Is Franchising For Me
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Is Franchising For Me



FREE Franchise Consultation: Using our customized model for research, we’ll present you with 3 choices of franchise concepts to suit your tastes. This meeting will take place within 30 days of our ...

FREE Franchise Consultation: Using our customized model for research, we’ll present you with 3 choices of franchise concepts to suit your tastes. This meeting will take place within 30 days of our first consultation. Guaranteed.



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Is Franchising For Me Is Franchising For Me Document Transcript

  • ==== ====FREE Franchise Consultation: Using our customized model for research, we’ll present you with 3choices of franchise concepts to suit your tastes. This meeting will take place within 30 days of ourfirst consultation. Guaranteed. ====When it comes to expanding your business overseas, franchising has become the ModusOperandi of the day. In Singapore, many businesses including restaurants, café chainsand fashion chains have shown interest in and considered setting up overseas franchises. Itmakes sense financially for them in the sense that the franchisor (the business owner that grantsthe franchise) can charge an initial fee to the overseas franchisee (the person who takes thefranchise). Franchising in effect provides an almost cost-free expansion since the original businessreceives royalties and a constant stream of income from the franchise. But there are pitfalls toavoid. Franchising may not be suitable for all businesses and an overseas operation can fail for anumber of reasons.This article sets out briefly some of the challenges a franchisor venturing overseas may face andhow to overcome and resolve them.Franchise SystemsCompanies that wish to enter into a franchise agreement should familiarise themselves with thefranchise system. There are three different ways to operate a franchise:Unit franchise:The business owner allows only one franchise outlet, and licenses all trade marks and otherproprietary rights to only that one outlet.Area franchiseThe franchisee is only allowed to operate under the trade mark or brand name in one designatedgeographical area, such as the province of New South Wales as compared to the whole ofAustralia.Master franchiseThe franchisee is entitled to operate in the whole country, sometimes with a right to create sub-franchises and appoint sub-franchisees within the country.Costing would differ for each of the above types of franchises and is also affected by the potentialmarket size and share in the targeted country.
  • Regulations and Other Legal IssuesThe next things to look out for when considering whether to franchise are the laws and localregulations in the targeted countries, which will impact on the franchisor. In countries such as theUSA, the franchisor must comply with stringent disclosure requirements while in countries likeIndonesia, the franchisor may be required to register the franchise agreement with the relevantauthority before commencing operations. These requirements do not really present too much of aproblem to the franchisor, but they have to be complied with nonetheless. The franchisor shouldalso pay particular attention to laws and regulations in various other countries that directly affectthe business of the franchise. One example of what we mean here is that, since February 2005,franchising has not been allowed in China for foreign retail brands which do not have a minimumof two shops and more than one year of operations in China. This amendment to the franchiseregulations has made it difficult for established local brands to franchise to China.Of course there are perfectly legal solutions to avoid the problems that may be encountered. Therules differ from country to country and, therefore, any prospective franchisor must seek legaladvice when venturing into a foreign jurisdiction for the first time to ensure that all such regulationsand formalities required under the laws of the targeted country are complied with.Of course in some cases, it may still not be advisable to commit to a franchise agreement eventhough all the indications are positive. Some product lines may simply be unsuitable forfranchising.Common Problems Faced by FranchisorsThere are a range of problems that could be encountered by franchisors and we have attemptedto address the most common ones here.Initial InvestmentOne of the problems when embarking on a franchise, especially for local companies or SMEs(small medium enterprises) seeking to expand overseas, is the costs involved in the early stagesof a franchise. Preparation for franchising has to be done without the guarantee of payment andcollection of franchise fees and royalties in the short term. The costs involved include:odeveloping the franchise concept (normally done with the help of engaging external consultants)ooverseas market researcholegal mattersoproviding supportolooking for suitable franchiseesotrainingoproduct costs
