offers four important considerations to understand before you franchise an American brand
There is no shortage of American franchises in the UK. Indeed, the best known global brands, particularly in the fast food sector, are American: McDonald’s, Burger King, Subway, Pizza Hut, Papa Johns, Starbucks, Dominos, KFC. The list goes on. American brands also dominate a range of other sectors: fitness, hospitality, cleaning and care. We can safely say that the USA is certainly adept at exporting its franchise brands not only into the UK, but worldwide.
Less well-known American brands continue to make in-roads into the UK too. It is an attractive territory for US franchisors who want to test out international expansion: the UK is a reasonably-sized market; we speak English and US brands speak to us; franchising isn’t regulated, and best of all, the franchise sector continues to grow. The British Franchise Association/NatWest Franchise Survey 2015 found that since 2013, the contribution of franchising to the UK economy increased by 10% alone, with a growth of 46% in the 10 years leading up to the survey.
If you are a potential UK master or area developer, buying into a US franchise brand certainly offers an excellent opportunity, but there are some practical considerations to bear in mind before embarking on your new adventure.
1. American-level due diligence
Franchising is big business in the USA, contributing billions to the US economy. It is also heavily regulated. America in the 1950s and 60s experienced such a boom in franchising it motivated the state of California to enact the California Franchise Investment Law. The new law required franchisors to register with the state’s business oversight department before they could offer franchises, and also introduced pre-sale disclosure. The purpose was to protect investors from unethical franchisors, unfair practices and defective business models. Other states soon followed suit as did the Federal Trade Commission (FTC), which introduced the FTC Franchise Rule in 1979. This imposed regulations on franchising across the USA and which has since been updated. Non-compliance can result in reputational harm, substantial fines, investigations, and civil proceedings being brought against not only the franchisor entity, but the people behind it.
American franchisors therefore take compliance with franchise regulations very seriously. If the franchisor has expanded across the USA, they will also have experience dealing with different rules and regulations. And while the UK may not have extensive regulations, American franchisors will already have systems and processes that include a strong partner due diligence process. You can therefore expect to be fully vetted.
2. Franchise Disclosure
When UK franchisors recruit franchisees, they can tell them as much or as little about themselves and their franchise network as they want. Ethical franchisors will err on the side of disclosure. Others will at the very least be wary of being deemed to have made misrepresentations or misleading investors and will therefore be careful with how they “sell” the opportunity.
For the most part, American franchisors believe in the franchise disclosure process. Although it may seem burdensome, it can give you a competitive edge in the UK market. After all, franchisees are investors and the more information they have, the more confidently they can invest. Therefore, don’t be surprised if your American franchisor wants you to prepare a franchise disclosure document to share with your future sub-franchisees and do consider the advantage this offers as part of your recruitment strategy.
3. The Franchise Agreement
American (sub)franchise agreements tend to be double the length of UK franchise agreements. Although saying that, UK franchise agreements tend to be double the length of franchise agreements commonly used on the continent! As UK lawyers we would never advise our clients expanding into Europe to forgo what we consider to be essential terms of contract and we suspect US lawyers feel the same way about their agreements.
American franchise agreements tend to be (a) a lot more prescriptive with respect to franchisee obligations; (b) afford the franchisor more rights; and (c) are more restrictive with respect to franchisee rights and how they can be exercised. When it comes to very popular brands, American franchisors will insist on American-style franchise agreements. However, you may find franchisees pushing back where the brand is less well known. From a recruitment and marketing perspective, prospective masters may want to invest in having the franchise agreement revised or re-drafted to address this issue.
In all circumstances, it is recommended that American franchisors and masters have the franchise agreement reviewed and “anglicised” by a UK solicitor. There will most certainly be clauses in the US-version of the agreement that would be unenforceable or inapplicable in the UK. For example, restrictive covenants tend to be wider in scope than what we would consider reasonably enforceable in the UK, and often apply not only to the franchisee and principal, but also their close family members.
Additionally, there may be important provisions that need to be added into the agreement, e.g. provisions demanding compliance with the Data Protection Act 1998, EU competition law, VAT and the Trading Schemes Act 1996, and the Bribery Act 2010. Masters may also want to consider whether they want to become members of the bfa, in which case their agreement must comply with the bfa Code of Ethics and include provisions that American franchise agreements will not often include, e.g. stronger rights of renewal, mutual good faith obligations and minimum performance targets that are calculated with reference to the rest of the franchise network’s performance.
Finally, American franchisors and masters will want to consider the governing law and jurisdiction clauses. We have come across American franchise agreements that are governed by American law and subject to the exclusive jurisdiction of an American state’s court, and this has the effect of taking any legal action against a defaulting franchisee impractical and unjustifiably expensive. Your UK solicitor would be best positioned to advise on the most appropriate dispute resolution mechanism depending on the size, value and structure of the franchise.
4. Culture and the System
While American franchise systems have certainly been successful in the UK, this success has not come without significant adaption to the UK market. These adaptations are more visible when looking at end-consumer products and services, e.g. menu changes to suit local tastes; different charity and sponsorship arrangements, and brand positioning. In the care sector for example, it means focusing on contracts with the public sector (the NHS) whereas there is no equivalent in the US, yet American care brands do make it work here.
As a master, you will therefore want to study the local market and culture, and test how open the franchisor is to adapting the franchise system. Also note that the adaptations required will also see changes in franchisee communication, recruitment and management on account of different cultural business practices.
Four considerations when bringing a US franchise to the UK
1. American franchisors will have systems and processes that include a strong partner due diligence process. You should expect and prepare to be fully vetted.
2. Don’t be surprised if your American franchisor wants you to prepare a franchise disclosure document to share with your future sub-franchisees. Do consider the advantage this offers as part of your recruitment strategy.
3. In all circumstances, it is recommended that American franchisors and masters have the franchise agreement reviewed and “anglicised” by a UK solicitor.
4. Study the local market and test how open the franchisor is to adapting the franchise system to the UK’s culture and business practices.
ABOUT THE AUTHOR
Ayla Karmali is a consultant at Goldstein Legal. She is a dual-qualified lawyer, qualified to practice in England & Wales and New York and her practice focuses on general commercial and corporate matters with a specific focus on franchise agreements, distribution agreements, services agreements and trademark protection. Ayla is a bfa accredited Qualified Franchise Professional (QFP). Goldstein Legal is a straight-talking commercial law firm based in Berkshire. Our services cover business and commercial, franchise, employment and commercial property law. We offer a full suite of expert legal advice for business, which means we can provide our clients counsel along every step of their commercial journey. www.goldsteinlegal.co.uk