Franchising 2025

It is the author’s great pleasure to introduce the new Chambers Global Guide to Franchising. In this guide, the aim is to provide clear and practical guidance on the most important international franchise laws that will impact the international expansion of a company using the franchise business model. In this introduction, an overview of key aspects of international franchising is provided.

Because franchising is first and foremost a business system, legal regulation varies greatly by jurisdiction. It should not be assumed that a legal structure or solution that has worked in one country can be translated without modification to another jurisdiction. For example, franchise disclosure documents in the United States of America are extremely detailed, running to many hundreds of pages, whereas in Europe the expectation is that a summary is given. In some countries, franchise registration can be a formality whilst in others the authorities examine the documentation and raise queries. Withholding taxes continue to impact financial models, and new franchise laws are being enacted by more and more countries – most recently, the Kingdom of Saudi Arabia and the Netherlands. After 30 years of working in international franchising, the author still comes across new aspects every year.

Why Franchise?

Franchising offers businesses a sophisticated business tool for international expansion. The estimated turnover of franchise companies in the United States now exceeds USD930 billion. As globalisation continues at an unprecedented pace, more companies are looking to expand into the lucrative Middle Eastern, African, Asian and Latin American markets. The costs and risks associated with expansion into new markets can be prohibitive for small and medium-sized companies. Barriers to market entry for foreign investors can be considerable. Franchising in its different forms offers companies a unique opportunity for profitable international growth at a modest cost. John Y Brown Jr grew KFC from 600 stores to 3,500 stores through franchising by accessing the capital of third parties to drive fast growth. Companies do not need significant capital or a large head count to expand globally through franchising. According to a survey of members of the International Franchise Association, 52% of US-based franchise firms had units outside the United States in 2006, rising to 68.74% in 2024. It has been suggested that franchising creates enterprise value faster than traditional business growth. Because internationalisation is inherently risky, firms favour low-resource-commitment modes of entry into foreign markets, such as distribution and franchising. As a result, franchising continues to be a popular alternative to equity funded expansion. The franchisee gains access to a tried and tested business model, backed by a strong global brand. The franchisor relies on the local market knowledge, infrastructure and capital of the franchisee, thereby reducing the foreign market risk. A well-run franchise system creates a win-win partnership.

Definition of Franchising

There is no uniform definition of franchising. Each jurisdiction has a different approach. However, a uniform characteristic of franchising appears to be the existence of a “system”. This typically takes the form of an operations and marketing plan controlled by the franchisor. This principle originates in the United States of America. At the federal level, the Federal Trade Commission (FTC) Franchise Rule uses the concept of “control”, where “…the franchisor has the right to exert a significant degree of control over the franchisee’s method of operation”. Various US states follow the FTC Franchise Rule’s definition but add the concept of a marketing plan for further clarification, referring to a “marketing plan or system prescribed or suggested in substantial part by a franchisor”.

The US definition has influenced the approach to defining franchising in a number of international jurisdictions, such as Australia (where the Trade Practices (Industry Code – Franchising) Regulation states that “the right to carry on the business of offering or supplying goods or services in Australia, under a system or a marketing plan substantially determine controlled, is suggested by the franchiser or an associate of the franchiser”) and Canada (Alberta uses the concepts of “a marketing or business plan prescribed by the franchisor” and “significant operational control”), but other countries have taken their own unique route. One of the broadest definitions is found in France, where the Doubin Law on pre-contractual disclosure (Article L330-3 of the French Commercial Code) applies to any person who makes a trade name, trade mark or commercial sign available to another person and requires that other person to operate with an exclusive or quasi-exclusive commitment. In Indonesia, a franchise is defined more narrowly as a special right to use a proven, successful business system (where the system must be documented and distinct, with written standards and proven profitability for at least three consecutive years – supported by audited accounts for the past two years showing a profit – and registered intellectual property) for marketing goods and/or services, supported by an intellectual property agreement. Most definitions also include the payment of a fee and the licensing of intellectual property. The common elements of a franchise definition therefore appear to be that there is an agreement between the franchisor and franchisee, pursuant to which the franchisee is authorised to use the intellectual property of the franchisor and the business system of the franchisor in return for making a payment.

It is important to pay close attention to the precise definition of franchising in the target market, to avoid creating an “accidental franchise”. Equally, it is possible that a business system that is considered a franchise in one country may not be permitted to start franchising in another country, until it has met the profitability or pilot operations requirement. For example, in China the 2 + 1 rule requires that a company cannot to be registered as a franchisor until they have operated two outlets for one year.