  • osupply of products to the franchiseesFor retail chains, financial problems with shipment and manufacturing (even after executing anagreement with the franchisee) have to be considered. The sizable initial costs plus the time lag(about half a year to more than one year for preparations) before the franchisor can recoup themoney from the franchisee, may result in cash flow problems for the franchisor. This is especiallyso for smaller retail chains with a yearly turnover of say US$1m to US$5m as they may not havethe financial resources to provide or compensate for any delays.One example we experienced that illustrates this point is the case of a Singapore shoe retail chain(with about 5-6 shops) which embarked on a franchise for its shoe retail chain in Indonesia. In thecontract, it was stated that the balance of payment would be paid after the goods had arrived atthe Port of Jakarta. However, the payment was not made. Despite this, the franchisor had noalternative but to release the goods as they were already in the Port of Jakarta. He only receivedpayment at a time much later than the agreed date. This delay caused him some cash flowdifficulties.Problems like this can and should be addressed legally in the franchise agreement just as theywould be in a contract for international or cross-border sales of goods.Financial concerns can also lead to the lack of adequate preparation in coming up with thefranchise concept. This can, in turn, lead to inconsistency in the quality of the products anddifferent levels of support or commitment by the franchisor in different countries. The food in afranchise outlet in say, Australia, where the franchisor is located, would taste much better thanthose in another outlet from the same franchise in China. Though the situation may improve aftersome time, this is the usual problem that local brands or small medium enterprises face at theonset.The Trade Mark ProblemUsually, trade marks are the most important intellectual property rights in a franchise. Trade marksare territorial in nature and the franchisor will have to register its trade mark in the targeted countrybefore it can be protected there. Registration in your own home country is not good enough andyour local registration will not be recognised in another country.The franchisor may sometimes find that his trade mark has already been registered in the targetedcountry by a local third party as was the case with a particular popular Indonesian fashion brandseeking to franchise in Korea and Thailand. It found out the hard way about stolen trade markswhen it discovered, after entering into a franchise agreement with a local franchisee, that its ownbrand name had already been registered by other companies in these countries. To make mattersworse, it decided to leave these issues to the local franchisee instead, thinking that the localfranchisee would be more familiar with the situation. This caused him serious financial losses ashe had already shipped his products to the franchisee. The franchisee subsequently defaulted onpayment and did nothing to resolve the trade mark problem. From this it becomes clear that someinitial market research in the targeted countries and legal advice are needed when you want tostart your franchise.
  • Registering Your Trade Marks in Foreign CountriesThe Madrid System for the International Registration of Marks ("Madrid Protocol") and the ParisConvention for the Protection of Industrial Property ("Paris Convention") are two very importantinternational treaties regarding the registration of trade marks.The Madrid Protocol provides a one-stop filing system so that the franchisor can file for trade markprotection in his own country as well as his targeted countries at the same time. It does not giveyou an international trade mark that is recognised by all its member states or all countries acrossthe globe, but provides a convenience of filing in different countries at one go and also reduces thecosts of filing.The Paris Convention on the other hand, provides a very useful mechanism allowing thefranchisor to file the trade mark in his home country first at an earlier date and subsequently,within a given time frame, when he decides to file his trade mark in his targeted country, he is ableto claim priority or use his first and earlier filing date in his own country as the date of filing in thetargeted country. The Paris Convention gives the franchisor time to source for funds before filingfor trade mark protection in the targeted countries and the peace of mind that comes with knowingthat he can be protected by filing first in his home country.Take a real-life example of a Korean cosmetics company setting up its business in Singapore. Itregistered its trade mark first in Korea sometime in December 2005 before coming into Singapore.Upon entry into the Singapore market, it then filed for trade mark protection in Singapore under theParis Convention sometime in March 2006. However, the directors quickly received notificationfrom the Singapore trade marks registry that there was an identical trade mark filed by theircompetitor in January 2006. Taking advantage of the Paris Convention, the Korean company wasable to claim the earlier filing date in Korea of December 2005 as their date of filing in Singaporeand this allowed them to effectively override their competitors earlier application. This helpedprevent a situation where the Korean company would either have had to shelve its plans inSingapore or embark on costly litigation to recover its trade mark.In general, it is usually not advisable to leave trade mark matters such as registration to thefranchisee. The trade marks should always, where possible, be filed in the name of the franchisorotherwise the brand value or recognition of the trade mark may be diminished in the long run sincethe public in the targeted country may come to identify the trade mark with the local franchisee andnot the franchisor.Other Intellectual Property RightsCopyrightThis is another form of intellectual property rights which may be of interest to the franchisor.Copyright can attach to many possible mediums and is not confined to brand or logos alone.Instructional manuals, business forms, software and other items may all be protected by copyright.Unlike trade marks, copyright usually does not have to be registered and can be protected in manyforeign countries at one time if these countries are all signatories to the same internationalcopyright convention.
