Expanding Internationally: How UK businesses can use Franchise and Licensing Agreements

1.      Franchising: A model for replicating success

What is Franchising?

Franchising is a business model where a franchisor (who will be the UK established business) will support and grant a franchisee (a foreign partner) the rights to operate using the franchisor’s businesses model, intellectual property (‘IP’) and branding rights along with its operation methods and guidelines. In return for this, the franchisee will pay initial franchise fees with ongoing royalties throughout the term of its franchise. We often observe this model in common sectors such as food and beverage, retail and fitness, where brand consistency and operational standards are recognisable and crucial to a customer’s experience.

Key Considerations

Ensuring compliance with overseas regulations

The legal implications of international franchise agreements can be complex and vary significantly from one country to another. It is critical to understand and comply with the relevant laws and regulations of each jurisdiction a franchisee operates within. The UK itself does not have specific legislation regulating the franchising industry, however, in other countries such as France and Italy, specific laws regulate practices within their respective franchising industries. Additionally, the UK does not require franchisors to supply franchisees disclosure documents that reveal specific information about the franchisor its brand. However, several other countries, including the Netherlands, the United States, and Canada, require franchisors to produce such disclosure documents. Additionally, some countries (i.e. China and Brazil) require franchisors to register any franchisees with the government. It is therefore crucial to tailor any franchise agreement to comply with the local laws and regulations of the countries into which they expand.

Cultural Adaptation

Whilst consistency of terms throughout the franchise is essential, adaptation may be needed to align with local tastes and preferences; a well-balanced approach between brand integrity and market relevance can enhance attractiveness overseas.

Training and Support

Drafting in provisions that deal with training and support often provides franchisees with the assistance required for them to perform and maintain the current brands standards and operate the franchise system effectively. Such provisions often relate to communications, training and the provision of a detailed operations manual (otherwise known as the franchise ‘blueprint’), each of which are crucial for operational consistency.

2.      Brand Licensing: A flexible approach to international expansion

A brand licence is a contractual agreement that permits - in this instance - a foreign enterprise permission to use your intellectual property (‘IP’), such as trade marks and brands, patents, designs, trade secrets and/or ‘know-how’. This model is commonly found in sectors compromised with fashion, technology and consumer goods. This is because such agreements are flexible and can be tailored to allow foreign businesses control over production, distribution or marketing. If drafted correctly, a brand licence will appeal to a foreign business with a risk reduced standpoint — they’ve assessed the market and believe they can sell your products. UK businesses can then leverage this by providing them with the product and brand exposure (which may initially be slow, expensive, and risky for a licensee).

Capital investment (from you) for the overseas business will often below; typically no new manufacturing plant or sales force is needed.  Additionally, you receive upfront cash and/or ongoing license payments that increase the return on your IP investment. While licensing can take many form a common form of this includes franchising (as already discussed) and private labelling.

White labelling

Using this type of model allows your business to safely share your technology (including moulds, source codes, etc…) with an overseas business to manufacture your product, either with their branding or yours. Alternatively, they may provide your products or product components to a local foreign company for them to market, again either with your branding or theirs. In essence, licensing requires less oversight – compared with franchising – the overseas entity will usually take charge of manufacturing, distribution and sales.

This arrangement could be with a local partner that has sufficient brand recognition of its own.  Or it could be with a larger, multinational company that wants your products or components as part of their portfolio in certain foreign markets.

As with franchising, your products are reaching new overseas markets with little direct capital investment and marketing/sales risk. However, with this approach your business is vulnerable to greater risks to your IP’s value and reputation, if quality standards are not met – highlighting the importance to carefully plan and draft your agreements with a reputable foreign business.

Key Considerations

There are the IP laws to consider in every country where you license use of your brand.  This often requires research and advice from advisors with cross-border licensing experience to help file for foreign protection (where appropriate), ensure legal compliance and negotiate complex agreements. 

Each brand licence must be drafted with consideration as to how your business will allow use of its IP. The licence will need to procure how and where products are produced, and the consequences for no or low production so you can assess other options. As stated, poor quality products and services can damage your brand; therefore, it is important to draft in “policing” provisions allowing you to audit the foreign business and its processes effectively. These provisions can extend to minimum purchase obligations and targets if appropriate.

Detailed provisions will also need to be included to ensure that your confidential information is not shared with others.

Which model works best for you and your IP rights?

There are various factors that may influence with expansion model suits your business best, such as the type of sector your business operates within, the level of control/involvement you desire and the investment capacity you hold currently.

Franchise agreement

If your business is looking for greater control over use of the brand and the customer experience, particularly for overseas expansion, franchising may be more attractive to your business. This approach certainly requires greater involvement with the running of the overseas entity, but with this comes a greater cohesive brand presence.

Brand Licensing

Alternatively, if you would like to provide greater flexibility to your overseas licensee and do not have the capacity or resources for extensive and continuous overseas involvement, brand licensing may be better suited for you. In particular, you should consider licensing as a mode of international expansion if you firstly have IP that is valuable and can be protected, have resources to invest in ongoing oversight and have an appropriate licensee in place to work with. When drafted carefully, brand licences can provide opportunities for substantial long-term growth.  The initial investment can be still be large, but once made, can often be replicated in other markets.

How can we assist?

At Forbes, our specialist advisors can assist your business expand their reach internationally through expertly drafted franchise and license agreements. Our team understands the nuances of international markets and can work closely with your business to develop legal frameworks that protect your IP, ensure quality control and establish cross-border partnerships -tailored to your goals within.