Why is Franchising Regulated?

There are more than 30 countries in the world with specific franchise laws. These laws seek to protect local franchisees from entering into a long-term commitment to invest in a franchise business without full and frank disclosure of all material facts. A successful franchise agreement requires long-term collaboration based on mutual trust. In view of the significant investment and long-term commitment required from the franchisee, many countries in the world recognise the need to regulate the formation and content of the franchise agreement. The sale of a franchise can be compared to the sale of securities or investments, and the disclosure document can be viewed as taking the function of a mandatory prospectus.

Franchise regulation takes three principal forms.

• Disclosure obligation: A large number of countries impose a legal obligation on the franchisor to make full and frank disclosure of key commercial and legal information about the franchised business.
• Registration: An obligation to register the franchise exists in the USA and certain Asia-Pacific (APAC) countries. Australia has recently introduced a simple form. Some registration processes are complex and require translation into the local language, so franchisors need to factor the time required to satisfy these requests into their timetables.
• Relationship laws: Legislation designed to blacklist unfair terms in franchise agreements is on the increase. It is important to ensure that the franchise agreement is reviewed for compliance with these relationship laws.

Franchise Disclosure Obligations

The most important legal obligation of the franchisor is that of disclosure. More than 30 countries in the world have formal franchise disclosure laws. Most civil law countries recognise a general obligation of disclosure based on the principle of good faith but do not specify what is to be disclosed. The franchise disclosure document typically contains two elements. Firstly, information about the business opportunity (including financial information) must be given. Secondly, disclosure of the franchise agreement is required, highlighting important obligations of the franchisee.

Typical franchise disclosure items

Typical franchise disclosure items include:

• information about the business, including its history and the franchise opportunity;
• financial information about the franchisor, such as audited accounts;
• details about disputes;
• information about the fees and other charges payable by the franchisee;
• details of intellectual property licensed; and
• an overview of important contractual obligations such as restrictions on competition, renewal and termination provisions, and buyout options.

Some countries require a market study – for example, France and Belgium. This can be time-consuming to prepare if the business has never traded in the territory. It is important to carefully check the full list of required disclosure items applicable to the target country. It is not recommended to provide a franchisee in one country with financial data based on experience gained in another country.

Timing of franchise disclosure

Franchise disclosure must generally be made a certain number of days before entering into the franchise agreement or paying money – typically between 10 and 30 days. Some countries allow a deposit to be paid – for example, Canada (Ontario; CAD50,000). Most countries do not permit the making of any payment. Spain even prohibits the entry into a pre-contract.

Remedies available to the franchisee if no disclosure has been made

It is important to understand the rights and remedies available to the franchisee if there has been a failure to make the required disclosure. Typically, failure to disclose gives the franchisee the right to rescind the agreement and ask for both a refund of payments and damages. Some countries specify for time period for the exercise of these rights. For example, in Canada the period is two years. In other jurisdictions, such as France, it can be a defence that the franchisee was an experienced operator and did not rely on the disclosure information. Some countries, such as China and Korea, impose administrative fines.

Franchise Registration

Outside the USA, the registration of a franchise agreement is less common. Franchise registration should not be confused with the obligation to register the trade mark licence or the requirement to own a registered trade mark. Some jurisdictions have followed the example of the USA and require the franchise agreement to be registered with a government body before franchises can be offered for sale. Occasionally, registration is made after the franchise agreement has been concluded – for example, in Russia and China. In Indonesia, it is the obligation of the franchisee to register. It is generally in the best interest of both parties to comply with franchise registration obligations to ensure that the franchise agreement cannot be invalidated. Without a registered franchise, some government bodies can take the view that foreign exchange payments cannot be processed.

Relationship Laws

An increasing number of countries require a franchise agreement to have a certain minimum amount of content. Typically, these are commonsense requirements, obligating the parties to clearly document the most important rights and obligations that arise between them – such as, for example, the territory of operation, the duration of the agreement and the dispute resolution mechanism. Some countries will reject the registration if these terms are not present.

