Consulting » Franchising in the EU

COMPANIES THAT have scope for faster expansion than their capital and HR resources permit often turn to franchising as the means of exploiting that scope.

Franchising can allow businesses to successfully re-engineer themselves to access foreign markets and generate new income streams without the need for capital investment and extensive management infrastructure.

Franchising is not all about hamburgers and pizza. It is a way of building and re-engineering businesses that is applicable to corporations of all sizes in all commercial sectors to achieve a range of strategically desirable results.

Improved access to high-calibre managers and capital, bulk purchasing, economies of scale and enhanced product development explain why a wide range of businesses use franchising as a way to expand internationally and domestically.

Franchising is a win-win relationship as it provides the franchisee/ developer access to a proven format, a recognised brand, ongoing support, economies of scale and so on. Nevertheless, franchising is not without its risks and it is important that franchisors take proper expert legal advice to ensure that these are reduced to the bare minimum.

However, plain “vanilla” franchises are not necessarily the only or most appropriate option for a business. More sophisticated, finely-tuned options such as subordinated equity franchising, “Manchising” and various hybrid structures often present more impactful and versatile approaches.

Franchising, in all of its various forms is, without doubt, ideally suited to helping companies better exploit the European market. Although there is no up to date economic data about franchising in the EU it is estimated that there are some 10,000 franchised brands in the EU, which account for over €215bn (£203bn) turnover per annum. The lack of official economic data about franchising in the EU suggests that franchising is not achieving its full potential in the EU.

This is indeed the case. Although the EU has a population of around 500 million compared to the USA’s 310.9 million and the EU’s gross gomestic product in 2010 was $16.1tn compared to the US’ GDP of $14.6tn, the estimated 405,000 franchised outlets in the EU are dwarfed by the 901,093 in the US. Even Australia, with a population of only 22.5 million and a GDP of $1.2tn has an estimated franchise turnover of $130bn.

Underdeveloped market

The figures are very stark. Although the US has only 60% of the population of the EU and a lower GDP, franchising’s estimated turnover in the US is considerably more than double that in the EU. Compared to both the US and Australia, franchising in the EU is markedly underdeveloped.

This under development of franchising in the EU may be partly due to cultural differences between the three markets – (after all, George Bush did point out that the French have no word for entrepreneur). However there is no doubt that it is also, in part, due to a failure by the law in the EU to regulate franchising in an appropriate and uniform manner.

There are eight EU member states (France, Spain, Italy, Sweden, Belgium, Romania, Estonia and Lithuania) which have franchise specific laws. Some of these focus on pre-contractual disclosure requirements, some require documents to be filed on a public register and others impose mandatory obligations on the franchisor, there is no common structure or emphasis between these member state franchise laws. They all differ from each other. In addition to this, the general non franchise specific laws of each member state have quite a different impact upon franchising. The resulting lack of a homogeneity in the way that member state laws regulate franchising creates a barrier to cross boarder franchising. A barrier that can only be overcome with expert advice from specialist franchise lawyers. This reduces franchising’s cross border potential and reduces its accessibility to many companies.

Mark Abell is joint head of the franchise and licensing team at law firm, Field Fisher Waterhouse