In recent years, the UK’s economic environment has been difficult to navigate for numerous businesses due to the political uncertainty brought by Brexit, impacts caused by Covid-19 and the escalation of political tensions worldwide. For international expansion, although Europe remains the mostly favoured target market, the United Arab Emirates (‘UAE’) stands as symbol of economic prosperity in the Middle East, hence attracting businesses around the globe.
In this blog, we will be discussing international expansion through franchising agreements and why this business model has become a popular one in Dubai.
Hunger for International Expansion
Trading across borders is closely aligned with strong growth ambition. From manufacturing companies to businesses in the IT and telecommunications sector and from businesses in the food and beverage sector to the retail sector, according to data published on HSBC’s Going Global for Growth Report (‘the Report'), collected between September to October 2023, more UK firms are now looking for international expansion. UK companies cite increased profits as the primary benefits of international trade, followed by a diversified client base, improved business resilience and an enhanced brand.
Models for International Expansion
Numerous options are available to companies seeking international expansion. For example, strategic partnership arrangements, pure franchising, joint venture (‘JV’) franchising, or various hybrid models. One effective avenue is through a strategic partnership agreement rooted in a franchise framework. Today, international franchising is a proven model behind many businesses’ making great success all over the world. Surprisingly, this approach is gaining momentum even across sectors where it might not initially seem applicable.
International Franchising
Before delving into international franchising, let us explain the concept of franchising.
Franchising entails a franchisee, typically an individual or a group, acquiring the rights to operate a business using the franchisor’s established business model. Simply, franchisor grants a third-party the right to operate a franchise for a defined number of years. This includes utilising the franchisor’s IP rights such as trademark. Compared to corporate expansion, franchising allows brands to access diverse markets more rapidly.
Recent successful international expansions, such as the UK coffee chain Pret a Manger’s expansion in the US or JD Sports and Black Sheep Coffee’s expansion in the Middle East serve as notable examples.
But what are key legal issues to consider when expanding internationally through a franchising?
Keys for Successful International Franchising
Planning
The planning stage involves carrying out an IP audit, having a trademark strategy and corporate structure.
Depending on the brand and industry, it is essential to consider the broader spectrum of intellectual property rights (‘IPRs’) that define both the brand and its range of products and services. Therefore, carrying out an effective IP audit is vital. An IP Audit serves as the initial step in understanding your IP and its strategic importance.
Especially when expanding globally, franchisors must ensure ownership or licensing rights for all aspects of their system. Conducting an IP audit helps this is the case. A common trap where IP audit is omitted is copyright ownership. Commercial agreements belong to their authors. Therefore, if a franchisor engages a third-party for their marketing material, software or store designs without proper assignment terms, then it will be the author who will own these copyrights and not the franchisor. This consequently will lead franchisor to pay twice for their system.
An IP audit carried out well-in-advance will protect the franchisor from such a position as they will know that they are the owners of their system.
Additionally, having a trademark strategy plays a crucial role especially in jurisdictions such as England and UAE, which operate a ‘first to file system’. Under this system, the first person to register a trademark has priority over others. Therefore, if a franchisor delays application, it may have to incur fees to remove an incumbent registrant.
Lastly, as evidenced in JD Sport’s expansion plans, the wider the expansion, the higher the changes of exposure to legal risks. Hence, it would be sensible to separate core IP and trading operations from their licensing activities. Achieving this separation will necessitate a well-thought corporate structure. Moreover, such relationships are likely to be a long-term commitment. For instance, JD Sport announced its 10-year agreement with Dubai headquartered company GMG following a strategic structuring.
Know Your Franchisee
While it may seem unimaginable for a franchisor not to know their franchisee, the best practice is to gather all information about the franchisee at the earliest opportunity. Doing so would not only impact the terms of the franchise agreement would also enable franchisors, along with any preliminary documentation to back out of a deal without problems.
Target Market: The United Arab Emirates (‘UAE’)
Although Europe remains the most favoured target market for international expansion, the UAE stands as beacon of economic prosperity in the Middle East, hence attracting businesses around the globe. JD Sports and Black Sheep Coffee’s recent expansions serve as a reflections on this trend.
According to data published in the Report, the Middle East ranks as the third favoured target market both for companies that are already internationally trading but looking to expand and companies not trading international but considering to.
For businesses operating in the UK, the UK’s economic climate was identified as the primary challenge, with the global economic climate ranking the second and the cost of doing business ranking third. Further, among the participants in the survey, financial support / incentives came up as the top factor that would make businesses consider trading internationally, followed by tax reliefs and then less regulation.
The UAE
The UAE is a federation system consisting of seven emirates. Each emirate is allowed to create their own economic free-zone to encourage economic development. Within these free-zones, full foreign ownership is allowed for companies. In 2020, Positive List of Economic Sectors and Activities in which Foreign Direct Investment is Permitted was published. Accordingly, hospitality and food services sector was included in this list, allowing businesses in this sector to be incorporated with full foreign ownership in ‘on shore’ jurisdictions. This development has been a significant catalyst behind the notable growth of franchising in Dubai. Previously, many international brands were hesitant with the UAE’s national ownership requirements, and hence, were reluctant to entering the market.
Franchising is regulated by the UAE Commercial Agencies Law (‘`CAL’) if the franchising agreement is registered. CAL provides favourable rights to franchise’s local agents. However, registration is not a mandatory requirement, and where the agreement is unregistered then it will be subject to the terms agreed in the franchise agreement together with various UAE federal laws applicable to general commercial arrangements. It is common practice to avoid registration. Therefore, UAE not only offers technological advancements but also adopts a business-friendly approach.
Tying these factors with Dubai’s strategic location, strong infrastructure with a proven business model and an established brand: from man-made islands to hotels, Dubai has got the best of all’, it comes as no surprise to see international expansion through franchising in Dubai.