Blacklisting unfair terms in franchise agreements is a relatively new trend. Countries such as France, Germany and Italy use fair trading laws to ensure that the franchise agreement is fair and balanced. In Germany, any provision in a franchise agreement that deviates from the German Civil Code can be challenged and requires justification. In France and Italy, the competition authorities have the power to investigate whether the franchise agreement is fair and balanced. Franchisees can raise a complaint and require unfair provisions to be struck out. The leading case in France is that of Subway, where the French competition authorities struck out an arbitration clause that would have required the franchisee to arbitrate in New York. In Italy, a group of franchisees filed a complaint against McDonald’s for unfair practices. McDonald gave undertakings to the authorities to discontinue certain practices.

Other countries, such as Saudi Arabia, the Netherland and Malaysia, require specific rights and obligations to be included in the franchise agreement, such as approval rights for the franchisee, protection against termination for minor breaches and protection against non-renewal without good cause. In the Netherlands, significant system changes are subject to consent requirements if the costs exceed an agreed threshold.

Franchising and Competition Laws

Franchise agreements invariably include restrictions on competition. In a typical international franchise relationship, the franchisor would grant an exclusive territory, and the franchisee would undertake not to operate a competing business. In addition, most franchisors impose nominated suppliers for critical goods and services, or nominate an affiliate as the sole supplier for certain contract goods and services.

In the United States of America, the authorities apply the “rule of reason”, whereby the practical impact of the restrictions on competition contained in the franchise agreement determines if the restrictions are permitted or not. In the European Union, restrictions on competition contained in vertical agreements, such as franchise agreements, are prohibited and require an exemption to subsist. Most franchise systems fall below the market size threshold of 15% where the authorities intervene. Even large franchisors, such as Burger King and Subway, have not reached that market share. This protection does not apply to so-called hardcore restrictions. Those are restrictions on competition, such as price fixing, that are deemed inherently detrimental to consumers and are therefore prohibited regardless of market share. The EU vertical restraints block exemption (VBER) sets out in detail permitted and prohibited restrictions.

A common question concerns the maximum permitted duration of purchase ties and other exclusivity obligations in franchise agreements. Under the VBER, these are permitted for five years. However, pursuant to the case law of the European Court of Justice in its landmark decision in Pronuptia of Paris, it has been clarified that longer restrictions are permitted to the extent that they are necessary to safeguard the uniform quality standards and appearance of those operating in a franchise system. Therefore, the requirement that franchisees purchase certain distinctive goods only from approved sources can often be justified for more than five years.

Duration, Minimum Term and Renewal

Franchise agreements are typically long-term contracts. They often have a duration of between 10 and 20 years. Termination rights are therefore important from the point of view of both parties. Many franchisors reserve to themselves extensive rights of termination for breach by the franchisee, but will deny to the franchisee the right of early termination. A number of countries, such as Germany, impose a statutory requirement that both parties must be permitted to terminate the franchise agreement for material breach.

Some jurisdictions require a minimum or maximum term for a franchise agreement – for example, France (ten years maximum) and Korea (ten years minimum). Other jurisdictions, such as Saudi Arabia, prohibit termination of the franchise agreement without good cause. This follows the tradition of the commercial agency laws, protecting local companies from termination without compensation.

Getting Paid

It is important to verify whether the target territory has foreign exchange regulations that may prevent the franchisee from paying franchise fees in a foreign currency. Countries such as South Africa and Azerbaijan continue to regulate currency outflows, and permits may be required to pay franchise fees. Some countries impose a maximum permitted amount that can be paid by way of royalties to foreign licensors – for example, Nigeria and Pakistan.

Withholding Taxes

Withholding taxes can significantly impact payment flows. Most countries impose a withholding tax on royalty and technical service fee payments to foreign recipients. The tax amount can range from 5% to 25%. Franchisors will typically seek to impose on the franchisee an obligation to gross up payments, thereby increasing the amounts payable by the amount of the tax. Where withholding taxes are high, this can be onerous on the franchisee. Arguably, the franchisee should not pay a tax that is intended to be paid by the franchisor. The franchisee may not be able to receive a tax credit for this payment, and it may not be able to deduct it as an expense. The franchisor should typically be able to receive a tax credit if it is a profitable business.

Some countries have an excellent network of double tax treaties enabling franchisors to reduce the amount of withholding taxes that they have to pay. For companies that franchise internationally on a broad basis, it is therefore important to consider where the franchisor entity should be based.

Conclusion

No guidebook can replace due diligence and advice from specialist local counsel with experience in franchising.