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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
by Emily O’Connor
The selection of the “right” partner or Candidate is a crucial issue for Franchisors who plan to initiate international expansion, all the more so since, for example, Master Franchisees have the responsibility to implement the Franchisor’s strategies, to select Sub-Franchisees, to offer training, to coordinate activities with local Franchisees and to monitor performance. In this respect, the Franchisor will have to determine the business profile of the ideal international partner considering their strategy, policy and the target countries. Franchisors often choose a foreign partner who has a good knowledge of the target market and who can provide insight and experience to adapt the System to any special characteristics of the local market without violating the network’s core values and principles. Franchisors may also choose a partner from their own country and send the partner to the target market. In this case, it is important to check if the partner has the experience required or if it is prepared to get involved in the countries at issue.
Before approaching a Candidate, a Franchisor should first create a profile of an ideal future Franchisee in regards to education, professional experience, financial background, personal capabilities, etc. Frequently, a Candidate approaches a Franchisor seeking to license Franchisor’s product before the Franchisor has considered expanding into the Candidate’s country. A Franchisor is advised to thoroughly investigate the Candidate’s professional history and expertise because the future Franchisee will be a key element in the franchise’s success in the target market. It might be necessary to hire a private investigator to do a background check.
The Franchisee needs to have financial, educational and operational skills to establish or pilot a System.
The Franchisor should make sure that the Candidate will be able to fulfill all its financial obligations, meaning that the Franchisee is able not only to pay its Initial Fee, but also to finance the development and conduct of the chosen System in the designated area.
Financial needs vary depending on whether a Candidate is being sought to act as an Area Developer or a Master Franchisee. The Area Developer needs more money than the Master Franchisee because it owns and develops the Units itself.
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Therefore, among the methods to internationalize Systems described here, Area Development requires the highest investments for the partner of the Franchisor and exposes the Candidate to the highest possible economic risk. By contrast, the Area Representative bears hardly any economic risk and its investments are low. In terms of investments and economic risk, the Master Franchisee ranges somewhere between Area Developer and Area Representative.
The Candidate may be interested in a System not only as an owner and operator but also as an investor. In this case, the Franchisor is advised to clearly document that if the Candidate decides to become an investor, it needs to team up with an “operating manager” who will be involved in the transfer of Know-how from the beginning. The operating manager will be the person who develops the System within the target market.
Usually the Candidate will organize a company to minimize its personal liability. It is possible that the Franchisor holds a share in the company of the Franchisee/Area Developer. The Franchisor and the Candidate can also incorporate a joint-venture.
When a Franchisor signs a contract with a company, it would be prudent to include a requirement that any changes in the management board of the Candidate/contractual partner have to be reported to the Franchisor as soon as possible. The contract should include a provision requiring the contractual partner to give notice of any such management change to prevent, for example, a competitor of the Franchisor becoming a partner of the company of the contractual partner without the Franchisor having knowledge of it.
A Candidate with experience in competing products and services may be an advantage, but also risks being a disadvantage, as the Candidate might not accept the rules and standards of the System so easily.
While it is not necessary that the Candidate have previous experience in the field of the System, the Candidate should have a thorough understanding of the complex operations of the relevant distribution mechanism.
Ideally, the Candidate should speak the language of the Franchisor as well as of the target market to be able to adapt the System and run the network. In any event, it is essential that the contracting parties communicate in a language both understand to avoid any misunderstandings due to language difficulties.
The Franchisor will often provide pre-contractual disclosure, documents, manuals, training etc. only in its native language. Where a Candidate does not understand the language of the Franchisor, the Franchisor will have to translate the most important pre-contractual and contractual documents (see also § 4.4.9 on Language requirements) and the contract should specify who pays the costs of translation.
To avoid any misunderstandings, the contract should be provided in the language of the Franchisor as well as in the language of the contractual partner and the parties should agree on one controlling language. Sometimes this is specifically required by the law of the jurisdiction of[Page77:]the target market. In such situations, parties should determine which language version of the contract is legally binding.
It is possible that the Franchisee itself will not manage the System directly, but appoint somebody as manager of the System.
The Franchisor should know the owners, managers and key operators of the Franchisee, because the Franchisee will receive training from the Franchisor and receive its confidential information, which in many countries can be provided only to a natural person and not to a company.
The Candidate also has to be willing to make decisions that fall only within the boundaries of the System, as set out in the guidelines of the original concept provided by the Franchisor. The Candidate has to accept that any amendments to the guidelines to accommodate country-specific cultural or legal differences should be adopted only by prior agreement and require Franchisor’s consent in writing.
