The How-To: Franchising Your Brand In The Middle East
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Once your homegrown F&B concept has proven to be successful with the first outlet or two, it may be time to consider franchising to further its growth. Here is a basic checklist of points to keep in mind when franchising out your brand.
PART ONE: PREPARING TO FRANCHISE
If this is the first time you are considering franchising, before approaching any franchisees, there is some homework you need to do beforehand:
1. Protect your brand
First, you will need to make sure your brand name has been registered as a trademark in the relevant territories in which you are looking to franchise. As a bare minimum, a clearance search should be undertaken to make sure the proposed name isn’t already in use by a third party in those countries. Remember that here in the Middle East, there are some restrictions on registering certain products; for instance, alcoholic drinks.
2. Build your manual
The next step to creating a franchise is to develop the franchise manual. This document essentially sets out the way in which the franchisee should operate the business under the brand. There are various consultants out there that can assist with this if you need professional help.
3. Perform due diligence
As the franchisor, you will want to undertake sufficient due diligence in relation to both the proposed territory (e.g. the competition, specific local laws, etc.) and the franchisee (e.g. checking public records, their financial accounts, background checks on the shareholders, etc.) The franchisee will also be doing similar due diligence on you and your brand, so you may wish to prepare a standard pack of information for franchisees, which is a legal requirement in some countries in Europe and around the world.
PART TWO: BUILDING THE FRANCHISE AGREEMENT
The final piece of preparation for franchising is to ask your franchise specialist lawyer to prepare a template agreement for you. It is market standard for the franchisor to prepare this, and you will need to decide your approach- i.e. putting forward a fair and reasonable short form agreement, or going for a more “belts and braces” franchise agreement.
Key points to consider in the franchise agreement include:
You will need to decide the initial term (often 5-10 years) and terms for renewal (including whether it’s mutual, or subject to the franchisee meeting certain criteria).
Here in the region, the franchisee often requests exclusivity for one or more countries in the GCC, but that will obviously come at a cost. Alternative options are to grant rights to a single country, but give a first right of refusal on additional countries.
3. Development plan
Is this franchise agreement going to be for a single outlet, or a development agreement which provides the framework for multiple outlet agreements? If the latter, what is the roll-out plan/ development schedule for the territory i.e. how many outlets to you expect the franchisee to roll out?
How are you going to structure the fees? For example: is there a territory fee, a royalty fee, an outlet fee, a training fee, etc.? How are these paid- i.e. upfront, or on opening of outlets, or quarterly, etc.?
Remember to set out who pays for any applicable taxes such as VAT on the fees, and whether the fees will be grossed up for any taxes, including withholding tax? Find out which of your entities will be entering into the franchise agreement, and if tax advice has been obtained on this in relation to this particular territory.
6. Franchisor obligations
What will you be offering in terms of support/training for the franchisee? Will this be provided from your own country, or will you travel to the franchisee? This will impact the tax advice, so it should be decided upfront.
7. Granted rights
Will the rights be exclusive (bearing in mind the commercial agency laws in the UAE and wider Middle East, which may protect the franchisee)? Also, will any of the rights be subject to amendment (e.g. removal of exclusivity) for failure to perform (e.g. failure to meet the development plan)? Will there be separate rights for development and operation of the outlets?
8. Specific assignment or termination rights
Do you want any specific rights of termination? Are your IP rights restricted in duration in any way (e.g. patented systems/licenses from third parties)? Do you need any specific rights of assignment e.g. upon sale of the brand/intra-group reorganizations?
What rights, if any, will the franchisee have to sub-franchise in the territory? Will such sub-franchises be on an agreed form of sub-franchise agreement attached to the main franchise agreement? Will you be a party/have third party rights to directly enforce against the sub-franchisees?
10. Specific restrictions on the franchisee
Are there any specific restrictions on the franchisee e.g. no internet sales/no re-sales to discount shops/malls? What restrictions (if any) are you expecting to place on the franchisee in relation to franchising/operating a competing business, and how long will this last, and which brands does it apply to?
11. Competition law issues
Consider whether any particular restrictions on the franchisee could give rise to competition law issues (e.g. restrictions on exclusivity, setting of prices, non-competition, etc.).
12. Governing law and dispute resolution
What is the preferred approach for governing law and dispute resolution i.e. courts or arbitration (applicable rules, seat, language)? Consider applicable mandatory local laws in the territory. Is the country where the franchisee is located a signatory to the NY Convention on Arbitration? Do the local courts have power to assume jurisdiction on matter of public policy?
13. Applicable foreign laws
Are there any applicable anti-bribery laws (e.g. US FCPA and/or UK Bribery Act) or data protection laws (e.g. GDPR) that you are required to pass down to the franchisee?
14. Right of step-in
Do you want the option to step-in upon termination of the franchise agreement, to the extent possible, taking into consideration the foreign ownership restrictions onshore in the UAE and elsewhere in the region?
15. Specific requirements
Do you have any other specific requirements such as purchasing of equipment/special ingredients from you, the process for approval of suitable sites, format of monthly reporting, etc.?