Franchising in India

05 May Franchising in India

Franchising presents a real opportunity for uk businesses to expand into India, say LISA SEN AND DAVID BOND OF FIELDFISHER

Franchising is a long established commercial strategy for growth, distinguished from other forms of distribution and agency by control, ongoing support and training, and use of a common brand. It is an extremely flexible model and can help British companies of all sizes expand both within the UK and overseas, allowing franchisees to access business opportunities that would otherwise be beyond their reach with a higher chance of success than usual.

So why do businesses use franchising? Would a corporately-owned and operated network be easier to run and be more profitable? Well, not necessarily, for the following reasons:

(a) With franchising, costly internal management is replaced with powerful financial incentives, namely the retention of profits created by the franchisee’s own endeavours and the risk of losing the capital it invested in the business. Franchising creates a financial synergy between the franchisor and its franchisees, so there is less need for monitoring and a greater probability of maximum performance by the franchisee.

(b) Franchising is a solution to the capital, managerial and information constraints faced by expanding businesses, giving the franchisor access to capital that would otherwise be unavailable to it in a cost effective way and one that offers fair reward to the financier, i.e. the franchisee. Franchising also provides an efficient way to obtain the managerial expertise needed to grow the business.

(c) On the international front, franchising allows businesses to leverage its franchisees’ local market knowledge as it expands into new markets.

Low-cost capital, motivated managerial expertise and better local market knowledge are three key resources that should reduce a franchisor’s overall risk and have a significant positive impact on a franchisor’s financial performance. But perhaps the most important advantage of franchising is the improvement in business performance it generates, bringing entrepreneurs, full of determination and ideas, into the business.

Although franchising offers clear commercial advantages, unless the business adopts an appropriate franchise structure, it is likely to encounter substantial difficulties and commercial frustrations. It is also fundamental that the business has some understanding of the market it wishes to enter and does not abdicate all responsibility to its franchisees.

Negating risk
UK SMEs that have a unique brand and business concept can consider franchising as a means to enter India. This is particularly advantageous if the business does not want to take the financial risk of investing large amounts directly in the territory. Furthermore, there are no mandatory legal requirements to register with any authority, provide a pre-contractual disclosure document or obtain consents before entering into a franchise agreement. Franchise relationships are governed primarily by the Indian Contract Act of 1872 and therefore it is important to have a comprehensive agreement that is clear and safeguards the rights and interests of all parties.

To minimise risk it is recommended that trademarks are protected through registration to prevent infringement as soon as a company makes plans to enter India. However, some protection is available for unregistered marks under common law, especially for well-known trade marks. In addition, a disclosure document is recommended, outlining details of the franchise business, key terms of the grant of franchise rights, obligations of the franchisee, and risks for the franchisee in taking on the franchise. This is to prevent misunderstanding by the franchisee of their role in making the business a success and misrepresentation claims by the franchisee if they suffer loss.

The key challenge is to find the right franchisee/master franchisee that will grow part or all of the brand in India. The franchisee must have the financial resources, networks and good reputation to meet the obligations and targets, as regulatory restrictions make lending to Indian franchisee companies difficult. Due diligence is highly recommended.

The development schedule or targets must be realistic, bearing in mind the bureaucratic delays in obtaining consents to open and operate outlets and the challenge of finding suitable real estate. Market research is also recommended to ensure the goods or services are suitable for the specific territory. India has 29 states and seven union territories with varied local laws, customs and culture that have to be taken into account when planning business expansion and the actual role of the local business. Franchises are more successful if cultural adaptations are made. As such, the role of a local business partner can be particularly valuable.

Resolving disputes can be complicated as it is difficult to prevent Indian parties going to court, especially if the agreement is terminated early for breach. The court process is can be bureaucratic and slow. However, if there is a violation of intellectual property rights then there is no option but to seek an injunction or interim relief through the local courts. It is generally preferable to have an arbitration clause with an arbitration venue located outside India in a country that is party to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”), and notified as a reciprocating territory by the Government of India. This will ensure that any award made in that country will be enforceable in India subject to public policy.

With careful preparation, expert advice and a viable financial model, franchising can create value for a business and give it a commercial edge in an increasingly competitive market place.