Moving From The US To Australia: Master Franchising Made Simpler

Expanding a US franchise into Australia can be a strong growth strategy. Australia has a vibrant franchising industry, with a mix of home-grown and international brands. However, for those expanding into Australia, it is not as simple as exporting a US agreement and appointing a local operator. Australia is a mature and heavily regulated franchise market. A US franchise system must be adapted to Australian legal requirements, consumer expectations, supply chains, employment conditions, property costs and franchisee expectations. Master franchising can be an effective entry model, but only if the structure and documents are properly aligned from the outset.

Below we set out just a few of the factors that need to be considered to enable a successful expansion into Australia.

STRONG FOUNDATION STRUCTURES

Before entering Australia, a US franchisor should decide whether master franchising is the right structure, or whether direct franchising, through an Australian subsidiary, a joint venture, corporate-owned pilot locations or a staged hybrid model is more suitable. If master franchising is used, the agreement should clearly allocate responsibility for Australian franchise documents, disclosure documents, annual disclosure updates, Franchise Disclosure Register information, sub franchise documentation, operational compliance, monitoring, brand standards and reporting matters.

TICKING OFF - DUE DILIGENCE & TESTING

We suggest master franchising works best where initial due diligence is done to make sure the market is right for the franchise system and the US franchisor, the Australian master franchisee and downstream franchisees clearly understand responsibility for compliance, disclosure, recruitment, training, support, supply, reporting, enforcement, marketing, intellectual property protection and dispute resolution.

Successful US franchise expansion into Australia usually requires proper localisation before franchise sales begin. This includes testing unit economics against Australian costs, adapting manuals, reviewing products and supply chains, adjusting pricing, assessing local suppliers, reviewing employment assumptions, considering leasing and site selection, adapting training materials, preparing Australia’s required mandatory franchise documents, securing Australian intellectual property protection, preparing register information and confirming support arrangements for Australian franchisees. Any earnings information used in Australia should also be reviewed carefully and placed in proper Australian context, as US performance history may not reflect Australian costs, trading conditions, demand, wages, rent, logistics or compliance costs.

INTELLECTUAL PROPERTY PROTECTION

Intellectual property protection is also critical. US trade mark rights do not automatically protect the brand in Australia. Brand names, logos, slogans and other key marks should be protected in Australia in the correct classes and ownership structure before launch. The master franchise agreement should also clearly deal with ownership of Australian intellectual property rights, licensing arrangements, sub-licensing rights, enforcement control, enforcement costs and ownership of local adaptations, marketing materials, manuals and data.

THE RIGHT TERRITORY

Territory rights also need careful drafting. While some US franchisors view Australia as a single national territory, the country’s geography and logistics may require a more tailored approach.

Territory provisions should address exclusivity, staged development rights, minimum performance obligations, consequences for failing milestones, reserved channels, online sales, national accounts, delivery platforms, marketplaces, brand extensions and corporate-owned locations.

FRANCHISE DOCUMENTS & THE FRANCHISE REGISTER

Problems often arise where US-style documents are used in Australia without sufficient adaptation A US agreement is unlikely to adequately address Australian disclosure obligations, cooling-off rights, restrictions on certain contract terms, the requirement for the agreement and commercial model to provide the franchisee with a reasonable opportunity to make a return on required investment, compensation, termination, supply arrangements, Australian dispute resolution and forum settings, and Franchise Disclosure Register obligations, to name just a few areas.

A disclosure document must also be prepared and issued in line with a specific required format, which will seek to reflect the Australian franchise system, including local details about the franchisor or master franchisee, litigation, existing franchises, intellectual property, supply, online sales, establishment costs, recurring payments, financing, earnings information and financial details.

Australia’s Franchise Disclosure Register creates an additional public-facing compliance obligation. Franchisors entering the market may need to provide information for the register before entering into franchise agreements where register obligations apply, and then update or confirm that information annually. Responsibility for register compliance, the identity of the relevant reporting entity, the content to be provided and consistency between the register, disclosure document and franchise agreement should all be settled before launch.

RETURN ON INVESTMENT

The franchise agreement and commercial model should be structured to provide the franchisee with a reasonable opportunity to make a return during the Term on the investment required by the franchisor. This does not guarantee profit, but it does require careful consideration of the Term, fees, mandated expenditure and operating model. For US franchisors, this is particularly important because Australian wages, rent, logistics, compliance costs and local demand may differ significantly from the US market. Initial investment, fit-out, supply chain costs, stock, technology, royalties, marketing contributions, staffing and likely revenue should all be tested against Australian conditions.

Any significant capital expenditure expected to be required during the Term should also be properly disclosed and discussed, including the circumstances in which the franchisee is likely to recoup that expenditure.

BRAND PROTECTION & CONTROL

The US franchisor must retain enough control to protect the brand, while allowing the Australian master franchisee to operate effectively. Control mechanisms can include operations manuals, training standards, approval rights, audit rights, reporting obligations, supplier standards, technology systems, marketing approvals, data access, recruitment criteria, sub franchise agreement approval and breach escalation procedures.

AN EXCITING OPPORTUNITY FOR GROWTH

Franchising into Australia can be a great opportunity, to ensure however it is the right opportunity for your system you need to do a bit of investigation then preparation to set the foundations. A successful Australian launch requires more than converting US documents and hoping for the best. It requires an Australian legal and commercial structure that protects the brand, supports franchisees and reduces the risk of a costly and disorganised market entry. A mix of commerciality and legality done right to suit where you are and where you want to be.

The above are only some of the key issues that should be considered before launching or negotiating Australian master franchise rights.

How We Assist Overseas Franchisors, Master Franchisees and Investors

Our Franchising, Franchise Advisory and IP Protection team assists US and international franchisors with Australian market entry from both a legal and commercial perspective.

We assist with:

·       Australian market entry structuring;

·       master franchise agreements;

·       sub franchise documentation;

·       Australian franchise agreements;

·       disclosure documents;

·       Franchise Disclosure Register preparation;

·       compliance reviews;

·       trade mark protection and IP licensing;

·       territory and development frameworks;

·       online sales and channel strategy;

·       supplier and distribution arrangements;

·       significant capital expenditure reviews;

·       renewal, termination and exit planning;

·       dispute resolution frameworks; and

·       ongoing Australian franchise network support.

We also advise Australian master franchisees, investors and local operators who are negotiating Australian rights for overseas brands, including reviewing proposed master franchise structures, local rollout obligations, development milestones, IP rights, exit exposure and compliance responsibilities.

International franchising into Australia is most successful where legal structure, compliance, economics and operational design are aligned from the outset.

If you are considering expanding a franchise system into Australia, or negotiating Australian master franchise rights for an overseas brand, contact our team for a fuller briefing, market-entry roadmap or review of your proposed structure.

Please note that this is a general and brief update; it does not purport to be comprehensive legal advice of all information and/or relevant to your circumstances. Consequently, specific legal advice for each of your circumstances should be obtained first before taking or not taking any action with respect to this area.