  • PatentsThese do not quite fit into the business model of franchises since patents are, by their nature,confined to subject matter of heavy industrial application. This may change in the future as manycountries such as Singapore have made or are making changes to their laws, allowing businessmethods to be patented. Like a trade mark, a patent has to be registered and have its ownequivalent of an international system of registration by way of the Patent Co-operation Treaty. TheParis Convention also applies to patents.Control over FranchiseesIt is always advisable to exercise some supervision and control over a franchisee. The first steptowards this is to incorporate the right clauses in your franchise agreement at the onset. Thefranchisor should insist on some form of reporting requirements and a right to inspect accounts.There should also be some provisions to safeguard the franchise concept and sometimes thefranchisors business methods. Generally, the franchisor should be looking to protect, by way ofcontractual clauses in the agreement, what may not be protectable under intellectual propertylaws.This helps the franchisor to prevent a situation where the franchisee acquires knowledge, copiesthe franchise concept and uses this to compete with the franchisor. This can sometimes happen atthe end of the franchise period. Basically, there should be restrictions imposed on the franchiseewhen dealing with materials or other property of the franchisor, and these should be returned andaccounted for by the franchisor upon the expiry or termination of the franchise.See You in Court - But Which Court?It may be at times necessary to take legal action against an errant overseas franchisee that isoutside the jurisdiction of the courts and also beyond the control of the laws in the franchisorshome country.It is advisable to make some provisions for this in your franchise agreement. The two importantconsiderations here are the place to sue and the law to apply. It is important to seek legal advicefor these matters since your choice of place and law often determines success and directly affectsthe prospects of recovery as rules may differ from country to country. Some countries may havebilateral reciprocal enforcement regimes allowing their respective courts to recognise and enforceeach others judgments while others may be signatories of international conventions to the sameeffect. It is important to know these in order to choose your place to sue and the applicable law.Sub-Franchising and Exchange of GoodsAnother problem with franchising is the inconvenience caused to end consumers when it comes tothe exchanging of defective products. This is especially so where there is sub-franchising createdin different places in the same country. For instance, in Australia, when a customer buys an itemof clothing from an outlet in Sydney, he would not be able to exchange it in the franchise inMelbourne. This also happens in Indonesia, especially if the shop is owned by different people.That is why some retail chains like Hammer and Nail (Indonesia) prefer to own the businessthemselves. This can be used either as an alternative or a stepping stone to establishing a fully
  • fledged franchise.Raise Public Awareness FirstIt may be easier for local brands who want to expand overseas by franchising to consider settingup their own flagship store in the overseas country first. This would raise public awareness of theirbrand and product in the targeted country and help to attract more franchisees later on. Famouslocal brands such as BreadTalk in Singapore may not be known to anyone in overseas countries,such as Germany. As such, potential investors in Germany would be hesitant to invest in thebrand. By setting up a flagship store, the franchisor can test the local market.However, before venturing overseas, research should also be done on consumer behaviour tomake sure that the consumers in that country would appreciate the product, bearing in mind thatdifferent countries have different cultures, tastes and market trends.Franchising -A Great Tool for the Right Business with the Right KnowledgeFranchising is a useful tool when it comes to expanding your business overseas. However, as wehave shown here, there are also potential pitfalls and risks involved. This can be avoided or atleast minimised if the necessary preparatory work is carried out before you venture into afranchise agreement with a foreign partner.Acquiring knowledge of consumer behaviour patterns, local market conditions and regulations,developing a suitable franchise concept as well as paying attention to various details in yourfranchise agreements are just some of the more critical matters that you, as franchisor, shouldtake note of.Knowing your market and your rights as a franchisor or a trade mark owner lays down thefoundation for the creation of a successful franchise.Written by Ong Lay Bin (Director) and Anthony Surayasyma (Indonesian-based Partner) of O&LConsultancy Services Pte Ltd in collaboration with Mr Han Wah Teng (Advocate and Solicitor,Supreme Court of Singapore) of Keystone Law CorporationPlease go to our website at or email us for more details.Article Source:
  • ==== ====FREE Franchise Consultation: Using our customized model for research, we’ll present you with 3choices of franchise concepts to suit your tastes. This meeting will take place within 30 days of ourfirst consultation. Guaranteed. ====