What a Franchisor Should Know Before Negotiating a Franchise Agreement in Brazil, China, Japan and the United States Chairman: Carl Zwisler, Gray, Plant, Mooty, Mooty & Bennett, PA, Washington DC; IDI country expert for franchising (U.S.A.) Presented By: Brazil: Luciana Bassani, Dannemann Siemsen Advogados, Rio de Janeiro; IDI country expert for franchising (Brazil) China: Paul Jones, Jones & Co., Toronto; IDI country expert for franchising (China) Japan: Souichirou Kozuka, Gakushuin University, Tokyo; IDI country expert for agency, distribution and franchising (Japan) U.S.A.: John Baer, Greensfelder, Hemker & Gale, Chicago Chair: IBA Franchising Committee June 18, 2011 IDI Conference Amsterdam, Netherlands

Hypothetical A Spanish franchisor, FranMundo, attends MAPIC in Cannes, France and meets with  prospective master franchisees from each country. FranMundo is a retail clothing chain which operates through company owned stores owned by an affiliate, Rmundo in Spain, and as a "franchisor" in France. FranMundo is hoping to expand into vibrant markets around the world, but has not settled upon which markets.

In preparation for MAPIC it has created an exciting stand with videos and  glossy brochures, samples of  its merchandise and advertising materials. They promote their products as offering  "the best margins in the industry."  For those who express interest in its franchise, FranMundo conducts 20 minute seminars where they explain their franchise program in depth, based upon their experience in Spain and France, and they provide proforma earnings information for their outlets.  They are careful to explain that these numbers are based only upon their experience in their Madrid stores which have been open for 10 years.

They describe the size of the store, the typical cost of the inventory which they require franchisees to carry. FranMundo requires the entire inventory to purchased from FranMundo's affiliates. However, they do permit certain accessory items to be purchased from sources they designate, and who agree to pay FranMundo's affiliate a "commission" on purchases made by FranMundo's  franchisees. 

Because of their desire to maintain margins for their franchisees and to maintain an upscale image which caters to sophisticated shoppers,  FranMundo approves all advertising materials used by franchisees, including the prices at which franchisees may advertise.  Franchisees may only advertising on the internet using a website which is hosted by FranMundo. FranMundo believes that image is of the highest importance, and will only begin franchising in a country in cities with the greatest fashion awareness.

From the limited research it has performed, FranMundo understands that the cost of establishing a franchise network in a new country can be expensive. Its Managing Director has stated that he will not even enter into serious discussions with a prospect unless the prospect signs a nonbinding letter of intent and pays a good faith deposit of  25,000 Euros, which will be used to cover FranMundo's market research and legal expenses. The entire amount will be credited against the initiation franchise fee which the franchisees will pay.  The initial fee will be 5 cents for each person living in the master franchisee's territory, and it is due when the franchise agreement is signed. The master franchisee must open 5 stores the first year, and 10 each year thereafter for 10 years. If the master defaults in his development obligations, the master franchise agreement may be terminated. 

Having already had experience with two countries which regulate franchise sales, FranMundo understands that legal compliance can be costly.  The Managing Director has instructed his lawyers to use the franchise agreements which he has prepared for France, and if possible, to apply Spanish law and a Madrid venue in all contracts which will be used overseas.  The Managing Director has cautioned his international development team and lawyers that to assure success of the first franchisees, it is critical that the first international stores be open and in operation by November 1 of this year to take advantage of the Christmas shopping season which generally accounts for 50% of the company's retail sales. FranMundo has prepared for international franchising by having its financial statements audited using International Financial Reporting Standards.

FranMundo does not want to invest the time or money to establish company owned stores in the new international markets. It will spend its resources to develop its distribution network. It has decided to offer master franchises and to require master franchisees to make the investment required to establish stores in each country.