Usually, a Candidate is not allowed to sell products or services that compete with the System and its sole focus should be on the goods and services of the System. If, however, the Candidate is a multi-brand operator already selling similar products or services/brands, a Franchisor may allow it to continue to sell competing products.
Candidates can be found in a range of places: at franchise fairs, via business consultants, brokers or franchise associations, through franchise networks or other franchise organizations, at franchise seminars, as well as by putting advertisements in franchise magazines or on special Internet platforms for franchising, social media, and the Franchisor’s own company website. A Candidate may also be an existing distribution partner of the Franchisor in another country or may be met by chance when traveling, on holiday or at private occasions.
A key resource in finding Candidates is an international franchise broker or consultant. Franchise brokers and/or consultants can be a valuable source of local Know-how in the target market and an efficient tool. As the process of negotiating with a Candidate may be long and the outcome not always clear, it is essential that the three parties involved (Franchisor, broker and Candidate) have a clear common understanding of each party’s roles, liabilities and remuneration. Moreover, parties may wish to consult the ICC Principles to Facilitate Commercial Negotiation for guidance on the negotiation process in general: http://www.iccwbo.org/Advocacy-Codes-and-Rules/Document-centre/2013/ICC-Principles-to-Facilitate-Commercial-Negotiation/
The services provided by franchise brokers or consultants are numerous and may vary significantly in quality, price and efficiency from country to country. Especially in less developed franchise markets, “franchise brokers” may not yet reach the level of operation that Franchisor might be used to in its home country.
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The terms “international franchising consultant” and “international franchise broker” are not defined in most franchise laws. However, the Franchisor should be aware of applicable law when dealing with brokers in other countries. For example, franchise brokers have express duties and liabilities under the franchise laws of New Brunswick, Ontario and Prince Edward Island in Canada. In Malaysia, brokers must register in conformity with requirements imposed by the Malaysia Franchise Act. In South Korea, the franchise law defines a franchise broker as an “Orderman” and requires an Orderman to deliver disclosure documents to prospective Franchisees. In some European civil law countries, commercial agency laws applicable to franchise brokerage arrangements provide that a principal (Franchisor) may be liable for the acts of its “agent” (broker/consultant). In the United States, franchise brokers have to register in two states.
The services brokers or consultants provide must therefore be determined by the contracts brokers and consultants enter into with Franchisors in compliance with the applicable local laws.
With their experience, brokers or consultants can help to define the overall international strategy of a Franchisor. With a clear international strategy in mind, the Franchisor and broker may define the first or next international target market and potential Candidates in the target market.
Operationally, the franchise broker will assist the Franchisor to allocate potential local partners (suppliers, Candidates, investors, etc.) and facilitate any negotiations in the target market, typically with the Candidate and any other investor.
Some franchise consultants will assist the local Master Franchisee after signing the agreement in setting up the franchise, adapting the System locally and establishing and running the pilot operations and/or finding local Sub-Franchisees for the Master Franchisee.
Background checks are important not only to allow Franchisor to get important information about a Candidate, but also in some jurisdictions to fulfill national requirements for background checks. A Franchisor should not rely only on the information provided by the Candidate, but seek additional information through other sources as well, such as global services or local counsel, or government programs like the US Gold Key program.
In certain countries the law requires Franchisors to do a background check on contractual partners to see if a partner appears on a “watch list.” These watch lists have different parameters and sanctions in different countries; for example, in the United States, the US Department of the Treasury’s Specially Designated Nationals List (see also § 4.4.6) includes individuals, groups, or companies from around the world that are subject to national sanctions. US citizens are not allowed to conduct any business with listed entities, and may face financial penalties (up to $10 million) or even imprisonment (up to 30 years) for violations.
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Corruption is a worldwide issue. Even though the market is booming in certain countries, corruption interferes with the proper conduct of business, potentially leading to blackmail, protection money and spying, and theft of Know-how of the System. In addition to destabilizing the System, the corrupt acts of a Franchisee may also create a liability for the Franchisor in the target market (see also § 4.4.5); parties are counseled to acquaint themselves with any relevant national anti-corruption laws.
The ICC offers a wide and well respected suite of resources to help companies avoid problems arising from bribery and corruption, including a freestanding ICC Anti-corruption Clause. See § 4.4.5 for information on the range of ICC tools.
While a Candidate’s financial situation, background and work experience are important, a Franchisor may wish to enlist the help of a consultant or even psychologist to advise on the suitability of a particular Candidate as well. Most often there is only one Candidate at a time being considered for a Franchisee’s position, but if there are more Candidates, using the services of an assessment center may also be helpful.