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Beyond the headlines, many details to consider


Published:

Philip Zeidman

Illustration by Jonathan Hankin

I wonder how many readers who skim over the periodic collections of “ opens first franchise in ” pay attention to them. Not many, I think, recognizing them not as news, but as company press releases.  

Maybe these are more interesting if there are near-simultaneous sales in several locations, and maybe a bit more if the sale is of rights to a territory of impressive size and economic significance.

And what if it is a transaction in another country?  Here, it’s unlikely to be of a single unit, unless perhaps across the border (for a U.S. company, Canada or Mexico) or a flagship or otherwise noteworthy or historic foreign location.

So what catches your attention if, as it is likely to be, it’s for a territory defined by geographical or political boundaries? If the market is known to be growing, perhaps admiration for the foresight. If it’s a risky place to do business, perhaps the reaction is, “what do they know that I don’t?”

It’s clear that the bigger the market, the more likely the move is to be reported on and talked about. But the fundamental question of whether a sale of a large territory to a single buyer is wise has been a perennial subject of discussion among franchisors since the very inception of franchising.

Untangling one big mistake

The pluses are pretty obvious: It certainly does not burden the franchisor as much in terms of transaction costs as would many separate sales covering the same ground.

The minuses tend to get less attention. But there’s a reason why “putting all your eggs in one basket” is an idiom that has endured: One misstep, whether at the farm or in business, can have disastrous effects.

In franchising, if you are occupied with untangling one big mistake, you are almost certainly reducing the likelihood of returning to that market anytime soon and your competitors have been free to enter without much challenge from you.

Again, what if this is a cross-border transaction? The appeal is seductive: “In one fell swoop” you will have planted your flag in a market, or several submarkets, more rapidly than you could possibly have done if you had to master the complexities of different cities and cultures within a single country.

And what if the deal is to cover several countries? Let’s acknowledge there are not many places in the world where this should even be considered. In Europe, for example, for all the allure of a “single market,” and not even pausing to reflect on whether Brexit portends further political and economic splintering, franchisors have learned a hard lesson on the challenge of 50 countries (28 of them in the European Union), speaking 23 officially recognized languages, with cultures and customs that have successfully resisted melding for centuries.

Are there any parts of the world where multi-country franchising has taken hold? If there is one such region, it is probably the Middle East. A little thought, and the reasons come into view: similar histories, religions and cultures; no language barriers among the countries; families which transcend borders; and other similar factors. All of these have led some franchisors to go for the big enchilada (or its Middle Eastern equivalent).

But not so fast.  

In addition to the risks of any transaction so sweeping, which I’ve noted earlier, consider some that are very much factors in the Middle East.

If you are considering taking on the entire region, or a large part of it, you are almost certainly going to be negotiating with one of a small number of huge multi-brand operators who have captured much of the franchising activity. They are sophisticated, experienced and well-resourced.

No one size fits all

It’s not as much a “one size fits all” proposition as you may have been led to believe.  The countries range from tiny populations in unappealing markets (Yemen, Libya) to Egypt’s 97 million, and from markets which remain relatively sheltered from the world beyond to the United Arab Emirates, whose malls could be mistaken for any in the U.S.

By contrast, Saudi Arabia, controlling much of the region’s economy, is so dominant that it may someday be the linchpin to any planned regional expansion. But the kingdom is in the throes of such unprecedented change that it is difficult to make plans confidently (women being allowed to drive ... and more than 200 royal figures, politicians and business leaders arrested and held at the Ritz Carlton in an “anticorruption sweep” until they coughed up more than $100 billion of “lost revenue” to be allowed to check out).

Despite the commonality, the presence of Sharia law, and the lack of any franchise-specific statutes, there are plenty of differences among the laws of the countries.  Saudi Arabia and Kuwait have made clear their protective commercial agency laws apply to franchise arrangements, while other countries have so far not followed suit. UAE and Saudi Arabia have started implementing a VAT system. Will this trend spread to the rest of the GCC countries?  

Finally, just over the horizon, different franchise laws may be coming and amendments to previous governmental policies may be significant. A proposed franchise law in Egypt addresses both “disclosure” and “relationship” requirements. In the UAE, a new investment law permits 100 percent foreign ownership of certain UAE companies, which may affect decisions as to the method of entry.

In Saudi Arabia, the Ministry of Commerce has published draft franchise regulations. They include certain pre-conditions to franchising; certain required provisions of the agreement; a cooling-off period; disclosure requirements; provisions regarding certain key aspects of the relationship; and more. (Full disclosure: through the World Bank, I was engaged by the ministry to provide comments on the draft franchise regulations.)

So, “one fell swoop”? Yes. But, after that big headline, there’s an awful lot of small print you will need to master.

 Philip Zeidman is a partner in DLA Piper’s Washington, D.C., office. Reach him at 202.799.4272 or philip.zeidman@dlapiper.com.

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