Franchising, the route to international expansion for restaurants

August 27, 2024

Franchising is a proven route to the successful international cooperation between food and beverage (F&B) businesses such as restaurants and coffee shops and real estate investors such as owners of hotels and shopping centers. Global brands such as Burger King and Dominos Pizza and strong local brands such as Jamie's Italian or Costa Coffee are using franchise and management agreements to successfully grow in both traditional economies and emerging markets.

A tasty way of doing business

Franchising is an established way of expanding a business internationally. Annually it accounts for turnover of US$300 billion in Europe, USD$850 billion in America and US$130 billion in Australia. Together with management agreements, it is the preferred form of international expansion for many successful restaurant and leisure brands. The success of F&B franchising in the US has demonstrated that international franchising works for the sector.

Benefits for all concerned

Franchising works because it offers real benefits, not only to the restaurant brand but also to its local partner. It offers a number of clear advantages to hotel owners and shopping malls looking to improve their F&B offering and it is at the same time attractive to the restaurant brand. For the restaurateur or celebrity chef, it removes the need to invest capital and other substantial resources in creating a new restaurant abroad. A franchise strategy will see the local partner place the restaurant in his existing property and make the bulk of the investment into fit out and decoration, whilst benefiting from the know-how, good name and quality assurance program of the company acting as franchisor. Franchising enables restaurant companies to access the required capital and grow the business internationally by partnering with high quality local investors such as hotel owners. These investors are highly sophisticated and have a great incentive to make the project a success in their local market. They also have a strong understanding of the local F&B market. So franchising enables the hotel owner to have access to the blueprint of a strong proven concept with a known reputation. Few local owners have the resource and time to research their own specialist know-how to put together an innovative and successful F&B concept for the local market that would generate attractive levels of income without the trial and error that goes into building a successful new F&B business.

Adding spice to the mix

In order to take advantage of the huge potential that franchising offers, one needs to plan the approach carefully. It is important to be discerning as some would-be franchisors will not have the structure in place to support a local opening. A franchise which has been well planned, structured and executed can have a substantial positive impact on a business but one that has been done opportunistically and without being thought through can be catastrophic.

Key preparatory steps include due diligence on the partner to ensure that there is a good match between franchisor and franchisee as regards to business philosophy, approach to operational standards and cooperation. The franchisor should be open to appropriate local adjustments such as modification of menu items, alcohol policies and opening hours and the franchisee should be prepared to accept that the franchise system must be followed correctly. Franchisees that refuse to invest in training, regular renovations and brand upgrades are typically less successful in the medium term than others. The reality is that on those relatively rare occasions where international franchises fail, this is usually due to lack of due diligence regarding the right partner.

Expert advice Before entering into an arrangement with a restaurant partner you need to ensure the F&B brand is fully protected and that any franchise fees or royalties are structured tax efficiently. That requires some expert professional advice long before negotiations start.

• The creation of a franchise manual can take 4-6 months. The manual needs to reflect the DNA of the brand, otherwise the franchisee will not be able to follow it.
• The protection of your IP and know-how is essential, this requires not only trademark registrations but also the creation of a professional quality audit program to verify that your franchisees are following the brand standards.
• The financial model needs to be sound. There will need to be enough profit in the franchised business to enable the franchisee to make a good living after paying you a royalty fee.

Early planning is therefore key.

Franchise Laws

It is often overlooked that there are global franchise laws. It is important to get support from specialist franchise lawyers when negotiating the franchise agreement. This begins at the letter of intent (LOI) stage. Whilst the LOI is non-binding, it can be extremely difficult to negotiate against a signed LOI. Key provisions to focus on as regards the legal agreement would be:

• The duration of the franchise agreement
• The number of units to be opened and other minimum targets
• Termination and renewal rights
• Investment in brand standard updates, and
• Exclusive territories and restrictions on competition

Step-in rights have become an area of controversy. Many franchisors require the right to take over the business of the franchisee on termination at book value. Whilst franchisors often have no intention of exercising this right, there has been a recent trend to impose very onerous step-in clauses on franchisees. Such clauses are best resisted.

Dentons Franchise Advisory has worked with many leading global brands on their franchise business model, franchise agreements, IP protection and regulatory compliance. If you are considering franchising as a way to grow your business, please feel free to reach out.