Case Study – A US Brand’s Entrance Into Australia

Problem

A well known US brand was seeking to enter the Australian market but had limited experience in the way the law operated in Australia, in particular the rules and regulations governing Franchising in Australia.  They were also confused as to what form the expansion should take, and whether they should commence an Australian office to oversee development, appoint a master franchisee, or engage directly with prospective franchisee from their US headquarters.

Issues

The franchise regulatory environment in Australia is unique.  Foreign franchise brands looking to expand into Australia need to fully comply with the law as it relates to the franchising, including compliance with the disclosure document requirements outlined in the Franchise Code of Conduct.  Larger overseas franchise brands often choose to establish an Australian company to oversee the development and expansion of the brand, however this solution can require significant commitment and costs associated with staffing and resourcing the new company.  The other alternative is to appoint master franchisees who are then responsible for recruitment and management of franchisees within their allocated territory.  Master franchisees can be appointed to large territories (say, for example, the whole of Australia), individual States within Australia, or for particular regions within a State.  Master franchisees are responsible both to the Franchisor (through a master franchise agreement) and to the franchisees they appoint via individual franchise agreements.  Often the master franchise agreement includes development obligations requiring the master franchisee to establish a certain number of franchisees within their territory, within a certain period of time.   The final option is the direct appointment of franchisees within Australia through an overseas head office.  Whilst this is often seen as the preferred option by many overseas franchise brands as they likely have existing recruitment processes and franchisee management systems, it can be complicated by the reality of managing franchisees in a far away location, that are subject to vastly different laws.  Whilst this is often alleviated by the appointment of local agents such as lawyers or accountants, it nonetheless requires significant commitment by the franchisor to be successful.

Solution

For our US client, we provided a breakdown of all their expansion options.  In consultation with them, they decided the most attractive option was to appoint State level master franchisees.   As the client had existing US documentation outlining their core commercial requirements, it was a relatively straightforward exercise to produce a Franchise Code compliant master franchise agreement, master franchise disclosure document, template unit franchise agreement and template unit disclosure document.   The US client recruited a master franchisee in their first target State, and have enjoyed significant expansion.

Lessons:

  • Australia is an attractive market for overseas franchise brands, but caution is required – Australia has a heavily regulated franchise industry and overseas franchise brands need to be aware of the traps.
  • There is no ’one size fits all’ when it comes to establishing an foreign franchise brand in Australia – A number of options exist for overseas brands looking to set up in Australia. From foreign owned local subsidiaries managing expansion, to the appointment of master franchisees (at various levels), what is appropriate to a particular overseas franchise system depends on a number of factors.
  • Clean sheeting franchise documentation is the best way to proceed – As Australia has specific disclosure requirement and compulsory provisions within a franchise agreement (and provisions which are specifically prohibited), we have found it is best to produce ‘clean sheet’ franchise documentation rather than attempt to shoe-horn foreign documentation into a form acceptable in Australia. While it is always good to have foreign documents available to us in order to see what kinds of things are important to the brand, foreign documents (in particular those produced in the US) have a language and style significantly different to typical Australian documents.  This can be an issue both in the interpretation of foreign style clause in applying the law, but perhaps more importantly, create a marketing issue as prospective franchisees (and their advisors) are more used to seeing Australian style documentation, and can be intimated when confronted with something more suitable to a foreign country.

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