The international franchise agreement

Business internationalization is the result of developing and implementing a precise strategy that allows us to access foreign markets that we consider "priority" markets (countries where we want our company to be present).

There are multiple figures that will allow us to talk about an internationalized company, such as recurring exports , the best known.

Or even the granting of licenses, a contract by which we are granting the right to use our brand to a foreign company in its country.

Although it would also be possible to operate in a different market than our own under the figure of the joint venture (joint company between a local and foreign partner ) or invest directly through the acquisition of a company.

In this case, we will talk about franchising , which is one of the most common ways companies use it to internationalize.

The franchise unites large capitals with SMEs, and is a good marketing and diversification strategy for the commercialization of a product or service. This instrument allows us to expand our brand geographically, reaching international markets that will impact the appreciation of the brand. 

Or don't we all know McDonalds, Burger King or Calzedonia?

The franchise in the internationalization of the company

Internationalizing a company through franchising has become an increasingly common strategy.

However, it is one of the most complex access methods.

In addition to the inherent difficulties of establishing a franchise network, there is the need to learn how to operate in new markets, with all that this entails.

It will be vital, therefore, to know how the corporate and legal sphere works in the specific sector of activity in which we operate. 

Therefore, we must choose the most appropriate formula to implement our brand in the desired market. 

International Franchises

Types of international franchise

International franchising can be carried out in different ways. There are different criteria for classifying franchises depending on the activity they perform or the contract between the parties.

Depending on the element transferred from the franchisor to the franchisee, we can classify them as commercial, industrial, production, distribution or product franchises, service franchises and mixed franchises.

Depending on the relationship between the franchisor and the franchisee , it can be individual, multiple, equity-based, regional, or master franchise. And depending on its location , it can be a corner store, shop-in-shop , or online store.

To access other countries, the most common is the master franchise, which allows the franchisee to subfranchise with the aim of acting as the franchisor in their country. Although each specific case must be studied. 

Advantages and disadvantages of international franchising

There are multiple advantages that the international franchise provides for the contracting parties:

Advantages for the franchisor

• It has a partner who knows the market well (the franchisee), from whom it acquires continuous knowledge; and with which it reduces the risks involved in any investment abroad. It also avoids restrictions on foreign investments in certain commercial activities. 
• It reduces the expenses involved in any capital investment abroad, by relying on a self-financing network, while increasing the number of points of sale by independent entrepreneurs interested in the proper functioning of their business. 
• It gives international renown to its brand and products, without altering its quality and prestige thanks to the uniformity of the franchise.

Advantages and disadvantages for the franchisee

• You work with a reputed and international brand name while getting assistance and knowledge from the franchisor.
• You will be able to compete with other big brands, without being just an agent; and without losing its legal and patrimonial independence. 

Although we must not forget about the disadvantages:

• Being part of a franchise network implies assuming additional entry costs that would not be found when establishing an independent business (entry fee and royalties, For example). 
• Furthermore, the operation of the business will be limited by the franchisor, so it will not be able to innovate too much. 
• In case the franchise network loses its good reputation, your business will be affected. 
• It will be under continuous supervision of the franchisor. 

In any case, to eliminate other inconveniences or for our dream to become our biggest nightmare, we must regulate our relationship with the other party, franchisor or franchisee, depending on the position in which we find ourselves, in an international franchise agreement. 

Definition of the international franchise contract

As we said, a franchise is a commercial contract by which the franchisor grants the franchisee the right to operate a proprietary system for marketing goods and services under the franchisor's brand (which will essentially be a brand license ).

The franchisor will allow the use of distinctive signs, provide technical assistance on marketing, supply equipment for the provision of services, maintain the promotion and advertising of its sign, supervise compliance with quality commercial techniques and, may redeem the franchise upon termination of the contract.

For his part, the franchisee , residing abroad, will operate according to a system or business model ( know-how ) developed by the franchisor in exchange for a fee and/or royalty.

You must respect the brand image, have stock to provide services and observe the franchisor's instructions regarding prices and market information. 

The European Court of Justice defines it as "more than a means of distribution, it is a way of exploiting financially, without committing one's own capital. It is a body of knowledge."

And the European Union, which regulates it in EU Regulation 4087/88 , as "a set of industrial or intellectual property rights relating to trademarks, trade names, business signs, utility models, designs, copyright, know-how or patents, which must be exploited for the resale of products or the provision of services to end users."

Elements and characteristics of the international franchise contract

An international franchise agreement is one that links two legally independent companies, namely the franchisor and the franchisee, and whose main elements are:

• La trademark license and transfer of know-how (the owner of the brand and knowledge (franchisor) makes it available to the franchisee). 
• Royalties or Canon. The international franchise contract is onerous, therefore, the franchisee must compensate the franchisor during the term of the contract.
• Territory. The territorial scope in which the franchisee will execute the contract must be delimited. 
• Assistance from the franchisor to the franchisee. The franchisor must provide market, technical and commercial information to the franchisee. 
• Possibility of subfranchising: The franchisor may prevent the franchisee from subfranchising. 
• Non-compete. The franchisor must not conduct competitive business with the franchisee. 
• Confidentiality: The franchisee must keep the business secrets obtained from the franchisor until after concluding the contract. 
• Contract duration. Normally it is one that allows the franchisee to recover their initial investment. 

As we see, setting up an international network of franchises is not easy, and involves knowledge about different matters related to international trade.

International business law and market knowledge will be key tools for accessing new markets and ensuring that our operations are as efficient as possible. 

RRYP Global are expert lawyers in International Trade Law.