This article first appeared in the Entrepreneur Middle East July 2018 edition.
Continuing on from our previous legal blog on creating a home-grown F&B concept, once your concept has been proven as successful in the first outlet or two, it may be time to considering franchising. Here is our basic checklist of points to keep in mind when franchising out your brand.
Doing your Homework / Preparing to Franchise
If this is the first time you are considering franchising, before approaching any franchisees there are a few bits of homework to do:
1. Brand Protection: 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. See our earlier Checklist on Registering Your Brand in the Middle East. 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 e.g. alcoholic drinks.
2. Manual: The next step to creating a franchise is to develop the franchise ‘manual’. This documentessentially 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. 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 such as no sale of alcohol in KSA) 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 requirements in some countries in Europe and around the world).
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 e.g. 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:
1. Term/Renewal: You will need to decide the initial term (often 5-10 years) and terms for renewal (including whether its mutual or subject to the franchisee meeting certain criteria).
2. Territory: Often here in the region, the franchisee 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 later, what is the roll-out plan / development schedule for the territory i.e. how many outlets to you expect the franchisee to roll out?
4. Fees: How are you going to structure the fees e.g. – is there (i) a territory fee (ii) royalty fee (iii) outlet fee (iv) training fee etc. How are these paid (i.e. upfront / on opening of outlets / quarterly etc?
5. Tax: 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)? Which of your entities will be entering into the franchise agreement and has tax advice 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 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 (i) development and (ii) operation of the outlets?
8. Specific Assignment or Termination Rights: Do you want any specific need rights of termination? Are your IP rights restricted in duration in any way (e.g. patented systems / licences in from third parties)? Do you need any specific rights of assignment e.g. upon sale of the brand / intra-group re-organisations?
9. Sub-Franchising: 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 - see our earlier legal update on GDPR in the Middle East), which 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?
If you would like any advice on turning your brand into a franchise (or alternatively franchising third party brands into the region) please contact us at firstname.lastname@example.org. Our lawyers are recognised specialists in this field (Band 1 ranked TMT Lawyer in the UAE by Chambers & Partner Global and Leading Individual – TMT by Legal 500) and have extensive experience of helping companies franchise brands in and out of the Middle East and globally. Chambers & Partners, IP, UAE 2017 commented: "Market observers recognise Joby Beretta of The Bench FZE for his IP practice, including franchising, licensing and disputes.